This appeared in todays Globe and Mail;
Teck Cominco's debt dilemmaA little more than three months ago, it looked like Don Lindsay was sitting pretty.
On July 29, his company, Teck Cominco Ltd., unveiled a blockbuster $14-billion (U.S.) takeover bid for Fording Canadian Coal Trust and Teck shares defied usual deal trading patterns by jumping 6 per cent to close at $42.85 (Canadian) on the Toronto Stock Exchange.
It was a false good omen.
Since then, everything has changed for Canada's largest base metals miner. A looming global recession has decimated metal prices at a time when Teck has loaded itself up with $9.8-billion (U.S.) in debt including a $5.8-billion short-term bridge facility to pay for the takeover.
Now shareholders are sweating over how the company will repay the bridge loan amid waning demand from steel makers for Teck's coking coal.
“If we'd known this was going to occur we might have done something differently, there is no question about that,” Mr. Lindsay, Teck's chief executive officer, said in an interview Tuesday.
Teck shares nosedived 20 per cent Tuesday on rumours that the company is planning a $3-billion stock offering – rumours that Mr. Lindsay said were bogus.
“I can tell you for certain that we are in no discussions with any dealer about doing an equity deal,” he said.
Still, the market meltdown has pushed Teck into a troubling financial position. Its coal will likely be fetching significantly less next year than the $275 a tonne customers agreed to pay in the 2008 coal year.
India's state-controlled steel maker is reportedly asking suppliers to reduce prices of current contracts to $100 a tonne.
While the coal from Teck's Elk Valley operations in British Columbia is not sold to India, world steel production has been slashed by more than 10 per cent and Chinese steel mills have cut output by between 30 and 50 per cent in response to the sudden economic downturn.
Mr. Lindsay said he is confident Teck's coal mines will continue to generate strong cash flow until the current coal year expires in April.
“That doesn't mean we haven't noticed the extraordinary reductions in steel production that have been announced around the world. We're watching things very closely but at this point all the contracts are being honoured,” he said.
Teck executives are working on a plan to reduce costs and raise capital to pay down the bridge loan. The proposals will be presented to the Vancouver-based company's board on Nov. 19.
Cutting Teck's dividend, which amounts to about $500-million a year, is one of several options.
“It's fair to assume that the board will review the dividend quite closely,” Mr. Lindsay said.
The company is also expected to curtail expenditures on expensive development projects such as the Fort Hills oil sands joint venture with Petro-Canada and UTS Energy Corp., as well as its Galore Creek copper project. Mr. Lindsay would not comment on specific assets but sources said the company is also likely to walk away from the Petaquilla copper project in Panama.
Teck is expected to sell its gold assets and could shut down money-losing mining operations such as its Lennard Shelf zinc mine in Western Australia, which was shuttered earlier this year.
At a forecast 2009 coal price of $180 a tonne, “we believe it will not be possible to fully repay the bridge loan of $5.8-billion, fund the capital requirements and make the required debt repayments for the term loan,” UBS Securities said in a recent note to clients.
BMO Nesbitt Burns analyst Tony Robson believes that Teck overpaid for Fording and has cut his rating on the company to a “sell.”
“BMO thinks the refinancing of the debt may prove difficult in the next 12 months and it all hinges on coal staying north of $150 per tonne,” Mr. Robson said in an interview.
For his part, Mr. Lindsay concedes that had Teck foreseen the market collapse it might not have pulled the trigger on a $14-billion takeover.
“The world is a different place. When we negotiated the deal in July, copper was at $4 a pound and coal was at $300 a tonne going to $400,” he said.
Teck Cominco (TCK.B)
Close: $8.75 (Cdn.), down $2.20
And later today;
Worried about the Teck Cominco Ltd.'s ability to repay $9.8-billion (U.S.) in debt, investors sent the company's shares lower for the sixth consecutive trading session.
Teck shares fell 20 per cent Wednesday afternoon to $7 each, mirroring Tuesday's losses. The selloff was sparked by rumours that Teck, Canada's largest base metals miner, would need to sell additional shares to service the debt, which was taken on to pay for its takeover of Fording Canadian Coal Trust.
The rumour was dashed by chief executive officer Don Lindsay, but his reassurances did little to calm investors, who have driven the shares down 79 per cent so far this year as the outlook for commodities such as coal has softened.
Scotia Capital analyst Lawrence Smith downgraded the company to “sector perform” from “sector outperform,” saying that despite Teck's “high quality assets” a decline in base metal prices could cause problems for the Vancouver-based miner.
Teck Cominco Ltd.
“We are uncomfortable with Teck's high debt level resulting from its acquisition of Fording, in an environment where commodity prices could remain at low levels for several years,” Mr. Smith wrote in a note to clients.
He left his 12-month price target unchanged at $26, slightly higher than the average 12-month price target of $25.51 set by the 17 analysts who follow the company, according to Bloomberg. Eleven of those analysts rate the shares as a “buy,” three as a “hold” and two as a “sell.”
Mr. Lindsay said Tuesday that executives are working on a plan to reduce costs and pay down the bridge loan, and the options will be presented to the company's board on Nov. 19. One option is to cut the company's dividend, a move that would free-up $500-million a year.
The company is expected to curtail expenditures on expensive development projects such as the Fort Hills oil sands joint venture with Petro-Canada and UTS Energy Corp., as well as its Galore Creek copper project. Teck is also expected to sell its gold assets.
In a presentation to investors in New York Wednesday, Teck executive vice-president Ron Vance said that in addition to its gold portfolio, Teck is considering selling a minority interest in various mines and development projects."
Meanwhile, BMO Nesbitt Burns Inc. analyst Ian de Verteuil warned that the Teck loan is a “good example of how banks can find themselves at risk” from impaired loans. If commodity prices continue to fall – copper is 58 per cent off recent highs and coal is off 53 per cent – the deal could be one of the fastest “underwriting-to-default experiences in the history of banking.”
“If commodity prices continue to deteriorate, a problem could develop as early as March, 2009,” he said, adding Bank of Montreal and CIBC were the Canadian banks with the most exposure to the deal.
“To date, the [banking] industry has to some extent side-stepped the problems of structured credit. The question that still needs to be determined is whether the speed with which the current economic conditions are deteriorating will catch Canadian banks less prepared to deal with the old, traditional monster – loan losses.”
