Teck Cominco buys Fording in $14.1-billion acquisition

COMMENT: Greenhouse gas emissions in BC are the target of the BC government's climate change agenda. GHG emissions are the target of everybody's climate change agenda.

Whew. I just installed another compact fluorescent. That should balance things out a bit.

Record-breaking deal by Teck-Cominco says it all: Coal is the future

Teck-Cominco's eye-popping, $14-billion purchase of Fording Canadian Coal this week sends a clear signal that coal will play an important role in the future of British Columbia. The deal makes Teck-Cominco the world's second-largest producer of metallurgical coal -- the kind used in steelmaking -- and solidifies its status as Canada's largest diversified mining company.

Oil and gas grab all the headlines, but coal is B.C.'s -- and the world's -- most abundant hydrocarbon resource, with estimated B.C. reserves of 20 billion tonnes, and proven global reserves of more than 892 billion tonnes, or enough to meet demand at current consumption rates for two centuries.

It is also the most secure. More than 26 per cent of the world's coal reserves are in North America, compared with just five per cent of oil and six per cent of gas. Forget ethanol. Coal is the obvious answer to energy security for the United States and its neighbours.

While much of the coal B.C. exports is used to make steel (70 per cent of global steel production depends on coal), B.C. also digs up more than a million tonnes of thermal coal, used to generate power, with much of it sold to Japan and Korea.

Coal meets 50 per cent of U.S. electricity needs, 20 per cent of Canada's and 40 per cent of the world's. If energy demand grows as predicted, by as much as 60 per cent over the next 30 years, the world will increasingly depend on coal to satisfy it.

Coal gets a bad rap from environmentalists who don't like the fact that, like most everything else on earth, it emits carbon dioxide. But the industry has taken giant steps towards making the production and use of the mineral more environmentally benign. All manner of technologies are being actively pursued, including carbon capture and storage, hydrogen from coal, gasification and coal liquefaction.

The first coal-to-liquids plant in the U.S. has been greenlighted in West Virginia by Consul Energy and Synthesis Energy Systems. With the help of ExxonMobil, they hope to produce up to 100 million gallons of gasoline a year and sequester the carbon emissions, making it a "clean-coal" gasification plant.

Making gasoline from coal isn't a new idea. It fuelled the Luftwaffe in the Second World War.

Perhaps its hard for politicians to grasp that the battery of environmental and social tests mining projects are required to meet have doubled the length of time it takes to bring a greenfield mine into production to 10 years from five -- and that this delay drives up the cost of development as well as the price of the commodity, while exacerbating a demand-supply imbalance.

Environmentalists may not like it but our political leaders should recognize the value of coal, not only as a key export, but as a plentiful and accessible source of energy that can serve as a substitute for expensive oil and gas. To rule it out on the basis of a Dickensian view of a coal-fired world is wrong-headed and short-sighted.

Teck-Cominco, a company that knows a thing or two about minerals, believes coal is the future. Those responsible for ensuring we have sufficient energy to fuel economic growth should pay heed.

Teck Cominco buys Fording in $14.1-billion acquisition

It was the wee hours of Tuesday morning, close to 4 a.m. in Vancouver, when the final "i" was dotted and "t" crossed in British Columbia's largest takeover -- Teck Cominco's offer to buy out its Elk Valley partner, Fording Canadian Coal, for $14.1 billion.

At that price, the Fording acquisition is also the biggest coal deal on record, according to Gerard McCloskey, chairman of U.K.-based McCloskey Group, a coal-industry research company.

By phone and in person, representatives of the two companies, and their bankers and lawyers, worked around the clock in Vancouver, Toronto, Calgary and elsewhere. At least one negotiator had as little as eight hours sleep in four days.

"Everybody has been working around the clock," said Doug Horswill, Teck's senior vice-president for environment and corporate affairs.

And the timing couldn't be better. Vancouver-based Teck will pay $82 US per unit of Fording, an income trust, $3 of which represents the trust's last distribution to unitholders. Unitholders will also receive 0.245 Teck Class-B subordinate voting shares, the company's widely held class of shares. While technically a purchase of assets, the unitholders will receive the cash as a distribution, and the units will be collapsed.

Together the offer amounts to $93.76 Cdn a unit, based on the closing trading price of Teck shares and the exchange rate on July 28, the last day before the deal was announced. This works out to an 18-per-cent premium on the average weighted unit price over the 20 days up to July 25, Teck said in a news release. But it's below $97.50, the price Fording units traded at just a few weeks ago at the end of June.

But Horswill said Teck has been negotiating with Fording since the beginning of June, and while the unit price has softened recently, closing at $83.80 on Monday, Teck was in for the long term, not a short-term gain.

"We think there's an opportunity in the short run here to acquire this and pay down the acquisition relatively quickly," Horswill said. "But really, it's a 100-year asset that will keep us in a good steady business for generations."

Fording's principal asset is its 60-per-cent interest in the Elk Valley Coal Partnership which owns most or all of six metallurgical coal mines, five in British Columbia and one in Alberta. Teck owns the remaining 40 per cent, plus almost 20 per cent of Fording, which brings its actual ownership interest to 52 per cent.

As a result of its ownership in the partnership, Teck was already in "a very comfortable position," Horswill said.

"Our revenues even without buying [Fording] will be substantially up from last year," Horswill said.

That's thanks to the rising price of coal, which is negotiated company-by-company on a yearly contract basis. In April, Fording was able to secure an average price of $275 US per tonne, almost three times higher than the $93 US it was paid between April 2007 and March 2008.

Teck's main goal in acquiring Fording was to increase the amount of income it received from "non-exchange-traded commodities," Horswill said.

Much of Teck's business comes from zinc, copper and lead, whose prices fluctuate. But coal, with its annual contracted price, provides a steady, known stream of income, Horswill said.

"And the market normally pays a higher multiple [which translates into higher share prices] for that kind of business."

"So our belief is that as we move forward and get to where we want to be -- one-third of our normalized revenue from steady known income streams -- we think we'll start to get the multiples that big companies like [global resource company] BHP Billiton or Rio Tinto get," Horswill said.

"It's like a portfolio of assets which is worth more as a whole than it is in its parts."

Fording announced in December that it was looking at its options, including possible purchasers, in light of the federal government's announcement a year earlier that favourable tax treatment for income trusts would end in 2011.

The offer has to be approved by Fording unitholders and the court.

Fording units closed up $6.55, or 7.8 per cent, at $90.35, on the TSX on Tuesday while Teck shares rose $2.44, or six per cent to close at $42.85.

fionaanderson@vancouversun.com

© The Vancouver Sun 2008