Teck plumbs depths on black day for coal
Faced with tumbling commodity prices, a free-falling stock price and an over-levered balance sheet, Teck Cominco Ltd. unveiled a wide-ranging plan Tuesday to conserve capital and pay back debt amid a rapidly-deteriorating metals sector.
Without providing details, the Vancouver-based company said it is taking steps to slash capital spending, contain costs, defer projects and pursue asset sales. They are measures that many of its larger and smaller rivals are also forced to take.
"It's quite a disciplined, comprehensive plan we're working on and things will be announced in due course," chief executive Don Lindsay said in an interview.
The announcement came on a day when Teck's stock price plummeted 20% to $8.75 on concerns that coal prices will drop next year, and false speculation that it was planning an equity offering. The stock is now down 83% from its peak in the late spring, a gut-wrenching drop for one of the country's premier miners.
While the entire mining industry is struggling due to weak commodity prices and credit conditions, Teck's position is especially tenuous because it just took on US$9.8-billion in debt to buy the assets of Fording Canadian Coal Trust, its former partner on the Elk Valley coal projects. Teck's total market value is now just $4.2-billion.
"It wasn't too long ago that the biggest investor criticism of Teck is that they had too much cash," said Rick de los Reyes, an investment analyst with T. Rowe Price. "They couldn't have picked a worse time to lever up."
Teck's debt load includes a US$5.8-billion bridge loan that expires in less than a year. Despite falling metal prices, Mr. Lindsay said Teck will slash that debt over the next two quarters through its fixed coal revenues, copper hedges, and tax refunds. That means the amount it will have to refinance will be much smaller than US$5.8-billion, and he noted that the bond market is starting to open up.
When the Fording deal was announced in the summer, it was celebrated as a big win for Teck because of record-high metallurgical coal prices for 2008. They were settled at around US$300 a tonne, triple last year's levels, and the outlook for 2009 was excellent as well.
But that changed rapidly in recent weeks, as many of the world's biggest steelmakers unveiled huge production cuts in response to a slowing global economy. That means that they are using less coal to fire their blast furnaces, and they will push for much lower prices next year.
The fragile coal market received more bad news this week, as reports surfaced that major Indian steel companies are asking suppliers to renegotiate contracts back to 2007 pricing levels of around US$100 a tonne, rather than wait for the 12-month agreements to expire in March.
"I can't see the suppliers willing to renegotiate, but nevertheless it does not bode well for pricing next year," said one industry insider, who asked not to be named. "Obviously the demand situation has changed considerably in the last couple of months."
John Hughes, an analyst at Desjardins Securities, is forecasting metallurgical coal prices of US$175 a tonne for next year, which would allow Teck to reduce its debt load to a "much more comfortable level." But if prices fall all the way back to 2007 levels, the company would likely have to take more serious action such as asset sales to shore up its balance sheet, he said.
Mr. Lindsay said he has no regrets about the price paid for the Fording assets, and noted that Teck's long-term price assumptions for metallurgical coal are well below current levels. He also pointed out that if prices fall too much, supply will be cut back.
"These products are going to be needed. And they're relatively scarce," he said.Posted by Arthur Caldicott on 12 Nov 2008