Credit crunch and soaring costs could cause Teck t
Credit crunch and soaring costs could cause Teck to reconfigure, analysts say
September 18, 2008 - 19:05
Brenda Bouw, THE CANADIAN PRESS
VANCOUVER - Soaring project costs and uncertain debt markets could cause Teck Cominco Ltd.(TSX:TCK.B) to reconfigure, defer or possibly cancel some of its projects, analysts say.
"I don't know if they will be able to do everything if the credit markets don't get back to the normal operating range," said Kerry Smith, an analyst at Haywood Securities.
Smith said the company has to get rid of its debt that has piled up since it agreed this summer to buy Fording Canadian Coal Trust (TSX:FDG.UN), a US$14-billion deal that includes a $9.8-billion loan backed by at least six North American banks.
On Wednesday, Teck said costs at another of its projects, the Fort Hills oilsands development which it shares with other partners, swelled by 50 per cent to more than $21 billion.
Teck is also expected to decide soon if it will go ahead with the Galore Creek gold-copper-silver project in British Columbia, which was halted last fall after projected costs more than doubled to about $5 billion.
A new plan is expected to be released within days aimed at curbing expenses at Galore Creek, which Teck shares 50-50 with NovaGold Resources Inc. (TSX:NG).
Teck has said that report will help it will decide if it plans to go ahead with the project.
Officials at both Teck and NovaGold could not be reached for comment on the project's status.
Some analysts believe Teck won't go ahead with Galore Creek because of the costs, which they expect to rise further, and the uncertain debt markets.
Smith said Teck might consider delaying Galore Creek and focusing on higher priorities such as the Fording deal, Fort Hills, and its Quebrada Blanca mine in Chile.
He said Galore Creek is important, but Quebrada Blanca might be less risky because Teck has a larger stake in the project and more control as a result.
Galore Creek is also more susceptible to cost overruns because of the costs associated with working around the rugged terrain at its location in northern B.C., Smith said.
"Given what has happened with Fort Hills ... I think some of their other projects would be easier to build," Smith said.
"I wouldn't be surprised to see Galore happen a bit slower than what people thought given what has happened."
Smith sees Teck's top priority as finalizing the Fording deal. There are concerns about how solid the backing is from distressed Wall Street icon Merrill Lynch, which was bought by Bank of America.
Fording units have been punished as a result, falling just below $70 by mid-week, their lowest level since the Teck deal was announced in July. The units closed up nine per cent at $75.80 as part of a rally Thursday on the TSX. The price is still well below Teck's offer for Fording is valued at about C$91 per unit.
Teck president and CEO Don Lindsay told an investor conference this week that the deal was still on track, but that global steelmakers interested in securing coal could be called in to help finance the deal if the banks can't.
Smith said Teck's next priority should be Fort Hills, because it is part of the Vancouver-based company's diversification strategy.
Teck is responsible for 20 per cent of Fort Hill's costs. As a result, the new cost estimate increases its share by an estimated $1.84 billion.
As a result of the Fort Hills cost overrun announcement, Moody's Investors Service reiterated its review of Teck's senior unsecured debt for a possible downgrade. The review was initiated after Teck announced its deal with Fording.
"At this point, it comes down to the amount of debt they would carry," Terry Marshall at Moody's Canada said of the review.
An analyst who did not want to be named agreed Teck has a lot of balls in the air right now and "will have to go back and weigh the pros and cons of each."
Lindsay also said this week that the Quebrada Blanca mine in Chile, of which it owns 76.5 per cent, will be "the very best asset in the entire company."
The company is hoping to expand the mine, which became part of its portfolio after it bought Aur Resources Inc. last year for about $4 billion.
On the TSX Thursday, Teck shares closed up $1.37 or four per cent at $35.38.