Teck's risk-taking foray into coal could ultimatel
https://www.mineweb.co.za/mineweb/view/mineweb/en/page38?oid=86730&sn=Detail
Teck's risk-taking foray into coal could ultimately reap rewards
Teck's $12.9-billion gamble on total acquisition of the Fording Coal Trust, which saddles the company with nearly $10 billion in debt, may ultimately be paying off.
Author: Dorothy Kosich
Posted: Monday , 27 Jul 2009
RENO, NV -
Teck Resources' expanded foray into coal mining, the 100% acquisition of Fording Coal, which nearly plunged the company into financial disaster, may now prove its salvation thanks to the strength of coal demand.
During a recent conference call to discuss financial results Teck CEO Don Lindsay told analysts, "There's no question [coal] demand has picked up strongly. The issue is actually being able to fill that demand."
"We have not been able to meet the full demand at this stage," he said, adding that Teck is "not doing spot sales until we can produce more coal."
Lindsay noted that plans to build "very large steel mills" on the China coast "will have a very significant effect on seaborne met coal."
As a result, Lindsay recently met this past week with Teck coal managers, who are in the process of reviving expansion plans -originally introduced in 2007--that would increase Teck's coal production to 28 million tonnes by 2012 and 30 million by 2014. Originally, the cost of the expansion ranged from $400 million to $500 million.
"The bottom line is coal is going to remain quite tight ... throughout the industry, which will likely have an effect on price," Lindsay noted.
Canada's Haywood Securities forecast Teck will produce 20 million tonnes of coal this year at $160 per tonne.
Meanwhile, the sale of mining assets, the $1.5 billion private placement in Teck by the China Investment Corporation, and cost-cutting measures have result in a financial turnaround by Teck that has not gone unnoticed by analysts. Standard & Poor's has revised Teck's outlook from negative to stable, and affirmed the company's "BB+" ratings.
"We believe Teck Resources Ltd.'s aggressive debt reduction has reduced the risk of further downgrades," S&P said.
"The company continues to reduce debt through a mix of solid operating cash flow, asset sales, and a recent equity issue," S&P credit analyst Donald Marleau said. "As such, we believe that downward pressure on the rating has abated, with good prospects for lower leverage in 2009, a manageable maturity profile, and adequate liquidity."
‘The stable outlook reflects our expectation that Teck will use its free cash flow and proceeds from assets sales to reduce debt further during 2009," S&P advised. "We believe that the company's recent debt reduction measures, along with better-than-expected commodity prices, should push leverage down to about 3x by year end."
Lindsay recently told analysts that achievement of investment grade ratings is a major goal for Teck.
Haywood's Kerry Smith predicted Teck will repay the remaining $2.74 billion of a $4 million bridge loan by the end of 2010 through cash generated from Teck operations and the closing of additional non-core asset sales. The company's overall debt has been reduced by $4.6 billion.
"With a total of $8.9 billion in debt, Teck isn't out of the woods yet," Smith said. "Nonetheless, the refinancing risk that loomed over the stock earlier this year has been lifted, and a more positive outlook in both the coal and base metals markets has boosted Teck's share price over the recent months."
Haywood estimates the current capacity of Teck's coal operations is in the 24 million- to 25 million-tonne range, but would require "a modest amount of capital expenditure and some time to ramp up to these levels."
"With recent assets sales and the private placement with China Investment Corporation, there is no pressure for Teck to generate additional cash from more non-core asset sales in the near term," according to Smith.
"We still believe that the minor metals produced at Highland Valley (about 1 million ounces of payable silver per year), Duck Pond (about 250,000 ounces of payable silver per year) and Red Dog (2.5 million ounces of silver per year) could be sold to generate some additional cash," he suggested.
Teck is still considering selling a 20% minority interest in its coal assets, estimated to be worth $2 billion. However, Lindsay said the company was taking its time determining which partnership would be the best fit for Teck.