Teck – The Last Diversified Canadian Mining Giant

BHP Billiton chairman Don Argus stated last summer that Canada’s commanding role in global mining had been reduced to “branch office” status. This criticism reflects the fact that Canada`s major mining companies like Falconbridge, Inco and Alcan have fallen under foreign control.

Vancouver-based Teck, however, withstood this wave of industry consolidation and stands today as the last, diversified Canadian mining giant.

So I am both wary of and troubled by the intense negative media speculation over the immediate future of Teck. Due to the emotional “herd” mentality of current stock market investors, if you repeat something often enough it seems to become a fact even though it’s not.

Much of this negative coverage focuses on the company’s ability to handle the US$9.8 billion debt it incurred to fund its acquisition of the assets of Fording Canadian Coal Trust. There is concern over the $5.8 billion in bridge financing that is due at the end of October, 2009. The remaining US$4 billion is term debt and repayable over three years.

Yet, the company kicked into gear with a debt reduction plan, beginning in November with a suspension of its dividend. Teck has also cut costs, slowed down or deferred the development of various projects and, unfortunately, laid-off 1,000 employees and 400 contractors – about 13% of their global workforce. And the way Canadian tax rules work, Teck has recovered most of the expected $1.1 billion in cash taxes previously paid — a key aspect of the Fording acquisition that pleasantly surprised analysts when the deal was announced.

The company also sold its 60% interest in the Lobo-Marte gold project in northern Chile and its 50% ownership in the northern Ontario Hemlo operation to Barrick and is currently assessing other potential asset sales. These measures demonstrate Teck’s ability to move quickly and pragmatically, following the sudden collapse of global commodity markets. 
The company expects a substantial reduction of the bridge financing debt through the first half of 2009, and intends to refinance as conditions permit.

While the arm-chair quarterbacks may criticize Teck’s Fording acquisition, some background and perspective on this key Canadian strategic resource is in order. The six coal mines that were held in partnership between Teck and Fording constitute the world’s second largest exporter of coking coal, a critical component in the production of steel.  China’s Ministry of Land and Resources is creating a strategic reserve of coking coal, a move that demonstrates the importance and scarcity of this vital commodity.

These deposits have a known lifespan of almost seventy years and this could be much longer. Globally, only 10% of coal deposits contain the coking variety, the remainder is thermal coal, used for the production of electricity. At the time of the acquisition, there was a lot of speculation that foreign miners were interested in taking over this critical asset. A recent agreement establishes a higher than expected benchmark price for coking coal this year at US$129. Original estimates feared a price below US$100 a ton.

Not only is this significantly higher than earlier estimates but it also represents the second highest price in the history of the industry. The fact that such a benchmark can be set during one of the worst economic downturns in our lives is a testament to the long-term value of these assets.

Teck’s copper production is poised to grow approximately 75% between now and 2011. The company has major projects and has the largest private sector land holdings in Chile, one of the most pro-mining and politically stable countries in the world, as well as in Peru. The remainder of the company’s activities are in the United States and Canada. Many of the world’s largest ore deposits are found in politically unstable countries. This increases shareholder risk and operating costs.

Teck also has some of the highest quality zinc deposits on the planet – the Red Dog zinc mine in Alaska being the world’s largest. While the metal has been an underperformer over the past few years, industry expert Brook Hunt is predicting shortages in 2010-11.

Over the past half year, metal prices and demand have dramatically imploded, putting an abrupt pause to a “once in a generation” commodity supercycle”. Many companies, including Teck, find themselves under short-term pressure. However, there will be an end to this recession. And Goldman Sachs continues to remind investors that we are witnessing an exponential explosion of the middle class in China, India and other developing countries. This will entail an unprecedented world demand for copper, zinc, metallurgical coal, oil and other commodities.

State-controlled China Aluminum Corporation recently invested almost $20 billion in Rio Tinto signalling China’s expectation that the commodity slump may not last as long as many western economists believe.

Internationally respected financial adviser Donald Coxe recently stated, “Although we’ve had a tremendous setback, it will still prove to be, from the sweep of history, the greatest commodity boom of all time.… All major governments and all major central banks are reflating their economies, so base metal demand will come roaring back.”

Also, it still takes up to ten years to bring a new mine into production. And there are fewer giant, long-term ore deposits being discovered along with a shortage of the geologists and engineers necessary to take a mine from the drawing board to production. Lastly, metals are a fundamental building block of economic growth and are key to a high standard of living. Teck is not producing automobiles that are subject to the vagaries of consumers, or that can be manufactured at lower costs overseas.

Further, the company’s head office in Vancouver contributes to local mine research, post-secondary institutes across Canada and a wide range of legal, accounting and technical service firms. Teck is an integral part of Vancouver’s world-class cluster of almost 1,000 mining and exploration companies and supply and service firms that export their products and expertise around the world.

One of Teck’s core strategies is to build a diversified mining company that over the long run will offer more value to shareholders than those focused on a single commodity – a Canadian version of BHP-Billiton, currently the world’s largest mining company. 

This is not to look at Teck through rose-coloured glasses. 

There is no doubt that the company’s corporate management must focus and deliver against the immediate financial challenges. However, through its century of existence, Teck has survived many economic downturns. There is every reason to believe the company will make it through this one as well.  

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