What the Heck, Teck?

As we've all learned recently, a credit crisis is also a crisis of confidence.

Confidence rapidly dwindled this week in the financial stability of a major diversified mining company. Teck Cominco (NYSE: TCK  ) issued a press release Tuesday to dispel rumors that the company was planning an equity offering to pay down debt incurred from the acquisition of Fording Canadian Coal Trust last month. Unfortunately for Teck, the release did little to stem the tide of public opinion, as investors continued to punish shares down to more than 90% below their 2008 high.

Since prices for everything Teck mines have fallen precipitously, investors and analysts alike are concerned about the company's ability to repay loans totaling $9.8 billion … or more than three times the present market capitalization. The selling continued even as the company outlined a general plan of action, which includes:

  • Robust projected cash flow from existing coal contracts -- good through March 2009 -- which were priced at the unprecedented highs of last spring.
  • An anticipated $1 billion tax refund.
  • Projected gains from copper hedge contracts in view of the soft metal's softness.
  • Reducing capital spending and deferring development projects if necessary.
  • The potential sale of assets, including the company's portfolio of gold projects.

Unless market conditions improve quickly, investors appear to have reason for concern. Weary from the drag of weak zinc prices, Teck made a strategic move into copper just in time to watch the price plummet from $4 per pound to less than $1.70. In retrospect, the timing of Teck's big coal deal was no better. Forecasts are for a sharp drop in the price of met-coal next year. To make matters worse, Teck is facing skyrocketing cost projections related to its 20% stake in the Fort Hills oil sands project operated by Petro-Canada (NYSE: PCZ  ) .

Teck's gold assets, on the other hand, could fetch a pretty penny if the company holds out for a fair price. Because of their scale, I see North America's big three gold miners -- Barrick Gold (NYSE: ABX  ) , Newmont Mining (NYSE: NEM  ) , and Goldcorp (NYSE: GG  ) -- as the only viable suitors for these assets. Any of these buyers would represent welcome partners for junior NovaGold (AMEX: NG  ) , which is keen to bring the tabled Galore Creek project to fruition.

As for Teck's prospects, I believe China's stimulus package will boost commodity prices substantially, and may offer the breathing room required to pay down these loans.

Further Foolishness:

Over at CAPS, 755 members have rated four-star pick Teck Cominco an outperform. Whether you think Teck will succeed or fail at repaying this debt, please come share your thoughts and counsel with our community of investors. CAPS is free and fun!

Fool contributor Christopher Barker never thought Teck would become a wreck. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of NovaGold and Teck Cominco. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 14, 2008, at 5:39 PM, TengriTrader wrote:

    Debt is Death in these markets. Investors have no risk appetite and they will see anything that gives them even the slightest reason to be concerned.

    At a time when great companies with solid balance sheets are being sold off - it is utterly foolish for any management to rock the boat. TCK management has only themselves to blame for the massive sell off.

    I hope they make it but I fear its out of their hands and more dependent on the economy. If the economy improves they should be okay, if however next year we go into a deep recession that lasts for years then the the situation will become dire.

  • Report this Comment On November 16, 2008, at 11:40 AM, Chickenpookie wrote:

    Well, you did at least mention the rumors circulating... Hmm, I think I've seen and heard similar takeover strategies before. Do ya think? What about shareholders who've done their due diligence? Looks like someone's thrown a match on the tender box, and this should be investigated by authorities. How confident are we in authorities taking an initiative to perform their assigned responsibilities?

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