Teck Is Less of a Wreck

When you're down on your luck, sometimes all you need is a helping hand.

Teck Cominco (NYSE: TCK  ) has been dealt a pretty cold hand after a major metallurgical coal acquisition blew up in the company's face late last year. Earlier this month, times were looking particularly grim as the market questioned the miner's ability to dig its way through a mountain of debt.

Since that time, Teck shares have promptly doubled, and at least one helping hand believes that a broader recovery looms. An analyst at UBS Investment Research upgraded Teck this week after projections for 2009 coking coal prices improved substantially from $85 to $129 per tonne. Benchmark coking coal prices, as with iron ore, are negotiated each spring between major miners like BHP Billiton (NYSE: BHP  ) and leading steelmakers. Based upon freshly signed agreements between BHP and Japan's two largest steel mills, the 2009 benchmark remains well above the historical average.

With global steel production off by about 30%, and U.S. contingents like Nucor (NYSE: NUE  ) and U.S. Steel (NYSE: X  ) feeling the sting of capacity utilization dropping below 50%, I find myself pleasantly surprised by the robust benchmark price. In addition to providing a desperately needed boost to Teck Cominco, these prices suggest a profitable year ahead for battered met-coal competitors like Cliffs Natural Resources (NYSE: CLF  ) and Alpha Natural Resources (NYSE: ANR  ) .

One might say Ben Bernanke has also extended a helping hand to Teck, since the Federal Reserve's foray into quantitative easing this week brings the potential tally of the financial crisis beyond $13 trillion, and seems to have brought the inflation-hedging commodities sector back into the focus of dollar-weary investors.

A parting word of caution
While the added cash flow implied by these prices will permit Teck Cominco to pay down some debt, the scale of remaining indebtedness ($9.4 billion as of early March) leaves me entirely unwilling to suggest that this miner is out of the woods. To the contrary, I believe that major asset sales will still be required, including the possible disposition of a minority stake in the Elk Valley Coal project.

Finally, I urge Fools to carefully differentiate between the potential influx of inflation-anticipating interest in commodity equities and true demand recovery. The same analyst who raised the outlook for Teck also cited "optimism for an economic recovery". On the latter point, I urge extreme skepticism.

Further Foolishness:

Over at CAPS, more than 1,100 members have rated five-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 is the commodore of copper and the Colonel Klink of zinc. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Alpha Natural Resources, BHP Billiton, Cliffs Natural Resources, and Teck Cominco. The Motley Fool has a steel-clad disclosure policy.


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