Asset Sales May Weaken Teck Cominco - BMO

Teck Cominco Ltd. (TCK) confirmed this week that it has discussed the potential sale of core assets next year with Citigroup (C) in case it has trouble refinancing its bridge loan. This includes a minority stake in Elk Valley Coal, which it acquired in October as part of the roughly $13-billion purchase of Fording Canadian Coal Trust (FDG).

Teck is working to pay down this $5.8-billion loan that is repayable in late 2009 as well as a $4-billion term loan due in 11 equal quarterly installments beginning in April 2009 used to finance the deal.

However, BMO Capital Markets analyst Tony Robson thinks it will be difficult for Teck’s asset sales to match the roughly C$20-billion that it paid.

“Asset sales may weaken the company’s long-term cash generation capability and reduce future growth options,” he added in a research note.

Comments

[Vox Rationalis:]

Interesting. Consider:

Teck is trading at roughly 1/4 book value. Granted, book value has not fallen as much as it should to reflect current market conditions.

Teck is trading at a forward PE of less than 1.5. Granted, these estimates are likely to come down somewhat, but the company has contracts in place that should provide some stability in earnings.

Teck is expecting to pay half of the $5.8B bridge by the end of Q1 from cash flow and a big tax refund. At that point, their hedged contracts that pay them much higher than current market prices for copper and coal run out, and the rest of the year is much murkier.

Teck has long talked of selling certain non-core gold-related assets; this is not a new development related to the bridge debt.

Any management worth its pay will do contingency planning such as the potential Citi sale. This should be seen as an indicator of management's competence, not as one of the company's weakness.

Credit markets continue to be horrific. If you expect them to continue to be so through October, perhaps Teck's got problems.

My guess is that the Canadian government would back Teck's refinancing if it came to that, and might even extend the loan itself. This is a historically conservative company that made a mistake in purchasing the balance of Fording at the peak, but its long term prospects are still quite good - assuming copper and coal don't remain at 2002 levels indefinitely.

As for Robson's comments, I wonder if you're providing a fair reading of them. I mean, you paraphrase him as saying "it will be difficult for Teck’s asset sales to match the roughly C$20-billion that it paid."

Well, no kidding. Is this insightful? But more importantly, is it meaningful? Is there ANY indication that Teck might raise more case than is needed to meet the bridge debt obligation in October?

Then: “Asset sales may weaken the company’s long-term cash generation capability and reduce future growth options.” Again, no kidding - did Robson write anything that's not intuitively obvious to the casual observer?

2008 Dec 11 01:03 PM

[Vox Rationalis:]

Oh yeah, by the way, yes, I'm long TCK.

2008 Dec 11 01:18 PM

[toomuchgas:]

Teck has to be the worst case of a clueless management trashing a great company. Oh yeah, I forgot AIG.

2008 Dec 11 02:02 PM

[Big Nick:]

Is "Buy High-sell Low" the new "buy low-sell High?"

The craziest metric to look at here is not a traditional one such as PE, Debt ratios, asset to book or the like, it’s the simple calculation of what Teck could've done with all the cash they blew on overpriced acquisitions. Take the 4 Bln on Aur, 20 Bln on FDG, and another 1.5 Bln on minor stakes. That’s about 25 Bln on about 450 Mln shares (pre FDG) that paid out as a dividend would've been approx $55 per share, but even half that would've left the company with cash in the bank today, and the shareholders happy.

So the value destruction here is say ~40 in cash and ~50 in equity, a 90% annihilation. Nice try to camouflage this with the market, given other majors have only seen a fraction of the loss, even single commodity types, so much for the commodity diversification mantra. It is irrelevant when you go all in and bet the farm..the sickest thing is, tck already had 52% exposure to whatever FDG's upside was in the first place, so it was a greedy exercise all in all.

Staggering for a company with a share price hovering in the $4-5 range, and having cancelled its dividends. Apparently many even sr. employees of the company are outraged, at the new management brought in, especially long term people at seeing the company devastated with the banker style egocentric investment and speculation, as opposed to the shrewd, frugal, conservative and above all, smart acquisition and activity teck has historically been known for.

If you look thru the records, you will see that Teck paid next to nothing for their stake in the EV coal patch back in 1992, that basically funded the majority of the 52% stake prior to this FDG move, and also for the 1/3 stake in HVC that generated Bln's in FCF in the past few years. The "OLD Teck" would've been sitting on the Blns, waiting to snap up assets at these garage sale prices, not overpaid so grossly and foolishly as has been the case.

I'm shocked that heads haven't rolled over this! Seriously, does it really take a harvard MBA to figure out that basing a long-term valuation on commodity prices that are triple or quadruple the cost of production is probably a bed bet, and that at an all time peak commodity price, the value assigned should've had a fwd PE of 2 or 3 not the typical 6 to 10. A high-schooler knows its buy low sell high, not buy at twice the highest price in history!!!!!!!!!

Teck was looking to be poised to take a strong-hold among the top ten elite group of supermajors, and now are a joke and a shell of the company it was in the last century.





On Dec 11 02:02 PM toomuchgas wrote:

> Teck has to be the worst case of a clueless management trashing a
> great company. Oh yeah, I forgot AIG.

2008 Dec 12 05:50 PM