S&P Gives Teck Cominco Lowest Investment-Grade Rating

Troubled mining company Teck Cominco Ltd. (TCK) has received another blow, this time from credit rating agency Standard & Poor's.

S&P credit analyst Donald Marleau downgraded Teck's rating to "BBB-" from "BBB" with a negative outlook. Teck now has the lowest investment-grade rating that the agency offers.

Mr. Marleau said in a statement:

We base the downgrade on our view that lower commodity prices and output will likely result in weaker profit expectations, higher leverage, and heightened refinancing risk for Teck in 2009.

The downgrade reflects S&P's view of Teck's massive debt load, a result of its $14-billion acquisition of Fording Canadian Coal Trust's assets. Commodity prices have plummeted since that deal was announced, creating "elevated liquidity and refinancing risks."

To preserve its investment-grade rating in the first half of 2009, S&P said that the company must demonstrate its ability to fund maturities through "any" combination of operating cash flow, asset sales, or other sources.

The agency also noted that a downgrade to speculative (or junk) status could happen even if the company eliminates the near-term refinancing risk in 2009. That would be the case if Teck has an ongoing debt-to-EBITDA ratio of about four times. For the company to stay at "BBB-" with a stable outlook, debt to EBITDA would have to fall below three times on a sustained basis. According to S&P, that means reducing overall debt to $6-billion by the end of 2010.

Comments

[Livingstone:]

Firstly, the name of the company is Teck. Not Teck Camino or even Teck Cominco...just Teck. They officially changed their name on October 1, 2008.

Teck will come out of this and in a few years will be trading at a premium to NAV which at present is about $30 per share. S&P will be back on the band wagon with a positive rating. I would like to see a rating agency that can actually tell you where a company is going rather than where it has been.

Jan 15 10:10 PM

[PeteK:]

Agree with User 338338, the S&P Rating is just a bunch of BS.
So much politics and bias, it should be eliminated.

Jan 16 02:59 AM

[skrummydummy:]

I fully expect commodity prices to rebound with the incoming Obama administration's stimulus plans. Accordingly, TCK will experience a powerful rebound. The debt load is certainly heavy, but S&P is almost useless in terms of rating the stock itself. When S&P determines a stock to be a "buy," then is the time to sell (and visa-versa). I could name so many examples, beginning with BP, FRO, GE....

Jan 16 10:02 AM

[Big Nick:]

If TCk had been trading in the $ 4-6 dollar range for only a brief time then one may think it was the result of external factors to the company, such as panic selling, deleveraging, margin call dumping, or sector rotation of capital to cash, but it hasn't. The stock has been here now for a couple months, and it's no accident. There are no analysts out there screaming about how incredibly undervalued this stock is. Note there has been a %90 tanking of this stock, and that the debt on a per share basis is about 15 to 20 dollars per share, and the net cash flow per share at today’s prices and spot met coal is about a buck a share, or 2 at best with favorable CDN exchange.

A more likely scenario is that a gross blunder of value destruction has been made at Teck, in the form of a long shot gamble - that being the Forging transaction, that put a value of about 25 BLN +/- on that entity, or a FWD PE of 8 at the peak (and unsustainable) coal price, but more importantly and realistically a FWD PE of 50 at realistic margins like 50% (or $50) per tonne of coal sold. (note that the market puts a value of only 2.5 BLN on Teck in its entirety at the moment) Anyone who knows anything about valuation, or acquisition knows that this FWD PE was absolutely ridiculous, even the biggest gold companies in the world don't get these multiples, at even the lowest point in the cycle. But we're talking coal here, not gold.

The debtload at the onset of the FDG transaction was 14B, and has not been as rapidly paid down as expected. It's is most likely still in the 10B range, and even with the hedge effects, combined with the market taking less coal than output from EVCC, and rumored to be offering coal in the $100 range for next coal year.

In looking forward, specifically at debt serviceability, as would be the concern of S&P, even TCK bosses would likely admit the short-term debt can not be covered internally thru cash flows. There are 2 questions: 1) who will, or even would consider, refinancing the 6 Bln? and this leads to question 2), that is essentially the same as question 1, can they even cover the interest on the debt with cash flows at these margins. if you pull out a calculator and look at the last earnings results with today’s prices, you will see the answer is "not likely" The best that could be hoped for under current structure, would be a break even scenario, and even that would depend on favorable cdn exchange, metals not tanking even further, and most importantly a decent coal price like $130 to 150.

If you model the company’s cash flows from operations, you will see that there is in fact a risk, of not being able to service debt, at an estimated cost of 0.5 to 1 Bln per year. The only business unit at today’s prices that is providing significant cash flows is EVCC, but that is on last years prices. The Cdn exchange is also something that is keeping margins positive, but there are not guarantees there. If coal were to go back to $100, as seems to be rumored, or even with $130 and a par exchange (both very realistic outcomes), then Teck will be in deep trouble as S&P has correctly surmised.

The valuation question is how much leverage will the financiers of the massive debt loads have when it comes time to pay? and what "vultures" will come onto the scene? Another relevant question is will the BOC come to the rescue, as they seem to have for other staple canadian large industry? These answers will determine the most likely fate of TCK. Some optimists and bosses of TC seem to deflect pessimism with simple solutions like selling of Teck top tier assets, like its share of antamina, or the coal patch, or others. But the list is limited. For tier 1 assets (long life, low cost) TCK really only has a few and it’s doubtful that they would garner the 5-8 BLN in this market, that the company needs to get back on track. The important thing to recognize here, is that the asset disposal decisions and pricing may be forced upon teck management, and may be one way negotiations.

The market only values the entire company at 2 or 3 BLN right now, so who is going to come along and offer top dollar to a distressed company at this stage in the game. TCK has no leverage and it's going to have to shed its best assets, likely cropping a substantial if not a lions share of its asset value. These tier one assets are the very thing that investment grade shareholders valued TCK for, that took the past 20 years to build and acquire. "We don't need to keep the entire share of the coal patch" they claim? Ludicrous, as they already had 52% pre-FDG!!, imagine the irony of selling of the asset at today’s value of about 20 to 40% value per share instead of the $90, and being left with the same 52% interest or less, but shy about 14BLN?? The other irony here is that the original FDG teck merger brought question as the Elkview (teck) mine contributed not only more, but higher quality resource to the deal than all 5 of FDGs mines put together, and at higher margin as well, and FDG "hit the grand slam" and may as well have been awarded the "stanley cup" figuratively speaking as the deal also precluded their capital from one of the worst short term thrashings in market history. The whole deal really stinks of misguided acquisition behavior and major speculation.

Predictions of the author:
- After the next earnings release, TCk will be downgraded, off the investment grade scale at S&P to "speculative"
- The US CDn exchange spread will thin or be eliminated, even further reducing Tecks ability to refinance its debt and survive in the form its known as today.
- It will shed anywhere from 20% to 50% of its production capacity to finance / reduce / eliminate the debt, in the only business units that are projected to have any real margin near term, thereby reducing the company out of the respected status of a major and become just another mediocre asset holding mid tier mining company.

Jan 16 07:42 PM

[Vetted:]

Spoke with Teck last week, and learned that coal prices are critical. Remember that these contracts are generally 6 years in duration with numerous clients; and are staggered. Japanese clients are known to meet their contract obligations. Do not forget that Canadian tax law refunds Tech's substantial prior tax payments for acquiring a Canadian entity. Finally S&P rated various toxic instruments as AAA recently and the President was fired as a form of mitigation against numerous lawsuits pending. I have taken a substantial position. in TCK....

Jan 16 11:42 PM

[User 135840:]

I am only finding 4.88 billion in total debt, 7.2 bil assets--were are they getting the 14 billion in debt ?


On Jan 15 10:10 PM Livingstone wrote:

> Firstly, the name of the company is Teck. Not Teck Camino or even
> Teck Cominco...just Teck. They officially changed their name on October
> 1, 2008.
>
> Teck will come out of this and in a few years will be trading at
> a premium to NAV which at present is about $30 per share. S&P
> will be back on the band wagon with a positive rating. I would like
> to see a rating agency that can actually tell you where a company
> is going rather than where it has been.

Jan 26 02:42 PM

[Big Nick:]

If you take a look at DL's presentation for sept 08, the estimated pro forma debt at the onset of H2 08 was 11.4 BLN. The expected cash flows and hedging / coal contract effects were supposed to reduce that position to around 7 BLN by end of 2009. Almost immediately after this presentation came out, the prices crashed to near margin levels. The currency hedging program actually represents a large loss as well, and cancels out much of the gain on the cu hedging program. the expected cash flows of 1+ BLN plus per quarter are not being realized due to these factors as well as coal volumes not being fulfilled. The earnings / balance sheet release will tell all in 3 weeks, but the debt is likely still around 7-9 BLN, and won't be much less than that come the new coal year, when debt servicing ability will count most.




On Jan 26 02:42 PM User 135840 wrote:

> I am only finding 4.88 billion in total debt, 7.2 bil assets--were
> are they getting the 14 billion in debt ?

Jan 30 05:14 PM