Teck and Fording Should Benefit from Rising Coking Coal Prices
Coking coal prices are expected to heat up, says UBS analyst Brian MacArthur, as further flooding in Australia and declining inventories in China weakens global supply of the fossil fuel.
In a note to clients, Mr. MacArthur said flooding downunder has forced most coal producers to declare force majeure, essentially freeing companies from liability or obligation when an extraordinary event or circumstance happens beyond their control.
He wrote:
BHP Billiton (BHP) alone has indicated that production this year could be down by as much as 8 to 9 metric tonnes, representing 3 to 4% of global coking coal supply.In addition, the analyst said infrastructure bottlenecks and poor weather continue to threaten coal inventories in China.
As a result of both situations, UBS raised its 2008 coking coal price forecast from $170 per tonne to $225 per tonne.

Mr. MacArthur said Teck Cominco Ltd. (TCK) and Fording Canadian Coal Trust (FDG) will benefit from the increase, but cautioned the benefits may not be realized right away. He said earnings will be affected at both companies by carry-over tonnage priced at $91 per tonne, and told investors not to expect gains from higher coking coal prices until the second half of 2008.
Mr. MacArthur raised his price target for Teck shares from C$42 to C$46, and increased his target on Fording units from C$48 to C$57. He rates both stocks a "buy."
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