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."

Comments

[Yael Pipano:]

Brian MacArthur is a very talented analyst that knows his coal companies (I've gotten his input and models on Fording when I worked for a billion dollar hedge fund 2 years ago). But even if you don't believe him, the coal shortage, floods and force majeures are true, and you can read about it in any Australian paper, and the demand outpacing supply is also transparent from recent articles. UBS raising their price forecast for coal and their price targets for both Teck and Fording was I'm sure after careful deliberation and calculation of all the pertinent issues at hand. I do agree, the extra profits will not show on either company's income statement for at least the next 2 quarters, but there's definitely a good risk/reward ratio to owning either or both companies at this time. In addition to being in the right business at the right time they are well managed companies with a long track record, and Elk Valley is something we should all be familiar with.

2008 Mar 05 08:51 PM

[beegdawg007:]

Western Cadadian Coal will benefit more since it has virtually no carry over remaining on the 2007 contracts after April 1. With 115 million shares and production of 3.2 million Tonnes of coal, I figure the EPS this year to be close to $1.00 a share. The stock trades for less than $3.00. There is also a good chance that some Asian steel company will simply buy the whole company to secure a 25 year supply of coal.

2008 Mar 05 09:14 PM