Slowing Coking Coal Supply Should Benefit Teck Cominco

Strong global steel demand combined with a slowing supply for coking coal should boost earnings in Teck Cominco Ltd. (TCK)s tarting in 2009, says UBS analyst Brian MacArthur.

In a note to clients the analyst said:

Global steel demand remains quite strong despite the slowdown in the western world.

He added that the limited availability of reductants like coking coal has become a constraint on steel production growth.

He told clients the coking coal market will remain in deficit for at least the next 18 months, in turn, leading to higher prices. UBS upgraded its coking coal price forecasts from C$200 to C$300 per tonne in 2008, and from C$175 to C$275 in 2009. Long term, UBS now predicts prices at C$100, up from C$75, previously. 

Mr. MacArthur said Teck Cominco stands to benefit from the higher coking coal prices, but cautioned investors to remain patient.  

The analyst wrote:

We continue to caution that first quarter and second quarter earnings at Elk Valley will be affected by carry-over tonnage priced at $91 per tonne and therefore investors are unlikely to see the full benefits of a higher coking coal price until the second half of 2008. Furthermore, Q2 tonnes could be hurt by the roll-off of the existing favorable Canadian dollar hedge.

As such, Mr. MacArthur lowered his earnings per share estimate for 2008 from C$4.94 to C$4.92 and raised considerably his 2009 EPS estimate from C$6.66 to C$7.36.

He raised his price target on Teck shares from C$55 to $61, and left his "buy" rating unchanged.