It is no secret that Teck Resources Ltd. (TCK) wants to sell a 20% stake in its Elk Valley coal deposits to pay down debt and balance its commodity exposure. At a conference last week, chief executive Don Lindsay offered a price range of C$3-billion to C$5-billion for the minority interest in Elk Valley.
But is that feasible? BMO Capital Markets analyst Tony Robson is not convinced. Using a long-term metallurgical coal price of $125 a tonne, he calculated a value of C$1.5-billion for a 20% stake in Elk Valley.
However, he also noted that Elk Valley is very sensitive to coal prices because it is a higher-cost producer. Assuming a long-term coal price of $145 a tonne, he wrote that the stake is worth an estimated C$2.2-billion.
To reach Teck's stated price range of C$3-billion to C$5-billion, Mr. Robson suggested long-term coal prices of $165 a tonne to $215 a tonne are required. That would seem cheap compared to the $300 prices seen in 2008, but considerably higher than current prices of around $125 a tonne.
Mr. Robson wrote in a note to clients:
The average implied price of $190 [a tonne] would require exceptionally robust steel production and prices, and prolonged structural issues in the met coal market.
Teck has identified three potential types of buyers of the Elk Valley stake: Asian customers, financial institutions, and large mining companies. Of the latter group, Mr. Robson suspects that Brazilian giant Companhia Vale do Rio Doce (NYSE:VALE) is the most likely candidate. Vale has plenty of cash on hand ($12.2-billion) and limited exposure to metallurgical coal.
Should Vale be interested in increasing exposure to met coal, Elk Valley would allow easy and immediate entry into the seaborne coking coal market.
Mr. Robson rates Teck a "market perform." He had a very dim view of Teck for months, but his outlook improved after the company received extensions on its debt payments.