March 29, 2009

Teck Resources faces Perfect Storm

I have taken a position in Teck Resources (TCK) @$4.65 betting that the company will be able to meet its debt obligations or at least restructure them. Investors have written off Teck after its ill timed acquisition of Fording Coal, which was financed mainly with short term debt. Then Teck faced the perfect storm:
1. collapse in commodity prices, and
2. a credit crunch that left most companies with short term debt maturities crushed, Teck is one of them.

As a result , Teck shares have gone from high of $48 per share to low of $2 per share.

Teck Resources assets are impressive and valuable. Teck is
....engaged in the exploration for and development
and production of natural resources. The Company’s principal products
are copper, metallurgical coal, zinc and gold. Lead, molybdenum,
various specialty and other metals, chemicals and fertilizers are
by-products produced at its operations. It also sells electrical power
that is surplus to its requirements at the Trail metallurgical
After it consolidated its ownership of Elk Valley by acquiring its Fording Coal, Teck has become a major producer of met coal. Also, Teck owns significant oil sands reserves in the Fort Hills project among other oil projects co-owned with UTS energy in Alberta.

The market has priced a strong possibility of Teck liquidation or bankruptcy. So all bad news is priced in which creates for good risk reward proposition, if Teck manages to restructure its debt. And I think it can for the following reasons:

  1. Asset sales that can cover some of its obligations. Its assets base is impressive and the value is there. The industry still sees real value in this company's assets, just not at the prices it paid. The company has already sold some none core assets and looking for more sales.
  2. operational cash flow in 2009 will cover some its debt as some commodities price have increased from the bottom observed in Q4 2008.
  3. Possible short term debt restructuring. I can't see any lender forcing Teck to liquidate. Teck as going concern can cover its obligation but it may need additional time. I am betting that banks will give it that time.

Teck still faces a daunting task of repaying short term debt of $7.7 Billion (CDN). I have calculated that from already announced assets sales, tax refunds and free cash flow, Teck will be able to repay $3.6 Billion, see table. This will leave the company with a balance of $4 billion to refinance or repay through further assets sales.

Teck still has multiple options to generate funds from asset sales. It can sell its partnership with UTS to Total, which has an offer outstanding to UTS shareholders. this can amount to $500-800 million. It can sell partial interest in its coal operations for $4 billion and take an impairment charge, as it will less than what it paid for Fording.

This is a speculative extreme outcome situation. If it recovers then the payout can be good but the downside is 100% loss of principal, however given the caliper of the company I think it will pull through.


Anonymous said...

What is your opinion of the management team? To my knowledge it is the same management team that caused the heavy debt burden to begin with.

As well, any particular reason why you purchased it on the NYSE versus the TSX?

Sami said...

I think their track record is good but they got caught. I think the fording deal was forced upon them to some extent.

Fording was conduction a "strategic alternatives review" meaning that they wanted to sell. Teck hands were tied that either they bid or they find themselves with unwanted partner bigger and can push them around.

The price is what I have problem with as they paid a bit too much.

I think they are deal makers and they will be able to deal the assets to raise cash.

No reason to buy it on the NYSE other than I had some US cash that I did not want to invest in US local currency company and I did not want to convert to CDN dollar so I decided to buy a cross listed company with it.

Most money manager in the press have slapped teck as a goner and would recommend selling it so it is a risky proposition because if anything goes wrong this year they are done. so this is a call option.