Canadian miner Teck Cominco (NYSE:TCK) is changing its name to Teck Resources, and the company intends to build its brand just on the name Teck. The new name takes effect legally in April 2009. In addition, Teck is restructuring its business into five separate units: copper, zinc, coal, gold, and energy.
Last July, Teck agreed to acquire Fording Canadian Coal Trust (NYSE:FDG) for an estimated $13-$14 billion, of which Teck is borrowing $9.8 billion. The most significant piece of the deal is Fording’s 60% interest in the Elk Valley metallurgical coal operation, the world’s second largest producer of hard coking coal for export. Teck already owned a 40% interest in Elk Valley and was the mine operator. The Canadian government approved the deal earlier this week, and the takeover is set to take effect on October 29th.
Coking coal is used to manufacture steel, and its price has risensignificantly in the past year. Fording exports its coal primarily toAsian and European markets, and Teck expects the acquisition to add toits bottom line immediately. It had better.
Teck’s share price is within pennies of its 52-week low, down more than50% from a year ago. Competitors BHP Billiton (NYSE:BHP) and Peabody(NYSE:BTU) are also down, but by significantly less. Fording’s shareprice has been up about 100% in the past year, so if Teck can executeto its plan it should see its share price begin to turn back upward.
A couple of analysts were not impressed. BMO Capital Marketscut Teck’s rating to ‘underperform’ and set a price target ofC$30/share, 50% lower than its earlier target. The high cost ofoperations in Teck’s Fort Hills oil sands project is also weighing onthe share price.
Taking on nearly $10 billion in new debt and issuing new shares to payfor a huge acquisition is not a recipe for warm feelings from analystsand traders. And while Teck’s timing could have been better, this couldbe a really good deal for the company if it can bring up the rest of its operations to match the expected results from Fording.
October 3, 2008