Thursday, April 9, 2009 06:39 PM
Survivor Teck: Season premiere!
David Berman
With Teck Cominco Ltd. shares down another 7.5 per cent on Thursday, to just $6.13, the big bet is on whether the company will stave off bankruptcy.
Ian Howat, an analyst at National Bank Financial, tackled this question head-on in a note, looking at the company's ability to service its debt and its $5.8-billion (U.S.) bridge loan associated with its recent purchase of Fording Canadian Coal Trust.
His conclusion? Teck will survive. Indeed, he raised his recommendation on the stock to “sector perform,” from “underperform.” Although he lowered his 12-month target price to $17 (Canadian), from $23 previously, that still implies a 180 per cent return.
“We ran several cases to test whether Teck will breach the debt covenant and even in our worst case scenario, we don't think this will happen,” he said. “We focused on the debt covenant, not on the company's ability to pay off the bridge loan due in about one year as we view this as a bank problem. If the financial markets are still in a similar state one year from now the bank will just have to roll it over.”
His tests assumed that Teck would cut its dividend and that the majority of the company's free cash flow would go toward paying down debt. However, he assumed that commodity prices won't fall further.
“If commodity prices stay at depressed levels, the company will have to write down the value of assets lowering equity, which would then possibly put Teck in default of the debt covenant.,” Mr. Howat said. “Again, we would view this as a bank problem and they would amend the terms.”
