Donald Lindsay, president and chief executive officer of Teck Resources in his office on Burrard Street in Vancouver.LAURA LEYSHON
China's unyielding appetite for commodities pushed Teck Resources Ltd. and its CEO Don Lindsay into a near-death debt fiasco. Now, the Asian economic superpower is digging them out.
In May of 2008, Mr. Lindsay led a group of Teck directors to Shanghai where they witnessed China's economic explosion in full swing. The board members were so awed by the building boom they became converts to the notion that Chinese metals demand would remain strong for years to come.
Weeks later, they gave Mr. Lindsay the green light to go ahead with the $14-billion (Canadian) acquisition of Fording Coal - the top-of-the-market takeover that would leave Teck drowning in $9.8-billion (U.S.) in debt as the global economy collapsed.
Yesterday, China came to Teck's rescue, the final step in the copper, coal and zinc miner's self-titled "12-step plan" to kick its leverage problem and repair its balance sheet.
Teck unveiled a $1.74-billion (Canadian) private stock sale that will give China a 17.2-per-cent stake in Canada's largest base metals company.
The deal, struck with the hulking $200-billion (U.S.) sovereign wealth fund China Investment Corp. (CIC), will provide Teck with sorely needed cash to largely eliminate its crushing short-term debt load and a strategic partnership with the world's dominant commodity buyer.
"If you think about the market for our core products, China is obviously the single most important country by far in terms of demand. So getting a Chinese strategic investor was top of the list," Mr. Lindsay said.
The Teck CEO expects CIC will help his company increase its coal sales to China, a key pillar in the company's strategic plan. Mr. Lindsay also said that China may help Teck fund development projects including a pair of its copper mines in Chile. Teck is also a partner in the Fort Hills oil sands project in Alberta that has suffered from staggering cost inflation and China could help Teck fund its share of the project.
As the world economy has slipped deeper into recession and crimped metals demand, China has moved aggressively to buy resource assets and secure access to copper, oil, iron ore and coal.
Despite the recent collapse of state-controlled Aluminum Corp. of China's (Chinalco) proposed $19.5-billion (U.S.) investment in Rio Tinto PLC (another miner riddled with debt as a result of a top-of-the-market takeover), China's Commerce Ministry said earlier this month that it will continue with its so-called "go abroad" investment policy.
Through various state entities, China has plowed billions into resources in the past eight months, including oil in West Africa and Iraq, zinc in Australia and iron ore in Canada. With the vast majority of its holdings in U.S. dollar-backed investments, China is looking for diversification with the resource deals.
"They are a deep-pocketed partner. I don't know if they are the deepest pocket in the world but it is pretty close … they are clearly shifting out of U.S. Treasuries into hard assets. This is just one step in that," Mr. Lindsay said.
Several international mining firms were interested in taking a similar size stake in Teck but were rejected in favour of CIC and China. Mr. Lindsay believes the rival miners were interested in the stock as a precursor to a takeover. "That was something that was never going to be on the table," he said.
CIC intends to be a "long-term passive financial investor" and will not take a seat on the board. The deal underscores China's expectation of continued demand for metals and Teck expects to tap its new partner for insight into the state of the Chinese economy.
CIC chairman and CEO Lou Jiwei, who signed the deal for CIC this week, is a member of China's government cabinet.
"We addressed him as 'your Excellency.' He's one of the key people in the country," Mr. Lindsay said.
Despite shareholder dilution, analysts and investors generally applauded the proposed transaction that will give CIC a 6.7-per-cent voting interest in Teck. The company's class B shares jumped 8 per cent yesterday on the TSX. Once the transaction is completed, the company's A class shareholders, which are dominated by the family of Teck chairman Norman Keevil and Japan's Sumitomo Metal Mining Co. Ltd., will hold a 61.8-per-cent voting interest down from 66 per cent.
In a report to clients, BMO Nesbitt Burns analyst Tony Robson said he was "surprised" by the CIC deal as Teck had previously stated it wasn't planning an equity issue.
However, the analyst viewed the transaction as positive because of the $1.5-billion in proceeds from the stock sale that Teck intends to put toward debt reduction.
"With recent asset sales, today's move has done much to correct the former severely weakened balance sheet," Mr. Robson said in the report.
The CIC deal marks the final hurdle in an aggressive debt reduction plan hatched by Mr. Lindsay and other Teck executives at the depths of the market meltdown last November.
Teck has cut its dividend, laid off workers, sold $1.5-billion (U.S.) in assets, restructured its loans, cut capital spending and issued $4.2-billion (U.S.) in junk bonds to raise cash to reduce the loans from the Fording deal.
A former investment banker, Mr. Lindsay said he scribbled down the 12 steps comprising the plan on a note pad that is still sitting on the desk in his Vancouver home office.
"All along this was the last step. We hoped to get this strategic partnership with China and we did. So a lot of us are going on vacation now."