To understand the enormity of Teck's bad timing on the Fording Canadian Coal Trust takeover, take a look at what's happened to Walter Industries.
Walter, like Fording, mines metallurgical coal and sells it to steel makers. Back in July, when Teck offered to buy Fording in a $14-billion (U.S.) takeover that included $12.4-billion of cash, Walter was setting new highs at $111 a share.
But summer marked the end of the market's love affair with all things coal. Steel makers are cutting both consumption and the price they are willing to pay for met coal. Not surprisingly, Walter stock has tanked - it set a new 52-week low Wednesday of $26.65 a share.
Teck, or course, followed through and bought Fording at what now looks like a top-of-market price. Using Walter's valuation as a surrogate for what Fording is worth, Teck paid $12.4-billion in cash for coal mines that the market would now value at $3.5-billion.The takeover transformed Teck from a conservatively financed resource play to a highly levered company, just as both credit markets and commodity prices fell apart.
Here's where things get dicey for Teck: A large portion of that Fording takeover was financed with debt, and that has to be repaid. There's a $5.8-billion bridge loan in place, and a $4-billion term loan.
The question now is how Teck will pay back its loans. A $1-billion tax refund is coming, assets such as gold mines are clearly on the block, the dividend is likely history and capital spending will slow.
But the stock price is weighed down by concerns with debt. Teck's valuation has dropped 83 per cent this year, with stock that changed hands for $52 just before the Fording deal hitting a new 52-week low of $6.05 early Wednesday. Scotia Capital analyst Lawrence Smith weighed in Wednesday with a downgrade based in part on “growing concern that the current downturn in metal prices may be more severe and protracted than we had previously thought.”
“We are uncomfortable with Teck's high debt level resulting from its acquisition of Fording, in an environment where commodity prices could remain at low levels for several years,” said Mr. Smith.
In a sign of just how seriously the Street is taking the Teck situation, Bank analyst Ian de Verteuil at BMO Nesbitt Burns published a report Wednesday that detailed each bank's exposure to the mining company. Royal Bank of Canada, CIBC and Bank of Montreal made the largest loans to fund the Fording purchase, with each advancing $959-million. Bank of Nova Scotia and Toronto-Dominion Bank anted up $401-million, while National Bank contributed $75-million.
Details on these loans were part of a larger BMO Nesbitt Burns report that looked at the risks that come with corporate lending. Mr. de Verteuil warned that based on Teck's current balance sheet, “if commodity prices continue to deteriorate, a problem could develop as early as March, 2009, and this could be one of the faster “underwriting to default” experiences in the history of banking.”
