News

A little more than three months ago, it looked like Don Lindsay was sitting pretty.

On July 29, his company, Teck Cominco Ltd., unveiled a blockbuster $14-billion (U.S.) takeover bid for Fording Canadian Coal Trust and Teck shares defied usual deal trading patterns by jumping 6 per cent to close at $42.85 (Canadian) on the Toronto Stock Exchange.

It was a false good omen.

Since then, everything has changed for Canada's largest base metals miner. A looming global recession has decimated metal prices at a time when Teck has loaded itself up with $9.8-billion (U.S.) in debt including a $5.8-billion short-term bridge facility to pay for the takeover.

Now shareholders are sweating over how the company will repay the bridge loan amid waning demand from steel makers for Teck's coking coal.

"If we'd known this was going to occur we might have done something differently, there is no question about that," Mr. Lindsay, Teck's chief executive officer, said in an interview Tuesday.

Teck shares nosedived 20 per cent Tuesday on rumours that the company is planning a $3-billion stock offering — rumours that Mr. Lindsay said were bogus.

"I can tell you for certain that we are in no discussions with any dealer about doing an equity deal," he said.

Still, the market meltdown has pushed Teck into a troubling financial position. Its coal will likely be fetching significantly less next year than the $275 a tonne customers agreed to pay in the 2008 coal year.

India's state-controlled steel maker is reportedly asking suppliers to reduce prices of current contracts to $100 a tonne.

While the coal from Teck's Elk Valley operations in British Columbia is not sold to India, world steel production has been slashed by more than 10 per cent and Chinese steel mills have cut output by between 30 and 50 per cent in response to the sudden economic downturn.

Mr. Lindsay said he is confident Teck's coal mines will continue to generate strong cash flow until the current coal year expires in April.

"That doesn't mean we haven't noticed the extraordinary reductions in steel production that have been announced around the world. We're watching things very closely but at this point all the contracts are being honoured," he said.

Teck executives are working on a plan to reduce costs and raise capital to pay down the bridge loan. The proposals will be presented to the Vancouver-based company's board on Nov. 19.

Cutting Teck's dividend, which amounts to about $500-million a year, is one of several options.

"It's fair to assume that the board will review the dividend quite closely," Mr. Lindsay said.

The company is also expected to curtail expenditures on expensive development projects such as the Fort Hills oil sands joint venture with Petro-Canada and UTS Energy Corp., as well as its Galore Creek copper project. Mr. Lindsay would not comment on specific assets but sources said the company is also likely to walk away from the Petaquilla copper project in Panama.

Teck is expected to sell its gold assets and could shut down money-losing mining operations such as its Lennard Shelf zinc mine in Western Australia, which was shuttered earlier this year.

At a forecast 2009 coal price of $180 a tonne, "we believe it will not be possible to fully repay the bridge loan of $5.8-billion, fund the capital requirements and make the required debt repayments for the term loan," UBS Securities said in a recent note to clients.

BMO Nesbitt Burns analyst Tony Robson believes that Teck overpaid for Fording and has cut his rating on the company to a "sell."

"BMO thinks the refinancing of the debt may prove difficult in the next 12 months and it all hinges on coal staying north of $150 per tonne," Mr. Robson said in an interview.

For his part, Mr. Lindsay concedes that had Teck foreseen the market collapse it might not have pulled the trigger on a $14-billion takeover.

"The world is a different place. When we negotiated the deal in July, copper was at $4 a pound and coal was at $300 a tonne going to $400," he said.

Teck Cominco (TCK.B)

Close: $8.75 (Cdn.), down $2.20