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$600-million purchase part of plan to increase portfolio, spokesman says
Teck Cominco boosted its stake Monday in Canada's largest metallurgical coal deposit, announcing it will pay the Ontario Teachers' Pension Plan fund almost $600 million to acquire its share of the Fording Canadian Coal Trust.
The transaction gives Vancouver-based Teck Cominco, the operator of Fording's coal mines in the Elk Valley, an additional 11.5-per-cent stake in the trust, and lifts Teck's overall share of the operation to 52 per cent via direct and indirect holdings.
Teck stated in a news release that it has no plans to acquire additional units of Fording, and that Monday's deal was undertaken for investment purposes.
Reaction from the financial community was positive.
Dominion Bond Rating Service said the acquisition will have "a non-material impact on the financial profile of the company, as Teck will pay for the Fording units with cash on hand."
"Thus this additional interest in Fording has no material impact on the ratings of the company," DBRS analysts Robert Streda and Isha Aggarwal said in a note.
UBS Canada analyst Brian MacArthur maintained his buy rating for both Teck and Fording in a note to investors, increasing the target for Fording trust units to $40 Cdn from $34 and suggesting that prices for metallurgical or coking coal, used in steelmaking, are expected to increase when next year's contracts with steel mills are negotiated.
"Strong steel production globally, particularly in Brazil and India, is the key long-term driver for the coking coal industry. Strength in the coking coal market is being experienced as strong steel demand pulls against constrained supply," MacArthur said in the note.
He maintained his buy rating for Teck while bumping up slightly its target price to $57 from $56.
The Fording Coal Trust was formed in 2003 via a $1.8-billion deal that saw Teck, Fording, Sherritt International and Teachers join forces to create the world's second-largest metallurgical coal operation, primarily at five Elk Valley mines in the East Kootenays -- just as the price of coal for steelmaking was taking off due to exploding global demand in China and elsewhere.
"Teachers had held their position from the outset," Teck investor relations manager Greg Waller said in a telephone interview. "We'd always had a relationship with them. We had indicated in the past that if they were interested in selling we would be interested in looking at buying. That time came."
Waller said Teck has been looking to increase over time the proportion of coal in its portfolio of mining and energy resources to about 30 per cent of its business -- due to its comparatively stable prices.
Coal sells on the basis of annual, fixed-price contracts whereas base and precious metal prices change daily with mining company shares going along for the ride -- Teck is looking to lower the day-to-day volatility of its shares.
"Over the last year it's been about 16 per cent of our total revenue so this helps push us up a little further," Waller said.
"We have talked over the last year or two about our desire to increase what we refer to as the non-exchange-traded component of our business. Coal obviously fits into that.
"Base metals are an exchange-traded component and that has relatively volatile pricing. You don't know what your pricing is going to be from day to day let alone month to month.
"In the non-exchange-traded you negotiate prices and volumes and margins for a year at a time so there is a more stable pricing element to that -- it is generally viewed as less risky and more attractive to investors."
