MINING FINANCE / INVESTMENT
Teck to sell assets to drive down debt
Teck will sell assets to drive down debt, withdraw from Petaquilla copper project in Panama, and suspend dividend payments.
Posted: Friday , 21 Nov 2008
TORONTO (Reuters) -
Teck Cominco will slash spending, sell assets, withdraw from the Petaquilla copper project in Panama and suspend dividend payments under a sweeping plan to cut debt generated by its acquisition of Fording Canadian Coal Trust, the company said on Thursday.
Combined with a previously announced C$1.1 billion tax break, the measures total C$2.4 billion ($1.9 billion) and are aimed mainly at paying down a $5.8 billion bridge loan as quickly as possible. Teck also took on $4 billion term debt in the $13 billion takeover of Fording, which closed in October.
The plan, which triggered a 21 percent drop in Teck's share price, also affects fellow Canadian miners Kinross Gold and Inmet Mining. Kinross is buying Teck's 60 percent share of the Lobo Marte gold project in Chile. Inmet takes over Teck's 26 percent stake in Petaquilla, and so will not be able to depend on Teck to help fund the project.
Teck, which just over a year ago had little debt and C$5 billion in cash, has seen its shares plunge 90 percent since June as it has taken on the debt at the worst possible time -- as credit markets have seized up and plunging commodity prices have imperiled the company's coal, copper, and zinc revenues.
Teck Chief Executive Don Lindsay, who was lauded when the deal was announced in July, admitted as much on Thursday.
"There's no question if we had it to do over again, we would have done something differently," he said in an interview on Canada's BNN television network.
"But the world is what it is, and we just have to face the future and deal with it."
Teck said the measures -- which also include cutting zinc production at the company's Trail smelter in British Columbia by 20 percent -- were first steps.
The debt-reduction drive could include further non-core asset sales, and the company may even consider selling minority stakes in certain core assets if necessary, a spokesman said.
CONCERNS ABOUT FUTURE
The heavy debt load in a credit environment that has been described as completely shut to mining companies has some questioning Teck's ability to survive through next fall.
Teck plans to issue bonds to refinance the remainder of the bridge loan when it expires next October, which could be tough if credit markets haven't loosened by then.
It had also planned to pay down much of the loan through rich cash flows from the Elk Valley Coal Partnership, which Teck took control of in the Fording takeover. Elk Valley is a top producer of coal used in the steelmaking business.
However, waning steel demand has left some observers to predict that prices will drop to $100 a tonne next year from $275 a tonne for the 2008 contract year.
David Davidson, an analyst at Paradigm Capital, said he wasn't worried about the company's ability to refinance the loan, and noted that while commodity prices have fallen sharply, Teck should benefit from lower costs due to the falling Canadian dollar and weaker oil prices.
"We may be in a situation when we get to October next year and the markets are not better, maybe even worse. But I still think that a company of the stature of Teck will be able to borrow," he said.
Ernie Lalonde, senior vice-president of mining at debt-rating agency DBRS, said the duration of the commodity price downturn and its impact on coal price negotiations for 2009-10 will be key to Teck managing its debt position.
CAPITAL SPENDING, DIVIDEND CUTS
Teck will cut capital spending by C$730 million and will save C$486 million by suspending the dividend during 2009 on both its class A and more heavily traded class B shares. The annual payouts on both those shares is 50 Canadian cents.
The company said it will sell its 60 percent stake in Lobo-Marte to Kinross for $40 million in cash and $70 million in common shares. Separately, Kinross said it would acquire the other 40 percent of the project from Anglo American for $140 million in cash.
Teck will take a noncash charge of C$26 million in the fourth quarter due to its decision to walk away from Petaquilla. Teck's enthusiasm in the project has waned since development cost estimates doubled to $3.5 billion in February.
Teck shares ended the session down C$1.12 at C$4.10, while Inmet dropped C$1.73, or 10.4 percent, to C$14.85, and Kinross edged up 3 Canadian cents to C$13.97.
($1=$1.29 Canadian) (Additional reporting by Susan Taylor; editing by Peter Galloway)
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