June 1
The latest zinc trade data out of China came as a huge positive surprise to the market and should bode well for a balanced zinc market this year and next, according to Desjardins analyst John Hughes.
On Thursday, the Chinese government said that the country imported net refined zinc of 4,672 tonnes in April compared to net exports of 119,218 tonnes in the same period in 2007. Net imports from January to April now stand at 4,334 tonnes versus net exports of 119,218 tonnes during the first four months of 2007.
In a note to clients Mr. Hughes said:
We view this as very positive – recall that the market was expecting China to be a net exporter of zinc metal at an average monthly rate of 12,000 to 17,000 tonnes at the beginning of the year.
Going forward, the analyst said the country will record net imports of around 5,000 tonnes in May 2008 and be a net exporter by 50,000 tonnes in 2008. In 2007, China exported net 126,159 tonnes of zinc.
Mr. Hughes told clients the data supports his forecast of a balanced zinc market in 2008 and 2009, and based on the expectation for inventory levels to remain at current lows, he estimates average zinc prices of $1.25 per pound in 2008 and $1.50 per pound in 2009.
The Desjardins analyst also foresees a balanced world copper market in 2008 and 2009 after China also reported strong data for refined copper, with net imports at 109 kilometric tonnes during the month. For the year so far, net imports equal 486 KMT for a annualized rate of 1,467 KMT versus Mr. Hughes' estimate of 1,200 KMT.
Mr. Hughes' said China's strong demand for both copper and zinc markets is good news for Teck Cominco Ltd. (TCK) and reiterated his "buy" rating and C$59.60 price target on the stock.
He wrote:
nov 25
While figures show that China remains a net exporter of refined zinc, it nonetheless imported 15,941 tonnes of the metal in October – an all-time high. China continues to be a net importer of copper, bringing in 89,038 tonnes last month.
Domestic demand for both metals remains strong in China, while inventories are near historical lows, according to Desjardins Securities’ John Hughes. As a result, the analyst continues to see renewed strength for metal prices in 2008.
He also reiterated his “buy” recommendation and C$55 price target on shares of Teck Cominco Ltd. (TCK), which represents upside of 50% from its Thursday close of C$36.67.
As yet another signal of China’s growing appetite for metals, two of China’s largest metals company just announced plans to spend roughly $3.7-billion to develop a large copper mine in Afghanistan.
The Anyak copper field is estimated to contain 11 million tons of the metal, while 220,000 tons are expected to be produced there annually. The deposit is near the capital of Kabul, and was first discovered in a geological survey by the former Soviet Union in 1978.
Meanwhile, Octagon Capital analyst Hedrik Visagie forecasts copper consumption in China will be 4.7 million tons in 2007, zinc at 3.4 million tons and lead at 2.45 million tons.
In a note he said that,
If consumption grows by 12% in 2008, and Chinese mine production remains static to feed domestic growth, China will have to import 564,000 tons more copper, 408,000 tons more zinc, and 294,000 tons more lead.He also added that this is very bullish for the metals.
Mr. Visagie also pointed out that this analysis contrasts with some of the “current conventional wisdom of doom and gloom and oversupply.”
Oct 24
Teck Cominco Ltd. (TCK) is valued similarly to its competitors, but the company has "stand-out margins and growth," according to Citigroup Global Markets analyst John Hill. He is initiating coverage of the stock with a "buy" rating and a hefty price target of C$60 a share.
Mr. Hill is a believer in the so-called "commodity supercycle" thesis, and feels Teck is well-positioned to take advantage of it because of its exposure to base metals, coal, gold and the oilsands.
"In the global contest for resources Teck has natural advantages in Canada and Alaska, but may be 'stuck in the middle' in terms of critical mass," he wrote in a note to clients.
In the long-term, Mr. Hill sees Teck as a buyer rather than a takeover target because of its dual-class share structure and growth mandate. "Shareholders are trading control for superior long-term capital allocation, in commodity exposure, operations, and dividends/buybacks," he wrote.
Mr. Hill also noted that his "sum of the parts" model for Teck suggests upside to valuation.
Having blown the treasury on a series of high-priced acquisitions, Don Lindsay has created a diversified company with a future tied to surging copper. He says he's laid the groundwork for the next 20 years, but will the master of the deal prove as adept at the down-and-dirty business of mining?
VANCOUVER -- The only boy growing up in a house with five sisters, Don Lindsay did the dishes. He did more dishes, in fact, than all of his siblings combined.
At the time, no one was quite sure why he agreed to the chore night after night.
But the future president and chief executive officer of Teck Cominco Ltd. knew exactly what he was doing and why, even if others did not.
"Every family would have a version of this where they would argue over who would do the dishes," Mr. Lindsay explains.
"I always found that rather than sitting around and talking about it, it was better to do them and get them done. Then I could go play ball hockey."
As the head of Canada's largest diversified mining company, Mr. Lindsay has recently embarked on a similar cleanup campaign, spending billions of dollars on a series of small and medium-sized acquisitions and investments.
Yet to many, his actions have puzzled rather than placated. Teck's stock price, while posting strong gains over the past year, has still lagged most of its rivals.
Teck, Mr. Lindsay declares, is in the midst of nothing less than a major facelift. No longer a zinc-focused miner with declining copper production, it is now a copper-rich company with some of the best growth prospects in the industry. With five distinct operating divisions - copper, zinc, coal, oil and gold - Teck is building a portfolio diverse enough to effectively buffer the company's profit from wild swings in commodity prices.
The major problem, he concedes, is that most people haven't figured it out yet.
At stake with Mr. Lindsay's plan is the strategic direction of Canada's last great base metals company. In an industry that has seen some of its most storied names, including Alcan, Inco and Falconbridge, gobbled up by aggressive foreign buyers over the past year, Teck has become the Great White North's lone hope to become a mining major, able to compete in the same weight class as the sector's giants.
"We have a very clear vision of what we're doing. We've got seven or eight of the steps done and we've got more to go. It's coming together pretty nicely and we're not going to stop," Mr. Lindsay says.
TECK SPENDING SPREE
RAISES EYEBROWS
With a flurry of frenetic corporate activity, Mr. Lindsay, a former investment banker, has quarterbacked a slew of acquisitions and mining project investments during the past 12 months.
In a spree that has seen the company spend or commit to spend more than $7-billion, Teck bought copper assets in South America, pledged to build a massive mine in northern British Columbia, purchased majority control of its coal operations and significantly increased its holdings in the oil sands. Teck also dipped a toe into the diamond business and even plowed $25-million into a company that hopes to one day mine copper and gold from the ocean floor.
More than a few of the deals prompted rounds of collective head scratching.
Were the moves part of a well-developed strategy or simply the result of an overeager management team desperate to close transactions (and still reeling from its bitter loss in the battle for Inco in 2006)? While not insignificant in monetary terms, several deals could certainly be called safe - mere increases in the company's ownership of coal and oil sands projects.
"They have been doing all the right things. The problem is it appears to be random rather than part of a well-conceived strategic direction. Their challenge is convincing everyone that they really do have a strategic direction and they are not just opportunistic," said John Stephenson, senior vice-president and portfolio manager at First Asset Funds Inc., which owns roughly $4-million worth of Teck's common shares.
Still others worry that Teck is developing a proclivity for overpaying.
July's $4.1-billion friendly bid for Aur Resources Inc., which offered a 28-per-cent premium for the copper company's shares, was a little too friendly, some analysts say.
"When you start to look out now, their growth profile looks a lot better than it used to. It's just a question of what did they pay to get it," said Orest Wowkodaw, an analyst at Canaccord Adams.
"I think they paid up on every one of those deals. ... They surely didn't get anything on the cheap," he said.
Teck's hefty balance sheet has certainly been dented by all the activity, as well as the $1-billion worth of share buybacks and dividend payments it has returned to investors in the past year. Awash in $5.3-billion in cash at the start of the year as a result of strong zinc, copper and coal prices, Teck is expected to finish 2007 with less than $1.3-billion in cash on hand.
"It seems like in the last five months they've just blown the whole treasury," Mr. Wowkodaw said.
Mr. Lindsay bristles at the suggestion he has squandered the company's cash.
The CEO points to Moody's Investors Service's recent upgrade of Teck's credit rating as a "validation" of the company's strategy, despite the shrinking balance sheet.
"In the middle of the greatest credit crunch the North American economy has seen in 20 years, we got upgraded to the highest credit rating we've ever had ... obviously, they like what we did," he says.
DEAL MAKING DEFINES
LINDSAY TENURE SO FAR
Mr. Lindsay insists he is not a deal junkie, despite a popular perception to the contrary. Tall and trim in a dark blue pinstriped suit, white shirt and orange striped tie, the 48-year-old may have kept the polished appearance of the investment banker he once was, but in his heart, he says, he has always been a down-and-dirty mining guy.
Growing up in mid-town Toronto, his interest was piqued by a visit to a mine in 1968. A year later he bought his first mining stock. Coincidentally, both had a Teck connection. The mine was the company's Temagami copper mine in Ontario and the stock, Leitch Gold Mines, was a company chaired by Norman Keevil Sr., Teck's late founder and father of current chairman Norman Keevil Jr.
Trained as a mining engineer in university, Mr. Lindsay worked summers at a uranium mine in Saskatchewan and later at an iron ore operation near Labrador City. "I was a foreman in the pits," he says with pride. "I was a blasting engineer."
What came next, most would call a career. But Mr. Lindsay now refers to a 20-year stint at CIBC World Markets as a "diversion." While there, he launched a global mining team, which became a dominant industry force, brokering major mining deals and financings. Before leaving to join Teck in 2005, Mr. Lindsay headed the bank's entire investment banking operations.
Back in the business of extracting resources from the ground, Mr. Lindsay seems genuinely thrilled.
Seated at a boardroom table at Teck's head office in Vancouver, high resolution photographs of the company's 18 mining operations scroll by on a flat-panel television behind him. Turning his impossibly boyish face toward the screen, Mr. Lindsay remarks on a winter scene at a Teck coal mine.
"We have some of the most beautiful mines in the world," he says.
Mining has not, however, defined Mr. Lindsay's tenure in the executive suite at Teck so far. Deals and, most notably, attempts at deals are what have put Teck in the spotlight.
A $20-billion stock-and-cash offer for Inco in 2006 was Mr. Lindsay's full-blown attempt at the proverbial transformative transaction; the company-making deal that has become a hallmark of the mining industry in the past few years and successfully demonstrated by heavyweights including Xstrata, CVRD, Barrick Gold and Rio Tinto.
It never happened. Teck was forced to abandon its pursuit of the nickel producer and its prized Sudbury operations when a proposed $5.7-billion stock sale, the biggest in Canadian history, failed to find enough buyers. An all-cash bid by Brazil's CVRD won the day.
"If you look back at our last effort, the so-called 'Hail Mary,' I had a choice then," Mr. Lindsay says.
"CVRD had bid all cash and I could have just walked away. But I gave it one more go. I said we'll put it to the shareholders and see what they do. They called it the Hail Mary and I thought that was appropriate terminology. It was like that. You are deep in your own zone, there is a big lineman named CVRD bearing down on you and the clock is running out. You're down by five points. What are you going to do? Put your knee down and concede defeat or throw the ball? So I threw the ball. The fact is, when the ball was on the ascendancy the crowd was all excited and everyone thought it was going to make it. Then as the ball starts to reach its apex and come down, everyone realizes the ball is never going to make it.
"But you had to try. I have no regrets for trying. You had to go for it. That's what [Barrick Gold chairman] Peter Munk was talking about [when he publicly chastised Canadian mining CEOs for lacking "balls" and "vision"]. But it didn't work out. They had more money than us and more government support and all the rest of it. So then you get on with life and you build a company a different way."
In the wake of that very public setback, Teck entered a three-month period of reflection. Then it turned to Plan B.
TECK'S COPPER STRATEGY
WINS OVER THE PESSIMISTS
Too small to compete with most of the mining majors for large top-tier assets and unwilling to invest in many of the rich deposits found in overtly risky political jurisdictions, Teck has undertaken more of a piecemeal approach to growth.
Instead of a single, revolutionary transaction, the company has opted for a series of smaller deals that Mr. Lindsay contends will have just as dramatic an effect on the company. He concedes, however, the payoff for shareholders will likely take longer and there will be plenty of headaches along the way.
"If you look back on the company from 2012 or 2014 and ask if the program was transformational, I think you will find that it really is. It isn't as much fun for a journalist or an analyst. It's a slow and painful process and there will be periods where there will be capital cost overruns and delays. But at the end of it all, the Teck Cominco shareholders will have three times as much copper, three times as much gold, materially more coal and a whole oil sands business backing it up," he said.
"That is transformational."
The Aur transaction has already dramatically overhauled Teck's asset mix.
Long considered to be a play on zinc - a somewhat lowly base metal used primarily for galvanizing steel - Teck is now more of a copper company. It has sharply increased its exposure to the metal, whose short-term prospects are considered by most analysts to be far brighter than those of zinc.
In 2008, 53 per cent of Teck's profit is expected to come from copper while only 30 per cent of profit will come from zinc, even though Teck remains the world's second-largest zinc producer.
Fuelled by robust demand from China's booming economy, where copper is a desperately needed material to build housing and infrastructure, the metal's price has remained particularly resilient in recent months. Zinc, on the other hand, is more plentiful in China and with new mine supply expected to come on soon, most analysts are more bearish.
"There is some hesitancy with zinc and that is a potential negative for this company. I don't think people realize that copper is now a dominant force with this transaction. What they're saying is 'Look, we're really a copper company now with a zinc piece bolted on the side,' " Mr. Stephenson said.
In addition to the immediate 43-per-cent increase in annual copper production of 200 million pounds provided by Aur's operating mines in Chile and Canada, Teck expects further development of the Aur assets and other projects to help the company boost annual copper production by 72 per cent or 342 million pounds by 2010.
The immediate production revenue and growth potential from the Aur deal will help offset the massive capital spending of at least $1.5-billion that Teck is facing with the Galore Creek project in northern British Columbia. The company is committed to developing the asset as part of a 50/50 partnership deal with NovaGold Resources that was announced in May. The mine, which won't be in production until at least 2012, is believed capable of producing more than six billion pounds of copper and to have a lifespan of more than 20 years.
"Teck currently has one of the strongest copper growth pipelines in the Canadian equity market," Scotia Capital analyst Onno Rutten said in a recent note to clients. The analyst believes Teck is now the Canadian copper growth stock along with First Quantum and Inmet.
Mr. Lindsay says Teck's outlook for the price of copper shifted after the metal hit a record $4 (U.S.) a pound last year. "We were bearish on copper at that stage," he explains. They expected the price to drop back below $2 a pound. But it never got there, bottoming out at around $2.35 a pound. "That was quite an eye opener," Mr. Lindsay says. Teck believes that China has now replaced the United States as the main driver for copper prices. Despite a slowing U.S. housing market, the price has stayed above $3.50 a pound for the past few months, as Chinese demand remains strong.
"So the outlook looks pretty good. We don't need to have $3 copper, but if it's true that China is a buyer at $2.50, which is what things look like, then that would be a pretty good base," Mr. Lindsay says, cautioning that the company's long-term outlook for copper is well below that level.
Even so, many analysts and investors who initially criticized Teck for paying too much for Aur have changed their tune. Considering the current copper price and the market's revised expectations for the metal, Aur shares, some now suggest, would likely be worth far more today than the $41 (Canadian) each that Teck paid.
"If you look at it with a revised price deck for copper, they got a bargain," Mr. Stephenson said.
That might explain the anxious moments Mr. Lindsay and his management team endured on Aug. 21, the deadline for Aur shareholders to tender to Teck's offer.
While most expected the generous bid to be a slam dunk, the executives had reason to worry. Ahead of the Teck offer, Australian zinc rival Zinifex had built up a near 5-per-cent position in Aur, they had been told. As well, Xstrata and Anglo American, which both have operations close to Aur's in Chile, were still considered threats to launch rival bids. The market was willing to forgive Teck for its failure to pull off the Inco deal, but would it forgive it again if it lost Aur?
The stock tender came in as usual until about 2 o'clock in the afternoon, Mr. Lindsay recalls, and then "it just stopped." Still short of the necessary two-thirds of Aur shares needed for the deal to go through, the CEO began fretting that Teck's bid was going to come up short.
"I was thinking my nightmare is appearing," Mr. Lindsay says with a laugh. Shortly before the midnight deadline, a brokerage firm whose clients collectively owned roughly 30 million shares submitted enough stock to give Teck 93 per cent of the company, much to the relief of Mr. Lindsay and his team. "For five hours we were like, oh boy, here we go again," he says.
DIFFICULT TASK REMAINS
TO RAISE PRICE OF STOCK
Mr. Lindsay has time on his side, a rare luxury in the mining industry these days. His company is shielded from unwanted takeover bids by its dual class share structure.
With a market value of more than $21-billion, Teck is still very much a family business thanks to the protection of the founding Keevil family and its Japanese partner, Sumitomo Metal Mining Co. Ltd. Together they own more than half of the miner's class A shares, (essentially giving them voting control of the company).
Things are not about to change any time soon. Teck's straight-talking 69-year-old chairman, Mr. Keevil Jr., is emphatic; there are no plans to sell.
"None whatsoever," he says.
The stable ownership structure has allowed Teck to invest in capital-intensive long-term projects such as the oil sands. Although the estimated $4-billion it will have to spend up front for its interest in the Fort Hills project won't start being paid back for at least half a decade, the operation could run for half a century.
Heavy oil may be a new business for Teck, but Mr. Keevil says it meshes perfectly with the company's unwavering strategy of acquiring long-life, high-quality ore reserves in mining-friendly jurisdictions. While a dearth of exploration discoveries over the past decade has forced many other miners to acquire second-tier assets, old mines or properties in risky political jurisdictions in an attempt to replenish reserves, Teck doesn't face the same pressures.
"A mining company without ore reserves is an oxymoron," Mr. Keevil says.
Mr. Lindsay, the chairman believes, has brought a ferocious work ethic and a youthful enthusiasm to the company. "He has a great capacity for handling a lot of detail, which I never liked to do, as well as seeing the broad picture," Mr. Keevil says.
"He's a perfect CEO."
He also has major challenges ahead. Teck's Canadian coal operations are heavily sensitive to the rising Canadian dollar. Every 1-per-cent increase in the loonie against the U.S. greenback will reduce annual profit by more than $20-million.
As well, Teck's share price, while gaining a respectable 40 per cent on the New York Stock Exchange over the past year, has underperformed many of its rivals during the same period.
Stock in CVRD, which is also shielded from a takeover by the Brazilian government's "golden shares," has gained 172 per cent over the past year on the NYSE. Xstrata, protected by a 35-per-cent stake owned by secretive metals trader Glencore International, has seen its shares rise 48 per cent on the London Stock Exchange.
Mr. Lindsay's task of boosting his company's share price is sure to be much more difficult. The quick returns that an Inco acquisition would have provided will now have to be wrested from the always challenging and costly task of constructing mines and bringing them into production on time and on budget. With his asset portfolio largely in place, the deal maker finally has a chance to prove himself a down-and-dirty mining guy.
"What's not to like," Mr. Lindsay asks with a grin. "This is clearly, one of, if not the greatest company in the country. These are good times that are going to last for another 20 years."
*****
Teck CEO still hunting the next deal
Don Lindsay's deal-making days aren't quite over. Although he says a major transaction is unlikely in the short term, he remains keen to boost Teck Cominco's exposure to commodities whose prices are set by long-term contracts and not by the daily trading on the London Metal Exchange.
Iron ore, uranium or diamonds would do the trick, but finding the right project to increase Teck's annual revenue from so-called non-LME commodities to 35 per cent from 20 has proven difficult.
Simply buying the remaining 47 per cent of the Elk Valley Coal partnership it doesn't already own would not fulfill the mandate, according to Mr. Lindsay.
"I think doing something else would provide better and broader diversification," he says.
Something else could be iron ore. Teck wants producing assets so it can sell the commodity to steel-making customers already buying its metallurgical coal. Mr. Lindsay covets Rio Tinto's controlling stake in the Iron Ore Company of Canada's operations in Newfoundland and Quebec, but doesn't think the asset will come up for sale.
As for uranium, valuations remain high despite a recent market correction and the Teck chief executive officer says there are reasons why mining the metal used to make fuel for nuclear reactors is challenging.
"If we saw the right property and thought permitting was possible and political risk was minimal, then sure, we'd be interested. Taken all together, those three things are difficult to find."
Mr. Lindsay also likes Canadian diamonds, but because the country's two major mines are controlled by De Beers and Rio Tinto, Teck would have to stick with smaller projects for a foothold.
That leaves thermal coal (used to generate electricity from coal-fired plants). Some analysts believe a U.S. coal producer will be Teck's next acquisition target.
TECK (TCK.B)
Close: $46.70, down $1.24
*****
Aug. 1, 2006
Close: $38.30
Aug. 17, 2006
Teck officially withdraws its $20-billion stock and cash bid for Inco. The company regroups and begins to formulate its plan B.
Nov. 15, 2006
Mr. Lindsay makes a foray into the Canadian diamond business, investing $30-million in Tahera Diamond Corp.
Dec. 7, 2006
Jumping into the speculative prospect of mining base metals from the ocean floor, Teck ponies up $25-million (U.S.) for a 9.2-per-cent stake in Nautilus Minerals Inc.
Feb. 12, 2007
Teck says it plans to buy back as many as 20 million of its own shares. The company also says it will split its stock 2 for 1.
May 23, 2007
Committing to spend more than $1.5-billion to develop the massive Galore Creek copper and gold mine in Northern B.C., Teck forms a partnership with NovaGold Resources.
July 3, 2007
Making a big bet on copper, Teck unveils a $4.1-billion cash and stock offer for Aur Resources Inc. The deal gives Teck 200 million pounds of annual copper production from Aur's Chilean operations and its mine in Newfoundland.
Sept. 19, 2007
Boosting its presence in the Alberta oil sands, Teck buys an additional 5-per-cent stake in the Fort Hills project from UTS Energy.
Sept. 24, 2007
Paying $600-million to the Ontario Teachers Pension Plan Board, Teck boosts its stake in the Fording Canadian Coal Trust from 9 per cent to 20 per cent. The deal gives Teck a majority 53 per cent control of the Elk Valley Coal Partnership.
SOURCE: FIRST ASSET FUNDS, SCOTIAL CAPITAL
Tue Oct 9, 2007 9:01pm BST
(In U.S. dollars unless noted)
By Cameron French
TORONTO, Oct 9 (Reuters) - Teck Cominco (TCKb.TO: Quote, Profile, Research) still intends to grow into a global mining powerhouse, despite last year's failed attempt to take over nickel giant Inco, but it is in no hurry to rush into another blockbuster deal, its chief executive says.
Instead of trying to make that one big catch, CEO Don Lindsay has kept busy this year with smaller fry: bulking up the company's copper assets with the takeover of Aur Resources, adding to its coal and gold businesses, and building a position in Alberta's oil sands that Lindsay says could be worth more than C$20 billion ($20.3 billion) a decade from now.
"All of these steps... when you take them all together, it's quite material growth, kind of transformational growth," he told Reuters in a recent interview.
"I think we have such a good growth platform now, that we can really take our time and be very careful about any other moves. We have the capacity to make more moves if we want to, but we're in no rush."
While Teck is commonly referred to as the world's No. 2 zinc miner, Lindsay notes its fortunes are now more closely tied to copper prices after its C$4.1 billion Aur takeover.
With copper having risen 44 percent last year and 26 percent so far this year, Lindsay is happy with the exposure.
"We have sort of a positive outlook for copper," he said.
The Aur takeover, which gives an immediate 43 percent boost to Teck's copper output and doubles its copper resources, is also significant as Aur's operations in Chile are close to exploration properties Teck has in the region.
Included in this is the dormant Lobo Marte gold project in Chile, a joint venture with Anglo American (AAL.L: Quote, Profile, Research) that now could merit a second look, Lindsay says.
"The fact that we made the Aur acquisition has sort of caused us to look at that project in a whole new light because we now have skills there that we didn't have before," he said.
If Teck does choose to invest in the mine, it would add to a growing gold business whose upside expanded this year with a 50 percent interest in the $2 billion Galore Creek mine in northwestern British Columbia.
BLACK GOLD
But the company's most intriguing growth arm is perhaps its presence in Alberta's oil sands, which has largely been the domain of oil and gas companies rather than miners, despite the huge mining aspect of the heavy crude's extraction.
With a 20 percent interest in the Fort Hills project -- up from 15 percent this year -- and leases on two properties, Lindsay sees the size of Teck's energy business growing over the next eight to 10 years to perhaps the current size of the overall company, or C$22 billion.
"The point of the oil sands business is we're building for the future. These are assets that will have a reserve life of 50 years. We don't find that in the mining business very often," he said.
However, that growth could be slowed if Alberta adopts the recommendations of a provincial advisory panel and raises sector royalties by 20 percent, Lindsay said.
"If the final result is what's currently contemplated, there is no doubt in my mind that that will slow investment quite dramatically, and it will cause us to rethink things on the other properties," he said
"Fort Hills is a go; it's a great project. That won't slow down, but the other ones we'd look at very carefully."
Aug 6th
Davy Bui submits: I'm a little disappointed by the Teck (TCK) results. Revenue went up 1%, net income fell 20% and operating cash flow before non-cash working capital changes came down 3.7%. Their results across the board were down but that isn't what bothers me. After all, the company doesn't control pricing and they had given good visibility on the fact that copper production was going to be lower this year due to the Highland Valley mine extension and a drop-off from Antamina.
Here are the factors that did concern me:
- operating expenses up 20+%
- mining costs at Hemlo gold mine now close to actual spot price of gold
- 2nd straight quarter of substantial decrease in operating cash flow due to tax and royalty payments
It seems my hunch about the Aur Resources deal was correct: Teck's copper resources did need bolstering. Fortunately, the Aur and Galore Creek transactions should do exactly that (though Aur Resources quarter results weren't stellar either).
We didn't get an update on what Teck plans to do with their gold assets. They don't seem to be extracting maximum value and that needs to be addressed. Hemlo mining costs rose to $612 per oz. Additionally, they ran into community resistance at their Morelos mine located in Mexico. At this point, I wouldn't mind if they got out of the gold mining business.
Finally, cash flow from operations is down markedly this year. The last two quarters, changes in non-cash working capital have reduced OCF by C$675M, ostensibly due to tax and royalty payments. Year to date, operating cash flow is down ~65%, C$345M from C$971M a year ago. This may not be anything to worry about but I'd like to see these numbers improve.
Performance measurements to watch:
- lower costs @ Pogo & Hemlo
- update on Morelos
- hit production target @ Lennard Shelf
- rein in operating costs
- hit Red Dog production numbers
- consolidate Aur Resources numbers
- improve operating cash flow results
31 Jul 2007 at 04:57 PM GMT-04:00
VANCOUVER (CP) -- Teck Cominco Ltd. [NYSE:TCK; TSX:TCK.B] says it is shopping to expand its asset base, but hasn't been able to cut a deal since its offer for Aur Resources Inc. [TSX:AUR] because it wants to stay ''disciplined'' in its spending.
''We're committed to diversification. There are a number of opportunities we've been looking at but are unable to conclude a deal to this point,'' CEO Don Lindsay told analysts in a conference call Tuesday.
''Price is very important to us so we're trying to remain disciplined, but from time to time when we see a collection of assets or a key asset where there's something we can do to add value, create value, that may not have been recognized before, than we'll make the move at that time,'' Lindsay said.
The company announced late Monday that its second-quarter profit fell 21% due to lower coal prices and lower sales volumes at its
The company, currently making a C$4.1 billion cash-and-stock bid to acquire copper-rich Aur Resources Inc., reported earnings of C$485 million or $1.14 per share compared with C$613 million or $1.48 per share in the second quarter of 2006.
However, Teck's president and CEO said if adjustments for changing metals prices and one-time items were excluded from the comparison, the earnings would have been C$434 million in the second quarter of this year, compared to C$500 million last year.
''The significant change quarter to quarter is the result of lower coal prices and lower copper sales which were partially offset by higher zinc sales,'' Lindsay said.
Coal prices averaged US$101 per tonne, down 13% from US$116 per tonne in the second quarter of 2006.
Lindsay said the earnings for the three months ended June 30 were in line with expectations.
Cash flow from operations was C$579 million compared with $669 million in the second quarter of 2006.
The company said less copper ore was processed at
Meanwhile, sales volumes at the company's copper-zinc Antamina mine, in
Copper production was 81,000 tonnes in the quarter, and sales were 64,000 tonnes; down from 89,000 tonnes and 88,000 tonnes respectively in the same quarter of 2006.
Teck and Fording Canadian Coal Trust [TSX:FDG.UN], its partner in the Elk Valley Coal Partnership, said earlier this year they expected coal prices from the project to be 15% lower than a year ago.
Fording and Teck jointly own
While copper prices averaged US$3.47 per pound, an increase from US$3.27 per pound in the second quarter of 2006, Teck said the increase was offset by a lower Canadian dollar exchange rate of 1.10 in the second quarter compared with 1.12 a year ago.
The company's copper assets would be greatly improved if Teck's offer to buy Aur Resources succeeds.
Aur's significant copper holdings include a 76.5% interest in the Quebrada Blanca mine in
In
Teck also pointed to the 50-50 partnership it made with NovaGold Resources Inc. [AMEX:NG; TSX:NG] to develop the Galore Creek copper-gold mine in northwestern
Galore Creek is expected to produce in excess of 430 million pounds of copper, 340,000 ounces of gold and four million ounces of silver annually during the first five years of operations.
As for zinc, Teck said zinc prices in the second quarter averaged US$1.66 per pound, up from US$1.49 in the second quarter of 2006.
The company sold 105,000 tonnes of zinc in the second quarter, on production of 97,000, up from zinc sales of 27,000 tonnes in the same quarter in 2006, on production of 44,000 tonnes.
Despite the increase in zinc prices and sales, Teck said second quarter earnings are typically weaker than other quarters due to seasonally lower sales from its Red Dog mine in
''Sales volumes of zinc concentrates from Red Dog in the second quarter represented approximately 12% of its expected annual sales and there were no lead sales from the mine in the quarter, as market inventories had been depleted in the previous quarter,'' the company said in a release
Davy Bui submits: With nearly CA$5 billion burning a hole in their pocket at year-end 2006, it seems Teck Cominco Limited (TCK) CEO Don Lindsay and crew have been looking hard for places to put the money to work. Apparently, all paths were lined with copper.
The first major announcement heralded a joint venture with NovaGold (NG) to develop the Galore Creek copper/silver/gold project. Teck will make a US$478 million buy-in on the project which is expected to cost $2 billion. Lindsay noted the majority of Teck-controlled projects started as joint enterprises so we'll see where this goes.
The second deal was the $3.8 billion cash+stock friendly buyout of Aur Resources (AUR) at a 29% premium to market price. Once again, this acquisition is heavy on the copper. Up to 22 million shares will be issued to allow Aur stakeholders to maintain exposure. A 40 million share buyback program is still ongoing so the dilutive aspect should be minor (5-7% at most). No debt will be issued for this deal, which is projected to be immediately accretive and will boost copper production over 40% annually as well increase copper reserves over 140%.
Here are some items of possible concern to us stemming from these transactions:
Increased exposure to copper Aur Resources offer appears fully valued in today's market Galore Creek includes significant gold, which Teck mined at a loss in Q1 2007
The heavy copper focus suggests that perhaps the Antamina and/or Highland Valley sites may be slowing down. The company had announced that production at Antamina was coming into a lower-grade zone. They're also extending the Highland Valley mine which will cut copper production for the next few years. As copper is a third of their revenues and an even higher percentage of operating profits, maybe they wanted to shore up their copper production with these deals.
Or perhaps management is extremely bullish on copper. On the latest analyst rounds, they've stopped talking zinc and have been putting forth the case that the copper market today, with Chindia, resembles the 1960-1980 period when Japan went through its growth phase. During that time, copper traded well above its 20-year average price ($2.25 vs $1.38 in 2006 dollars). Lindsay suggests a Chinese-influenced trading range of $2.50-$3.50 in today's market and said Teck is very comfortable with that range. Also, today's new projects and discoveries are lower-grade than in past times so pickings are getting slim. I can't imagine that Teck didn't run the numbers on Aur and Galore Creek using that range so they must feel pretty good about it, even at a 29% premium in current market conditions.
As for the gold side, management remains as elusive as ever. They've put out the possibility of selling their gold assets or spinning them off to take advantage of the high multiple awarded to gold miners. However, they've stated that no decision will be made until the Pogo and Hemlo mines are brought to 100% operating capacity. At this point, the company's not focused on efficiency but rather just getting production up to speed. I'm sure it'll be discussed at the quarter-end conference call and, hopefully, we'll get something more definitive.
These concerns aside, we remain confident in our investment. We'd like to see management move closer toward adding non-exchange-traded commodities to their portfolio, and Lindsay addressed this during the conference call: you make the deals that are available. As investors struggling to find attractive prospects in today's stock markets, we empathize with his position! Or to paraphrase a thankfully-departed bureaucrat, you go with the deal you have, not the deal you wish you had. Teck are moving forward with their exciting oil sand projects but we won't see first phase production until 2011 and other prospects like nickel or uranium haven't yet made sense.
In summary, nothing here alters our assessment of the company. The portfolio composition hasn't changed much except to include more copper. The dual class stock still weighs on valuation though Lindsay mentioned the controlling family would be open to dropping that structure if circumstances arise. We await further word on the fate of the gold assets and how TC plan to extract value from them. And there are still plenty of "experts" warning of a sharp downturn in commodities any day now. In the meantime, we retain our trust in management and will add to our position on any significant pullback.
Disclosure: Author has a long position in TCK
FP Trading Desk submits: Lead prices surpassed aluminum prices for the first time in history last week, hitting a record high of US$1.30 per pound on the strength of growing Chinese demand and production shortfalls. And traders in the base metal are saying the ride isn't over yet, suggesting lead prices could in the very near term overtake zinc prices, currently US$1.55 per pound.
The soaring lead prices are great news for Teck Cominco Ltd. (TCK), according to Desjardins Securities analyst John Hughes.
"Teck Cominco produces approximately 440m lbs. of lead annually, and we expect a sizable C20¢ a share bump in third 3Q07 vs. 2Q07 earning per share, driven by high lead prices and seasonal shipments from the company's Red Dog mine in Alaska," Mr. Hughes told clients in a note.
He reiterated his "buy" rating on the stock and C$55 price target.FP Trading Desk submits: Looking ahead to results for China’s copper imports in May, initial data suggests the country took in a healthy 110 to 120 thousand metric tons [KMT] of the refined metal. While this represents a 34% decline in net imports compared to April, the average in 2006 was 49 KMT per month, according to Desjardins Securities.
Analyst John Hughes attributes the “extraordinarily high” import levels for the first five months of 2007 to a restocking phase by Chinese consumers, producers, traders and merchants. However, he expects levels to normalize in the 70 to 80 KMT range.
For Teck Cominco Ltd. (TCK), whose 267 KMT in copper sales last year accounted for 30% of its 2006 gross revenue, these developments are very significant. So too are copper prices.
Mr. Hughes sees the copper market strengthening as inventories continue to fall on Chinese imports and growing demand in the West.
In the second quarter, the cash price for copper on the London Metal Exchange was US$3.45 per pound, compared with an average of US$2.70 in the first quarter, he told clients in a note.
Based on current rates of decline, Mr. Hughes said copper inventories will approach the psychologically important 100,000 tonne level by the end of July.
“This sets an exciting stage for copper prices this summer, with positive implications for Teck Cominco and other Canadian copper producers,” he said.
Mr. Hughes has a “buy” recommendation and C$49.55 price target on Teck shares, which represents upside of roughly 8%.
FP Trading Desk submits: The first place people mention when discussing demand for metals these days is China. So metals markets were eagerly awaiting Friday’s announcement when the country reported that it became a net importer of zinc in April.
China’s net imports of zinc were 23,458 tonnes, compared to an average of 30,000 tonnes of net exports during the first three months of 2007, according to Desjardins Securities analyst John Hughes. China also continues to import large quantities of refined copper – 181,908 tonnes (net) last month.
As the western world’s largest zinc producer, Teck Cominco Ltd. (TCK) was also likely watching closely. Mr. Hughes reiterated his “buy” recommendation on the shares, while his C$49.55 price target represents upside of roughly 15%.
But it appears that price, not supply or demand is the reason behind China’s reversal on zinc.
At the end of 2006 and early this year, the spread between zinc prices in the West and domestic prices in China was much larger that it is now, Mr. Hughes said in a note to clients. With the price difference narrowed, Chinese zinc holders now have less incentive to export, something he considers a more “normal” situation.
“This structural shift in the supply-side dynamics of international zinc markets favours the Western world’s largest producer of zinc, namely Teck Cominco,” Mr. Hughes added.
