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While this year's coal contract negotiations and refinancing a $5.8 million bridge facility remain the primary concerns for Teck, Haywood Securities believes Teck should achieve its financial goals.

Author: Dorothy Kosich
Posted: Friday , 17 Apr 2009

RENO, NV -

Although Teck still struggles with the burden of a multi-billion-dollar debt, Haywood Securities believes that-with recent asset sales and rising commodity prices-Teck's debt is becoming less of a worry.

Haywood Securities Thursday raised its target price $4.25 to $11 for Teck shares.

While noting that the recent acquisition of the Fording Canadian Coal Trust left Teck "significantly more leveraged," Haywood mining analyst Kerry Smith said, "Nonetheless, with about $2.6 billion to $3.3 billion per year of EBITDA in each of the next 2 years, Teck should be able to quickly pay down the US$9.8 billion in debt to a manageable level."

However, Smith also notes, "Metal price volatility in combination with significant financial leverage is of great concern to us, and refinancing of the bridge loan, due October 29, be difficult, but barring any significant collapse in metal prices, should be achievable."

As the BHP Billiton Mitsubishi Alliance (BMA) has settled coal contracts ranging from US$115 per tonne to US$129 per tonne, negotiations with Teck's coal customers, Posco and other Japanese and Chinese steel mills, is ongoing. After factoring in increased shipping costs for Teck's seaborne coking coal, Haywood has assumed Teck's 2009 coal contract (an average for all sales, including met, thermal, and PCI) will settle at US$125 per tonne.

"Once these negotiations are finalized, Teck will have a significant portion of its revenue for 2009 locked in, coal production for 2009 is expected to be approximately 20 million tonnes," according to Smith. Haywood is unsure how much more tonnage will be sold will be sold this year under the 2008 contract price, and how many spot sales of thermal or semi-soft coal will be made throughout the year.

Meanwhile remaining currency hedges at Teck Coal are hampering coal margins, while US$1 billion in currency hedges remain throughout this month at Cdn$1.01 per U.S. dollar. "Once these hedges are finished, Teck Coal will see an immediate 20% improvement in margins, assuming exchange rates remain at current levels," Smith advised.

However, debt repayment still remains Teck's primary focus. The company has sold several non-core assets, which generated more than US$500 million, and has additional options in term of asset sales.

Haywood estimates that Teck's 22.5% stake in Antamina is worth $1.4 billion to $1.6 billion. The sale of Teck's 40% interest in Pogo could yield US$300 million to $400 million, according to Haywood's estimates.