Global Insight Perspective | |
Significance | A C$14.1-billion (US$13.8-billion) deal has been announced that will see Teck Cominco buying out the remaining 80% of Fording that it does not already own. |
Implications | Growth in demand for metals, particularly from Asian markets, has been one of the main drivers pushing for the deal. Another important factor has been the rise in coal prices, which Teck would now like to lock in to ward against the risks of further price rises. |
Outlook | The deal will significantly boost Teck's metallurgical coal business and will enable the company to better position itself to take advantage of growing worldwide demand for metals. |
Vancouver (Canada)-based Teck Cominco, a diversified mining company, has announced its intention to purchase Fording Canadian Coal Trust for C$14.1 billion (US$13.8 billion) in cash and shares. The friendly deal, which puts a 17% premium on Fording's recent share price, has already been unanimously approved by independent Fording Trustees, with other unit-holders to vote in late September. The deal is expected to close by the end of October and is subject to receiving the usual regulatory approvals. It includes a C$400-million termination payment if it fails to move forwards.
Mind over Metal
The acquisition has been described by Teck's chief executive officer, Don Lindsay, as presenting "no integration risk" as the company is already thoroughly familiar with Fording, through its existing 20% ownership interest. That share bought Teck a 40% stake in the Elk Valley Coal Partnership—Fording's main asset—which will now fall completely under Teck control. The Elk Valley asset comprises operatorship of six mines, including full ownership of the Fording River, Coal Mountain, Line Creek, and Cardinal River mines, and interests in the Elkview (95%) and Greenhills (80%) mines. The company is the world's second-largest producer of hard coking coal in the world—a relatively rare coal that is essential to the metals industry, and is crucial to the production of steel. It is been estimated that each tonne of hard coking coal is sufficient for generating enough heat in a blast furnace to produce around 1.3 tonnes of steel. According to the company, Elk Valley Coal has over 700 million tonnes of proven and probable clean coal reserves, 3.4 billion in-situ tonnes of measured and indicated resources, and 4.1 billion in-situ tonnes of inferred resources. Together, the six mines produce around 30.8 million tonnes of coal per year, for export to markets around the world.
Outlook and Implications
Teck is already estimating that the deal will result in a boosting of its revenues by half from next year, with positive implications for both earnings and cashflow.
More generally, the deal represents a move towards further diversifying Teck's asset portfolio and is in line with its long-term strategy of seeking exposure across a wide range of industries, from different metals to oil sands, coal, and potentially iron ore eventually.
Metal demand from Asia is on a solid upward growth trend, and Teck's deal with Fording places it in an ideal position to reap the financial benefits of being among the main players first on the scene with incremental supply. It is partly because of that growth that metallurgical coal prices have tripled over the last year, and it is partly against this problem that Teck is seeking to shield itself. With more of its own production, the company effectively insures itself against having to purchase coal at market rates in future, and thus reduces the risk of further price rises. Moreover, the rally in coal company stocks that had been observed in markets of late has since dissipated somewhat, providing Teck with the opportunity, motive, and means to seize Fording at a more affordable price. On the flipside, however, the danger for Teck is that if coal prices fall in the coming years, as some have predicted, the deal will have been badly timed. That said, the company seems to be firmly of the mind that the advantages of locking in coal prices now outweigh any risk in a global market that is otherwise experiencing rapidly growing demand for metals.