Teck shows more signs of renewal (May 10, 2010)

VANCOUVER — In the latest sign of a strong recovery, Teck Resources (TCK. B-T, TCK-N) has reinstated an annual dividend after paying a significant portion of its debt ahead of schedule.

“There’s a lot of good news to comment on today,” said Don Lindsay, president of Teck, in an April 21 conference call. “We have hit the debt reduction target that we originally put in place in July 2008 and we’ve hit it much faster than originally planned.”

Teck has now paid the original US$9.8-billion debt it incurred to buy Fording Canadian Coal as the market peaked before the crash. In 18 months, the company has reduced its debt from $13.4 billion to $5.4 billion.

Lindsay was unable to confirm in the conference call whether a dividend would be reinstated, but the next day Teck announced it would issue a 40¢ annual dividend. This is a reduction from the $1 dividend Teck had been paying when it suspended payments in November 2008.

The move comes shortly after Standard & Poor’s returned the base-metal giant to an investment grade rating. The company is still waiting for Moody’s to update its ratings but anticipates a similar upgrade. The company now has an investment grade rating from three of the four rating agencies.

The dividend and upgrades mark a turnaround for a company that truly felt the brunt of the recession. During the downturn, the company’s stock plunged to a low of $3.35 from a high of $50 six months prior. The stock is now trading in the mid- $40s, hitting almost $47 in early April.

For the first quarter of 2010, the company reported record quarterly earnings of $908 million or $1.54 per share. Earnings included a $656-million pre-tax gain from the sale of a one-third interest in the Waneta Dam that powers the company’s Trail metallurgical complex, a $50- million gain from the sale of its Turkish gold projects and a $56-million non-cash foreign exchange gain.

Comparative net earnings of $205 million for the quarter were much closer to the $214 million earned in the first quarter of 2009.

In 2009, Teck also sold its interests in two operating gold mines — a 40% stake in the Pogo gold mine in Alaska for US$245 million and a 50% interest in the Hemlo gold mine in Ontario for US$65 million. During the year the company also sold off its royalty from the Andacollo copper-gold project in Chile and its share of the Morelos gold project in Mexico.

The company sold the assets to help pay its burdensome debt load, a move Lindsay downplayed.

“I think it’s very important to note that although the asset sale program got a lot of media attention, it only represented 5% of our total asset base, and none of our core assets were divested,” said Lindsay.

Strong coal and copper prices are sure to benefit the company in the year ahead, but challenges remain.

The company is still trying to resolve a permitting issue that is blocking the expansion of its Red Dog zinc-lead mine in northwest Alaska. Court battles are being waged and the United States Environmental Protection Agency is trying to determine if the total discharge of solids in the water is acceptable. Teck is unable to expand operations to the new pit until the issue is resolved. Red Dog accounts for more than 15% of global annual zinc production.

Teck has also started a new prefeasibility study with NovaGold (NGT, NGT, NG-X) on their Galore Creek gold-copper joint venture in northern British Columbia. The partners plan to redesign the tailings facility, processing facilities and road access as well as potentially increase the designed throughput. The B.C. government’s commitment to building a highway 37 transmission line will also help the economics of the mine. The study is expected to be completed by mid-2011.

Teck’s share price climbed $2.28 on news of the dividend to close at $43.99. The company has 580 million shares outstanding.