Teck Restructures Massive Debt

VANCOUVER — Teck (TCK. B-T, TCK-N) is back from the brink of disaster: Canada’s biggest mining company watched its share price soar 37% in a day after news it restructured its massive debt load to reduce the amount it owes this year by US$4.4 billion.

The debt restructuring is a lifeline for the company, which saddled itself with US$9.18 billion in debt to cover its $14-billion takeover of Fording Canadian Coal Trust last year. When the global economy soured, Teck’s revenue streams fell off and its ability to repay or even restructure the whopping US$6.27 billion it owed lenders in 2009 fell into serious doubt. Its share price nosedived more than 90% and takeover rumours started to swirl.

But with credit markets and commodity prices starting to recover, Teck’s president and CEO Don Lindsay convinced lenders to sign onto a new credit agreement that reduces the company’s 2009 debt load by US$4.4 billion. The bulk of its payments will now come in 2011, including the majority of the US$5.8-billion bridge loan previously due in October.

“The bridge is now due in 2.5 years instead of six months and judging by the way the world changes these days, that is quite a long time,” said Lindsay in a conference call. “This is a much more manageable schedule, and one better suited to our long-life coal resources.”

Teck has two loans to balance, both stemming from the Fording deal: a US$4-billion term loan and a US$5.8-billion bridge loan. Under the original agreement, Teck was to have repaid the term loan over three years, paying some US$500 million in 2009 and then roughly US$1.45 billion in 2010 and 2011. The bridge loan was due in its entirety later this year.

Now, in exchange for higher interest rates that extend over a longer loan period, Teck has breathing room. In 2009, it owes lenders US$1.86 billion; in 2010, it has to repay US$1.08 billion. Most of the bridge loan has been deferred to 2011, resulting in a US$4.57-billion obligation that year. And in 2012, Teck will have to cough up the remaining US$1.67 billion.

To amend the bridge loan repayment, Teck is paying significantly more interest: the rate immediately climbs a percentage point to LIBOR plus 3.5% and will increase by half a percentage point every six months. Duration fees of 3.5% falling to 2.5% once the outstanding amount drops below US$3.35 billion, which are in addition to interest charges, must be paid every six months.

On the term loan, Teck is now paying LIBOR plus 3.5%, up a percentage point, until the end of 2011 when the rate jumps to LIBOR plus 5%. By 2012, if all goes according to plan, Teck will have spent more than US$1 billion in interest and another US$200 million on duration fees. The company is also paying extension fees totalling US$96 million.

The other key caveat of the amended deal is that Teck is obliged to hand over all proceeds from asset sales, capital market transactions, and operating cash flow to pay down the bridge facility balance. If the major somehow raises enough to pay off the loan ahead of time, all of its cash must then be directed toward the term loan until it is gone.

That may sound onerous, but analysts and shareholders are certainly pleased with the plan. Teck’s share price jumped $3.36 or 37% on the news, closing the day at $12.47. It was a welcome recovery: the company’s share price had hovered between $30 and $50 for three years until sharp commodity price declines put the major in serious risk of a liquidity crunch in the last months of 2008. Teck’s share price tumbled to a low of just $3.35 in early March.

Lindsay says the company still remains committed to not diluting shareholder value: “We have consistently said that we have no plans to do an equity issue and that remains the case,” he said. “We think the debt repayments are very manageable.”

How Teck will manage the payments is an interesting question. The US$1.86 billion it owes this year does not look to be a problem as Teck already has $1.6 billion in the bank and expects to receive roughly US$550 million in the second quarter from previously announced asset sales and tax refunds.

And in the short term, the company has made clear it plans to push ahead with asset sales. Lindsay says the company is in advanced talks around selling its 40% stake in the Pogo gold mine in Alaska; the sale could net $300-450 million for Teck, according to analyst estimates. The company is also seeking buyers for its stakes in the prefeasibility stage Morelos gold project in Mexico as well as three gold projects in Turkey.

But the biggest asset sale on the table is a stake in Fording. When Teck bought the Canadian coal company last year, it said it would look for a partner at some point. Analysts think Teck will seek to sell 20% of the coal division and peg the price tag at US$2 billion.

“We think having a partner would be a good thing,” Lindsay said. “And a number of the potential partners really bring something to the table in terms of making the project a more valuable business.”

Over the longer term, earnings from operations will certainly help cover payments but analysts are divided on whether that will suffice. Tony Robson of BMO Capital Markets described the task as “difficult to very difficult.” According to his model, the company would require a metallurgical coal price of US$200 per tonne and a copper price of US$2.90 per lb. to meet its obligations. At current prices (US$125 per tonne coal and US$2 per lb. copper) Robson thinks the company will find itself short more than $8 billion by the end of 2012, considering capex requirements, interest payments, and tax. Robson did not consider possible proceeds from asset sales, which could be significant.

Over at Haywood Securities, analyst Kerry Smith has a more optimistic outlook: “With about $3 billion to $3.7 billion per year of (earnings before interest, taxes, depreciation, and amortization) in each of the next two years, Teck should be able to quickly pay down the US$9.8 billion in debt to a manageable level,” he writes.

Teck’s first-quarter financials helped encourage optimism, as the company managed to earn $241 million. The earnings stemmed from $1.7 billion in revenues that resulted in a $765-million operating profit, as well as $800 million in tax refunds.

“Considering how weak the quarter was overall, we were very pleased with our results,” Lindsay said. “Our earnings show the effectiveness of the plan we announced last November to curtail uneconomic operations and reduce costs across the company.”

While the Fording deal certainly left Teck with a substantial debt load, it also provided a significant source of cash flow. In the first quarter, coal sales contributed 68% towards the company’s operating profits, compared to just 4% for the same quarter last year. The coal profits were helped along by the fact that coal contracts run April to April, which means Teck was still charging US$275 for a tonne of coal according to the deals negotiated last March, near the peak of the coal market.

One of the other big questions plaguing Teck in recent months was what coal price the company would nail down for its 2009 sales. That question has now been mostly answered: Teck has settled 11 million tonnes of coal sales for 2009, with its highest-quality product priced at US$128 per tonne. The majority of Teck’s coal sales are of high-quality metallurgical coal. In addition, the company is still negotiating with customers with respect to carryover tonnage — tonnes that customers deferred as the markets nosedived and steel demand fell — and expects carryover tonnes sold at 2008 prices to boost its average 2009 coal price. All told, the company expects to sell 18 to 20 million tonnes of coal this year.

The company also lined itself up for a tidy second quarter by arranging the sale of several key assets. There is cash yet to arrive from three transactions: Teck sold its interest in the Lobo-Marte gold property in Chile for US$176 million, announced the sale of its 50% i
nterest in the Hemlo gold mine in Ontario for US$65 million, and handed over the royalty rights to gold production from the Andacollo copper mine, in Chile, for US$270 million.

And no one believes Teck is finished restructuring its loans. Lindsay made clear the company’s new focus, now that it has some breathing room, is to refinance the bridge loan again to spread payments over a longer period.

At least one proven financier seems to have faith in Teck’s new plan: Jack Cockwell, the highly successful chairman of Brookfield Asset Management (BAM. A-T), is up for election to join Teck’s board. If shareholders give Cockwell the nod, Teck will become one of the few outside directorships Cockwell has ever accepted. Cockwell has known and worked with Teck’s chairman and controlling shareholder, Norman Keevil, for more than 30 years.