Teck slashes dividend and costs, sells assets to pay Fording debt

Vancouver – The harsh reality of Teck Cominco‘s (TCK.B-T, TCK-N) debt burden just became abundantly clear: the major has canceled its annual dividend, slashed spending dramatically, and walked away from or sold its interests in two major projects: the massive Petaquilla copper project and the Lobo-Marte gold property.

The news pushed Teck’s share price, which sat above $50 as recently as July and which has averaged close to $40 for the last three years, as low as $3.35 during the day’s trading. At close Teck’s share price sat at $4.10, having lost $1.12 on the day and $30 since the early October.

The company says these moves are “the first steps” in a comprehensive plan to reduce its almost US$10-billion debt, more than half of which is due within a year. The debt stems from Teck’s recent US$14-billion takeover of Fording Canadian Coal Trust to gain 100% ownership of the world’s second-largest producer of hard coking coal, Elk Valley Coal.

The coal bet seemed like a good idea at the time, in the middle of a year heralding record-breaking, US$300-per-tonne prices for metallurgical coal. Then came the sudden collapse in metal and coal prices, putting Teck’s ability to pay down the mega-loan in serious question.

The company is addressing a serious question with significant measures designed to save $2.4 billion. First, Teck has cancelled its annual $1-per-share dividend for Class A common and Class B subordinate voting shares. The move saves the company $486 million a year, though of course hurts the short-term outlook for investors.

Next the company slashed its budgeted capital expenditures by $730 million. Specifically, sustaining capital for the year now stands at $250 million instead of the $580 million previously planned. Teck says strong capital support in recent years has left its operations in good condition and thus able to survive on reduced budgets.

The other $400-million in expenditure cuts hit Teck’s development budget. Development capital has been reduced to $250 million for 2009, down from $650 million. The budget still allows Teck to complete several key projects, including the Andacollo concentrate project in Chile. In fact, the Andacollo expansion will absorb $160 million of the development budget in order to quadruple copper output by the end of 2009 while also adding significant gold byproduct credits.

The company says it will “devote only nominal financing to studies on its other existing growth projects,” which include the Relincho copper-molybdenum project in Chile that Teck acquired in its summer takeover of Global Copper and the Galore Creek copper-gold project in northwest British Columbia where development has been suspended indefinitely because of dramatically escalating costs.

And the company recently saw its development obligations reduced considerably when the Fort Hills partnership of UTS Energy (UTS-T), Petro Canada (PCA-T, PCZ-N), and Teck deferred the mine-development decision at the expensive Fort Hills oil sand project and put the planned Sturgeon upgrader on hold indefinitely. One analysts pegged Teck’s resulting savings at $1.3 billion for 2009 and $1.1 billion in 2010.

In another cash-saving move, Teck is reducing zinc production at the Trail metallurgical complex by 4,000 to 5,000 tonnes per month. The Trail facilities include one of the world’s largest integrated zinc and lead smelting and refining complexes as well as the Waneta hydroelectric dam and transmission system.

By reducing zinc production by 20% Teck can still meet customer needs. The company expects power sales will increase by roughly 15 gigawatt hours per month. Lead production will not be affected. 

But to meet its debt obligations Teck needs to do more than cut costs – it has to sell some assets for hard cash. To that end the company has essentially sold its interest in the Petaquilla copper project in Panama to joint-venture partner Inmet Mining (INM-T) and sold its majority interest in the Lobo-Marte gold project in Chile to Kinross Gold (K-T, KGC-N).

In the spring Teck earned in a 26% interest in the massive Petaquilla copper project from Petaquilla Copper (PTC-T), which held 52% of the project’s holding company. Inmet holds the other 48%. Since then Inmet has tabled two takeover bids for Petaquilla Copper, the first hostile and rejected and the second friendly and accepted. Inmet now holds 95% of Petaquilla Copper and is close to completing a complete takeover.

The project, first discovered in 1968, is home to 1.1 billion tonnes grading 0.5% copper with minor molybdenum and gold. Teck is walking away from the project, losing its 26% interest in exchange for dropping its financing obligations for the mega development project. And those development obligations could have been significant: in mid-2007 capital costs came in at US$1.7 billion but by early 2008 an interim report re-estimated those costs at US$3.5 billion, with a US$515-million contingency.

Inmet says it will continue to advance the project but, in light of current market conditions, will remain prudent in its approach. Teck expects to record a pre-tax non-cash charge to earnings of $26 million in the fourth quarter for dropping the project.

The Lobo-Marte gold project, which is in the Maricunga district of northern Chile, hosts 97.68 million indicated tonnes grading 1.72 grams gold per tonne plus 9.25 million inferred tonnes averaging 1.56 grams gold. Kinross will soon own the project after inking separate deals with joint-venture partners Teck and Anglo-American (AAL-L, AAUK-Q).

For its 60% interest in Lobo-Marte Teck is getting US$40 million and 5.6 million Kinross shares. Teck is also holding onto a 1.75% net smelter royalty on 60% of future production, payable when the price of gold is US$760 per oz. or more. Kinross is paying $140 million to Anglo-American for the other 40%, on which Teck’s first right of refusal expired Nov. 18.

And finally, as if to add salt to its debt wound, some of Teck’s contracted coal customers recently asked the major to defer some of their contracted volumes for the 2008 coal year. Teck’s coal contracts all run until the end of March 2009 and contracted coal sales until then at $300 per tonne are a key part of the company’s current financial plan. Teck says it will be negotiating with these customers but warns coal sales for 2008 will now be at the lower end of its 23 to 25-million-tonne guidance.