The BarkerLetter

Thursday, November 27 — I think Teck Cominco Ltd. is going to either get a lot bigger or a lot smaller in the coming months. This poses a dilemma for the investor. Namely, which will it be? The trouble with Teck is its debt …  some $9 billion and change … most of it short-term associated with their takeover of Fording Coal. To date the company has raised some $2.4 billion by scaling back its capital budget and selling some gold assets, plus calling in a hefty tax rebate for the 2nd Qtr. of ‘09. Those are all good things! But the question in my mind is whether or not the firesale will continue.  The trouble with divestiture as a way of paying down debt is it ultimately reduces the company´s ability to make money, compounded by the fact that the money raised is not going into capital projects but down the ceramic bowl. Logically, the company will be worth less, not more, as a result. Investors want to know where the future growth is going to come from.

The worry going forward is dwindling global steel demand. Teck has said it will dispute (that’s my word, the company actually said ´discuss´) the desire of some customers to defer contracted coal volumes for the current year. Not a good sign! Meanwhile, it has said it will pursue other asset sales. Also not a good sign. The company would make an attractive candidate for a merger if it were relatively debt free, but it isn´t, so I don’t think we´ll see the usual Saturday night swains lining up to dance.  Owww major shrinkage there!  In fact, I´d go so far as to say it’s in imminent danger of being viewed by the industry as a bit of a pariah. I’m not ruling out the possibility of a friendly merger with an asset poor but cash rich rival though. It’s an outside chance but it’s not impossible … nothing is impossible in this market! .. in which case Teck could indeed get bigger.

The worse case scenario I can envision is a hostile takeover by a syndicate or investment consortium who will take the wrecking ball to its portfolio, although I can´t see that happening because the company´s share structure is very well-buttressed. So are Tck.A and Tck.B shares worth their current valuation of $9.75 and $6.25 respectively? Somebody believes so: Yesterday (Wednesday) they were at $9 and $4.55.

I think the rally was a wake up call, but that the shares will go lower before they go higher from here. We’re in a bear market after all. It’s risky business, but I rate the B shares a buy if they fall back below this week’s lows.

Careful out there.