CIC on Teck: the Commodities Buying Spree Continues

Teck Resources (Teck) confirmed Friday that China Investment Corp (CIC), China’s sovereign wealth fund, will buy a 17.2% equity stake in the Vancouver-based mining company for C$1.74 billion (US$1.5 billion).  Teck undertook the deal to improve its balance sheet and to strengthen its ties with the world’s largest commodities market.

The deal is a continuation of China’s recent commodities buying spree.  The country’s cash-rich companies have taken advantage of the worldwide economic downturn to implement a strategy of diversifying their supply base by investing in overseas assets.  In the past month alone, Chinese firms have announced deals with Australia’s OZ Minerals, Swiss exploration company Addax, and Singapore Petroleum. 

The pace of deals has been unaffected by the high-profile collapse of Aluminum Company of China’s (Chinalco) failed $19.5 billion bid to double its stake in Rio-Tinto, an Australian mining giant.  Many industry-watchers have compared the Chinalco-Rio break up to China National Offshore Oil Company’s unsuccessful play for Unocal in 2005, which cooled the pace of Chinese overseas acquisitions for several years.  This time around, no such slowdown has occurred.

Teck, a leading producer of copper, metallurgical coal and zinc, is an important investment for the world’s leading importer of iron ore and other commodities, especially given China’s emphasis on securing the inputs needed to support its 8% annual GDP growth. Teck has a broad set of mining interests in both North and South America and is also a producer of gold and molybdenum.

While critics of the deal pointed to the C$1.30 per share discount on market price obtained by CIC in the transaction, Teck’s shares rose 8.1% to C$19.99 on news of the deal.

Teck was quick to point out the advantages of the deal.  "This transaction is an endorsement of Teck's future and provides an immediate and very positive impact on Teck's balance sheet," said CEO Don Lindsay. "It puts Teck back on the growth track and allows us to deepen our relationship with the largest customer of our core products."

Teck also emphasized the importance of cultivating ties with China, especially to help improve its metallurgical coal business.  Chinese imports of metallurgical coal may grow from 3 million tons last year to 20 million tons this year.  “That's going to grow significantly in the coming years because they're building very large blast furnaces on their coast,'' Lindsay said. ``This could help us with our metallurgical coal sales in the long term.''

"Clearly, CIC knows so much about the Chinese economy and all the people who run those [state-owned] companies," Mr. Lindsay said. "And not every mining company has a very friendly relationship with China right now,” he added, clearly referring to Rio-Tinto.  "In the end, this really helps build a strong Canadian competitor on the world  stage. That's what we're doing.”

Teck will use the $1.5 billion sale proceeds to shrink the $9.8 billion in bank debt it took on last year as part of its acquisition of Fording Canadian Coal Trust.  Since the Fording acquisition, the company has been selling off assets, entering into debt-deferral agreements and issuing $4.2 billion worth of bonds in order to shore up its balance sheet. Teck said that the proceeds will allow it to pay off the remainder of its $5.8 billion bridge loan.

Despite the company’s improved financial position, Teck said that it also plans to sell a 20% stake in its coal business in Western Canada (the former Elk Valley) to raise further funds.CIC, who was advised by Scotia Capital on the transaction, said that the share purchase was “for investment purposes as a long-term passive financial investor.”

The transaction is also simplified by the fact that it does not require the approval of Canadian regulators, who only reviews acquisitions where a foreign corporation obtains control of a Canadian firm.  Sources expect the deal to close by mid-July.