Teck Seen as Bidder as Rio Plots Exit From Canadian Iron
Teck, Canada’s largest diversified mining company is ready to look for “opportunities,” the Vancouver-based company’s Chief Executive Officer Don Lindsay said March 4 during the annual Prospectors & Developers Association of Canada convention.
“We have a balance sheet to die for,” he told guests in the ballroom of the Fairmont Royal York hotel in Toronto, noting that Teck isn’t among the mining companies that have announced about $50 billion in asset writedowns in the past year after takeovers turned sour.
Iron Ore Co. is a perfect target for Teck because it exports to Asia, would strengthen Teck’s ties with existing steelmaking customers and help lessen its reliance on coal and copper, said Laurence Balter, chief market strategist at Oracle Investment Research in Fox Island, Washington.
Rio Tinto Group (RIO), owner of a controlling interest in Iron Ore Co., hired Credit Suisse Group AG and Canadian Imperial Bank of Commerce to sell all or part of the 59 percent stake, a person close to the matter said March 1. Rio’s stake in Iron Ore Co. is valued at $1.8 billion, analysts at Deutsche Bank AG said in a March 8 note.
“Teck would be my number-one candidate for taking a run at the IOC assets,” said John Goldsmith, deputy head of equities at Montrusco Bolton Investments Inc. in Toronto, which manages about C$5.2 billion ($5.1 billion). A bid would “be consistent with what they’ve said in the past in terms of getting into other bulk commodities.”
Chris Stannell, a Teck spokesman, said the company doesn’t comment on speculation about mergers or acquisitions. A Rio spokesman declined to comment.
Iron Ore Co. operations are located in Labrador City, Newfoundland and Labrador, Canada’s easternmost province. About a quarter of its output is shipped to steel mills in Asia, the Pacific region and the Middle East. Its owns a 420-kilometer (261-mile) railway and port on the Gulf of St. Lawrence.
The unit has sufficient reserves to last 30 years at current production rates and sales were about C$1.8 billion in 2012, according to Labrador Iron Ore Royalty Corp. (LIF), which owns 15 percent of the producer. Mitsubishi Corp. (8058) has a 26 percent stake.
The possible sale of Iron Ore Co. comes two months after Rio fired CEO Tom Albanese following a $14 billion writedown on the value of takeovers. His successor, Sam Walsh, said last month he’ll continue with asset sales to reduce the London-based company’s costs and strengthen its balance sheet.
“All the majors are looking at their asset portfolio and seeing what’s non-core and looking to dump the assets they don’t think are core,” Ken Hoffman, a Princeton, New Jersey-based senior analyst at Bloomberg Industries, said yesterday by telephone from Belo Horizonte, Brazil.
While Rio is busy selling assets, Teck has repeatedly said it’s interested in acquisitions. The company has kept most of its cash in recent years, completing five purchases worth a combined $505 million in the past four years, according to data compiled by Bloomberg.
As of Dec. 31, Teck had C$3.27 billion of cash, up from C$1.33 billion in 2009. Teck is rated Baa2 by Moody’s Investors Service and BBB by Standard & Poor’s.
Coal and copper accounted for 75 percent of Teck’s 2012 sales, according to data compiled by Bloomberg. Zinc and energy revenue accounted for the rest.
“We’ve talked about in the past that iron ore would be a good fit for our portfolio, and it really would, for all sorts of good reasons,” Teck CEO Lindsay, 54, said Feb. 7 on a conference call.
“Values have come down,” he said. “There’s a few new assets that have become available.”
Valuations for iron ore producers have fallen amid weaker commodity prices and slower demand growth. The Bloomberg World Mining Index is trading at about 20 times earnings, compared with a multiple of 27 three years ago.
Teck fell 0.8 percent to C$30.10 in Toronto. The shares have dropped 14 percent in the past 12 months, while the S&P/TSX Materials Index has declined 15 percent.
Iron Ore Co. may not be the best opportunity for Teck, said Shane Nagle, a Toronto-based analyst at National Bank of Canada. (NA) Teck already ships metallurgical coal from Vancouver across the Pacific to Asian buyers. An iron-ore producer closer to Asia, such as Australia’s Fortescue Metals Group Ltd. (FMG), may make more sense, he said.
Yvonne Ball, a spokeswoman for Fortescue, didn’t immediately return a call from Bloomberg News for comment outside of normal business hours.
Teck doesn’t want to jeopardize its ratings by taking on too much debt for acquisitions, Chief Financial Officer Ron Millos said Feb. 7.
S&P cut the company’s long-term foreign issuer credit rating to BB+ in March 2009 from BBB-, the year after Teck acquired Fording Canadian Coal Trust for C$10.4 billion. The deal, Teck’s biggest, was completed just as commodity prices collapsed during the financial crisis and left the company struggling with debt repayments. Teck temporarily suspended its dividend and in 2009 sold a 17 percent stake in the company to China Investment Corp.
Other potential bidders for Iron Ore Co. include the province of Quebec and Cleveland, Ohio-based Cliffs Natural Resources Inc. (CLF), according to Credit Suisse in a March 4 note. Pat Persico, a spokeswoman for Cliffs, declined to comment on the speculation. Genivieve Heon, a spokeswoman for Quebec’s Ministry of Natural Resources, didn’t immediately return an e- mail seeking comment.
Interest also may come from Asian steelmakers who have established a presence in the so-called Labrador Trough geological belt that straddles Newfoundland and Labrador and its neighboring province of Quebec, said Adam Low, a Toronto-based analyst at Raymond James Financial Inc.
Labrador Iron Ore Royalty, with a market value of C$2.31 billion, may be a potential takeover target. As well as its 15 percent stake in Iron Ore Co., it collects a 7-cent payment on every dollar of revenue generated by the producer and has two seats on its board.
Teck is a potential buyer which may put the royalty at risk. Labrador Iron Ore CEOBruce Bone didn’t return a call seeking comment.
“If you’re a mining company, like Teck, and you’re trying to mine for profit, rather than securing supply to your steel mills, then perhaps eliminating that 7 percent royalty off the top becomes a lot more important,” Low said in an interview.
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