Teck Is Back in Black

BCBO-Feature-Dec09-Teck-5.jpg

To get a sense of how dramatic a shift Teck Resources Ltd. has made, consider how the future looked as recently as 2007, according to a feature headlined “Teck’s Transformation” in the Globe and Mail: “Having blown the treasury on a series of high-priced acquisitions, Don Lindsay has created a diversified company with a future tied to surging copper. He says he’s laid the groundwork for the next 20 years.”


The Vancouver company, under president and CEO Lindsay’s leadership, had just spent $4.1 billion in cash and stock to buy Aur Resources Inc., a company with mines in Chile and Newfoundland producing more than 900,000 tonnes of copper a year. Teck had also committed with partner NovaGold Resources Inc. to develop the Galore Creek copper and gold mine in northern B.C. In the first half of 2008, 58 per cent of Teck’s operating profit came from copper. 


Well, the future, as Yogi Berra used to say, ain’t what it used to be. In fact it now looks a lot more like the past. While Teck still has significant income from copper and zinc, even with Galore Creek now on hold, it has also emerged as a major coal exporter, thanks to a badly timed $14-billion deal that brought the company to the edge of collapse. Profit in the first half of 2009 was off only slightly despite the downturn, but the source of those dollars had shifted dramatically: two out of every three dollars of Teck’s profit now come from coal. 


As governments talk tough on carbon emissions and climate change, Teck, one of the biggest employers in B.C. and a stalwart of the economy, appears to be betting its future on a resource more often associated with driving the steam engines of the Industrial Revolution than with powering the green economy. 


The Copper Room – on the 34th floor of the Bentall 5 tower, where Teck’s Vancouver headquarters are located – is marked with the metal’s elemental symbol, Cu, by the door. A large board table dominates the room and a wall of glass provides a view across the Burrard Inlet to North Vancouver.


“It’s a year you certainly wouldn’t want to go through again; I don’t mind saying that,” says Don Lindsay, leaning forward slightly in his chair. Still trim as he approaches his 51st birthday, Lindsay, a skier and a jogger, confesses to being a bit stiff from a weekend game of soccer with his two preteen daughters. As we talk in early October about Teck’s recent history, Lindsay says the company is stronger for having survived its near-death experience. But there’s no avoiding that it was an abysmal year for mining companies in general, and for Teck in particular. 


Teck, with a history going back to 1906, is one of the few titans of the B.C. economy. It owns interests in 13 zinc, copper and coal mines in B.C., Alberta, Newfoundland, Alaska, Peru and Chile. The company is roughly one-tenth the size of the world’s largest mining companies, BHP Billiton Ltd. and Vale SA, but it is still a major concern by B.C. and Canadian standards. BCBusiness recently ranked it the second-largest company in B.C., after Telus Corp., with revenues of almost $7 billion in 2008. Of Teck’s 9,800 employees around the world, 5,600 work in the province.


[pagebreak]

Teck CEO Don Lindsay, arguably B.C.’s
most powerful miner, came dangerously
close to disaster in the recession.

The now-notorious Fording purchase, however, put all that into question. The deal – a $14-billion agreement to buy the balance of the Elk Valley Coal Partnership that Teck didn’t already own, the Fording Canadian Coal Trust – closed in October 2008, just as the credit crunch hit. The bridging financing for the $14-billion transaction was in place, but Teck went looking for long-term credit just as the financial industry stopped lending. The deal brought the company closer to the brink than any CEO wants to go – an experience Lindsay today describes as “intense.”


Buying Fording at the peak of the market rattled investors at a time when the global economy was collapsing. “It’s a much more volatile world,” observes Lindsay. “Information disseminates so fast that the world now has the ability for everyone to get simultaneously terrified.” From trading at more than $50 in May 2008, Teck shares dropped to around $35 by fall before taking a bobsled run to as low as a few dollars, where they lingered for months. Across the sector, companies reduced exploration and cut production. Closing steel mills reduced the demand for coking coal. Companies wrestled with low cash flow. Credit rating agencies raised alarms. In November 2008, mining companies announced plans to lay off some 500 people in B.C. alone.


“The global meltdown occurred and we obviously didn’t see it,” says Lindsay. “We did stress tests and planned for recessions, there’s no question about it. But let’s face it: this was bigger, deeper, longer and faster than anyone had ever seen before. We lived through it and did what we had to do.” Most mining companies saw their stocks fall in the order of 70 per cent in two months in the fall of 2008. For Teck, though, it was worse: down 90 per cent.


Lindsay grew up in North Toronto and trained as a mining engineer at Queen’s University in Kingston, Ontario, before earning an MBA at Harvard. He joined Teck in 2005, after working 20 years as an investment banker for CIBC World Markets Inc. That experience left some wondering, amid all the turmoil, whether he’s more deal-maker than miner. 


“I kind of think that’s overdone,” he says. “I’m a mining engineer. I wear the ring. I started working underground in Uranium City,” he adds, referring to the mining community in northwestern Saskatchewan. Running a company is not just about doing deals: “Occasionally there’s a deal that’s important to do, but setting the right tone and culture and building the right team is far more important.” 


While he acknowledges that there have been those who questioned his leadership, Lindsay says Teck’s board stuck with him and that he never felt he was likely to be fired. “The board supported the decisions that I made,” he says. “The decision to do Fording was done over a 15-month period. I’m sure we had at least 20 board discussions, two full strategic off-sites. You know, I didn’t do this by myself, but at the end of the day the CEO is responsible.”


In mid-November of last year, facing the prospect of defaulting on its loans, Teck set out on what Lindsay refers to as a 12-step program to return the company to financial health. The company closed some operations, decreased coal production, dropped zinc output at Trail and increased power sales. It worked to reduce costs on the Fort Hills oil sands project in Alberta, where it is a 20 per cent partner. It stopped hiring, froze salaries, cut back or eliminated consultants and in January 2009 said it would lay off 1,400 people, 550 of them in Canada, something Lindsay says was particularly tough. Teck suspended dividend payments to shareholders. 


Then Teck began selling what it considered “non-core” assets, which mostly meant gold mines. Lobo-Marte and Andacollo mines in Chile, Hemlo in Ontario and El Brocal in Peru all went. Later so did Pogo in Alaska and Morelos in Mexico, and mines under exploration in Turkey. In June 2009, Teck announced the agreed $825-million sale to BC Hydro of its one-third stake in the Waneta Dam on the Pend Oreille River outside Trail, subject to regulatory approvals. 


Finally, Teck embraced not a higher power but a foreign one with a July 2009 announcement that China Investment Corp. (CIC), a fund that manages currency reserves for the Chinese government, had paid $1.74 billion for a 17 per cent financial stake in Teck. A year earlier, Lindsay himself had argued the government should protect Canadian mining firms from unwanted foreign takeovers. 


“I think it’s just obvious we should try to keep head-office jobs in Canada,” he says now, defending the move. The operations might be global and the investors might be international, but it’s a question of where decisions are made and where lawyers, accountants and all the other supporting professionals are hired. The CIC investment keeps jobs in Canada, argues Lindsay. 

[pagebreak]
Workers at Fording River in B.C. mine coal, which now dominates Teck’s business

There’s also the hope that CIC’s connections will help Teck find more buyers in China for its metallurgical coal, which is used in steelmaking. “They want to help us build a great company,” he says. “To be good friends with China to me just seems obvious. For our company for sure, but for our country as well.” China is already the biggest user of the materials Teck produces, and its economy is recovering faster than those of the United States and Europe. New steel plants are being built on China’s coast, making it cost-effective to supply them coal from Canada’s west coast. “It’s a structural shift in the market,” says Lindsay. “Now everyone sees that, but during the depths of the global meltdown no one paid any attention to us saying that because that’s not what they were interested in, but now they see.”


Indeed, industry observers are generally positive about Teck’s prospects today. “This time last year, the world was coming to an end,” says Ian Howat, a Toronto-based analyst at National Bank Financial Inc. “Now people are talking about coking coal prices being $200 per tonne.”


Teck gets criticized for the Fording deal, but in retrospect it actually made a lot of strategic sense, according to Ian Nakamoto, director of research at Toronto-based investment firm MacDougall, MacDougall and MacTier Inc. “If they didn’t bid and win, the company would have looked good balance-sheet wise,” he says but adds that Teck “wouldn’t have [had] much of a future” relying on just the copper assets the company already owned. “They are OK copper assets,” Nakamoto says. He sums up what Teck would look like without Fording: “It wouldn’t be much of a company, put it that way.” 


While the Fording purchase was a much bigger deal, July’s CIC investment in Teck and the concomitant growth in coal exports have raised more eyebrows. For many casual observers, coal mining seems a relic of a distant era, especially with all the talk from provincial politicians about reducing carbon emissions and building a green economy. But in truth the industry has been a constant in B.C. for the last 160 years.


In 1865, as the gold rush peaked, gold mining was worth some 35 times more than coal mining in the province. But by 1885, more money was being made on coal than on gold, and by 1910 the value of coal mined from the province had reached $11 million, about double the total for gold. Today there are nine coal mines in the province, directly employing more than 2,900 people (according to government figures), with revenues worth some $3 billion a year – about half the money made on mining in B.C.


In early September, I meet with Randy Hawes, the MLA for Abbotsford-Mission and B.C.’s minister of state for mining. A former three-term mayor of Mission and a Mission Rotary Club member, Hawes is convinced that coal mining is consistent with the province’s environmental goals. As we talk, Hawes and an aide set up a laptop computer on a desk in his ground-floor office in the legislature to show pictures from a recent visit to several of Teck’s coal mines in southeastern B.C. In satellite images those mines appear as great black scars on the Earth. Up close they’re “big, big, big” but not so bad, says Hawes. 


“I was very, very impressed,” he continues. Elk and sheep are frequent visitors and even bears and cougars occasionally stop in, he says. No hunting is allowed in the mines, and the animals find it safe. “It almost becomes like a game preserve, which I think a lot of people don’t even think about.” To make his point, he shows me photos of half a dozen white mountain sheep posed against the black backdrop of Teck’s coal mine at Line Creek. As far as Hawes is concerned, mining is key to the provincial economy and is being carefully managed to protect the environment. Indeed, Hawes sees those working in the mining industry as “what I would call environmentalists. They’re all family guys with snowmobiles and the little fishing boats. They’re outdoors kind of guys.”


Ecological groups working in the Kootenays think the minister is overstating his case. Casey Brennan is a program manager with the environmental group Wildsight. “It’s not that we’re against mining,” Brennan says over the phone from his office in Fernie. “I wouldn’t be in Fernie if it weren’t for coal mines. But to say open-pit strip mines are like a game preserve is naive at best, deliberately misleading at worst.” The mine operators do plant grass that elk and other ungulates like to eat, and it’s likely the animals know they are somewhere that’s safe from hunters, says Brennan. But out of 130 square kilometres that the mines have stripped, just 20 per cent has been reclaimed, he notes. “And reclaimed is not restored; there’s a big difference.”


Then there are problems such as the increasing level of selenium in the Elk River. The mineral is toxic at high levels, and the company is working on reducing it. The animals, though, are easier to see, says Brennan. “That’s what they like to highlight when they take people on tours.”


[pagebreak]

Top: Copper, from such mines as Carmen de
Andacollo in Chile, was once Teck’s primary product;
bottom: Teck is getting out of the gold business, selling
its share of the Pogo Mine in Alaska in July.

One of the least-visible, but most vexing, environmental problems presented by mining is its contribution to climate change. Calculations that the Pembina Institute did for Wildsight in 2007 showed that the five coal mines at Elk Valley were responsible for about 11 per cent of B.C.’s total greenhouse gas emissions domestically. Adding the emissions produced by that coal later on in China, Holland, Mexico, Brazil and elsewhere, the amount of carbon released shoots to 120 per cent of B.C.’s current total.


In this province, the push in recent years has been to reduce carbon emissions and other greenhouse gasses that contribute to climate change. The main tool so far has been a carbon tax that adds a few cents to the price of a litre of fossil fuel, with the Liberal government promising a cap-and-trade system sometime in the future to encourage large carbon emitters to reduce. According to Teck’s director of environment and corporate affairs, Mark Edwards, the company’s B.C.-based operations currently pay about $11 million per year in carbon tax, which will go up to as much as $40 million by 2012 as the tax escalates. 


But that $11 million works out to about one penny of every $6.25 the company had in revenue in 2008, which for many critics is a small price to pay for an industry that facilitates the release of large amounts of carbon into the atmosphere. 


The province, in its attempts to cut carbon emissions, has done little that would make a difference in the day-to-day operations of a company such as Teck, even as it moves more heavily into coal mining, argues the NDP’s energy, mines and petroleum resources critic John Horgan: “A carbon tax on driving around the Lower Mainland is well and good, but the volumes of coal we move from the northeast and the southeast to Asia, without any significant cost to the producers or the end users in terms of climate benefit, is something we have to come to terms with as a community and as a province.” 


As for B.C.’s minister of mining, Randy Hawes says that mining itself emits only a small amount of carbon. Smelting is a source and steps are being taken to reduce those emissions, he says. But the government has no plans to start counting the carbon released when Teck’s coal is processed in China or elsewhere. “China is going to get coal, whether from us or Australia – so no, we don’t count that. We could do that and devastate an industry, but I don’t think we’re going in that direction.” 


From Teck’s 34th-floor boardroom, Don Lindsay points out that you can see a single grey windmill perched high atop Grouse Mountain. “If you want to build a windmill,” he says, looking up at the mountaintop, “it takes 170 tonnes of our coal.” His point is that if the green economy is going to have infrastructure, it’s going to need Teck and other mining companies. “If you want to have solar panels, we produce different elements in Trail that go into solar panels,” says Lindsay. “You can’t operate without the products we produce.”


With Teck getting deeper into coal and agreeing – with its sale of the Waneta Dam – to let go of a large part of its relatively clean hydro generating capacity, couldn’t an argument be made that the company has become browner just as the province is trying to go green?


No, says Lindsay; the coal mines Teck bought were already running. “We managed the coal assets anyway; we just own a bigger piece of it,” he says. And the Waneta dam will continue to produce clean power. The company’s assets may have shifted, but “it hasn’t changed the world at all.” He notes that Teck’s other products help the green cause too. Zinc, for instance, is used to galvanize steel, preventing it from rusting and making it last longer: “If all the cars were rust proof, then we wouldn’t have to make new cars. The way to reduce emissions is to actually produce less cars rather than more-efficient cars. It makes a huge difference.”


On the question of the company’s financial health, Lindsay says Teck is strong coming out of the downturn. Cash flow is good and there’s potential to grow the business, but likely by growing existing assets rather than through acquisition: “There won’t be a whole series of transactions. We had to do things to get through, but now if we just run the operations really well, the world is going to come our way.” And with governments spending to stimulate their economies, there’ll be a need for commodities, which Lindsay says should drive up prices. “You look forward to say 2011, when the effects of the largest stimulus packages are really kicking in, in terms of infrastructure spending and so on, and I think demand is going to get ahead of supply.”


Before all that happens, though, there will be another opportunity for Teck to step into the limelight. In a sponsorship deal announced a few years ago, Teck became the official supplier of gold, silver and copper (used to make bronze) for the 2010 Winter Olympics. Making the 615 Olympic and 399 Paralympic medals took 2.05 kilograms of Teck’s gold, 1,950 kilograms of silver and 903 kilograms of copper.


“We are on a bit of a mission here,” says Lindsay with evident pride. “I think having Canadian champions on the world stage in whatever field is important. We’ve got the Olympics coming up here. Having Canadians get on the podium and win the gold medal is important…. We should have Canadian businesses that are viewed as high-quality champions on the world stage.”


But after the athletes go home, gleaming medals in hand, Teck will carry on – its future fortunes closely tied to a far-off country’s growing appetite for a less shiny, decidedly less sexy, 19th-century material.