Friday, July 3, 2009

Flaherty's failed game of income trust dominoes

This is a classic, that ranks with the purchase of Prime West Energy Trust by middle eastern oil company Abu Dhabi Energy or TransAlta Power Income Fund by Hong Kong billionaire, Li Ka Shing that displaced Canadian investors forced to pay a 31.5% tax, whereas foreigners and corporations using excessive debt pay zero.. Here we have Teck loading up with excessive amounts of debt to acquire Fording Canadian Coal Trust and displace investors whose investment in this income trust was broadsided by Flaherty’s income trust tax and laid vulnerable to takeover given the pending 31.5% trust tax. Unable to deal with this excessive debt level in light of the collapse in commodity prices for its core business, Teck then resorts to selling 17% of itself to China's $200 billion sovereign wealth fund. Does Flaherty ever think things through to their logical and predictable conclusion.

Teck Sells 17% Stake to China Fund for C$1.74 Billion

By Rob Delaney and Mark Herlihy

July 3 (Bloomberg) -- Teck Resources Ltd., Canada's largest diversified mining company, sold a 17 percent stake to China's $200 billion sovereign wealth fund for C$1.74 billion ($1.5 billion) to reduce debt.

China Investment Corp., also known as CIC, will buy 101.3 million Class B subordinate voting shares for C$17.21 each, Vancouver-based Teck Resources said today in a statement. Teck said the deal will give CIC a 6.7 percent voting interest.

Teck has sold assets to reduce debt after adding $9.8 billion of loans last year to buy Fording Canadian Coal Trust, a producer of coal used in steelmaking. Teck last year sold more than half of its coking coal production to Japan and Korea and recently started selling to China, the world's largest steelmaker.

``For a lot of people looking at Teck's financial situation, there was certainly no opportunity for them to grow organically in the short term,'' said David Davidson, an analyst for Paradigm Capital Inc. in Toronto, who has a ``buy'' on Teck shares. ``This opens it up.''

Teck rose C$1.49, or 8.1 percent, to C$19.99 at 4:30 p.m. in Toronto Stock Exchange trading, the biggest daily gain since June 1. The shares have more than tripled this year.

Scotia Capital advised CIC on the transaction.

Coal Demand

Teck is betting that a ``strategic partnership'' with China may help the company win a larger share of the country's coking coal imports, which may rise to more than 20 million tons this year from 3.2 million tons last year, Chief Executive Officer Donald Lindsay said in a telephone interview.

``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.''

China is seeking access to raw materials for metals production, such as iron ore and coal. Wuhan Iron & Steel Group offered $400 million for part of Brazil iron-ore miner MMX Mineracao e Metalicos SA last month. Rio Tinto Group last month scrapped a $19.5 billion investment plan from its biggest shareholder Aluminum Corp. of China.

Teck said May 27 it was in talks to sell coking coal assets to Chinese companies to help it reduce debt and sold $4.2 billion of bonds on May 5 to refinance short-term obligations.

Teck in April said it sold about 5.6 million shares of Kinross Gold Corp. for proceeds of about $101 million and agreed to sell its stake in the gold production from Cia. Minera Carmen de Andacollo to raise about $270 million.

Profit Falls

The investment by CIC follows a second quarter that analysts expect to be worse for Teck than the year-earlier period. The company's profit fell 30 percent in the first quarter because of lower copper prices.

``For CIC, it represents the opportunity to participate in the inevitable upswing in commodities, and for Teck, CIC represents a long-term, patient investor that can also provide assistance in its largest market,'' Scotia Capital, a unit of Bank of Nova Scotia, said in an e-mailed statement. The transaction is CIC's ``first major investment'' in a Canadian company.

Teck is forecast to report a 29 cent profit for the second quarter, the average estimate of 11 analysts surveyed by Bloomberg. The company's net income was C$1.12 a share a year earlier.

To contact the reporters on this story: Rob Delaney in Toronto at; Mark Herlihy in London at


Dr Mike said...

When you do something stoooopid it usually comes back to bite you in the ass at some point.

Well , that applies to you & I.

If the gov`t does something stoooopid , they just spin & spin some more & blame it on someone else.

In the income trust case , they blamed it on a bunch of too rich , uninformed old farts who were bad investors & called it Tax Fairness.

The trouble with gov`ts is that they can get away with it as there are so many corporate skeletons lingering in the closets of our two main parties that they feel it is better to not open any past closed doors.

So much for being bitten in the ass for stoooopid policy.

The innocent took the bite in this case & I still have the incisor marks to prove it.

Dr Mike Popovich

Kephalos said...

Where in the hell of the Commons half-acre is the NDP? Douglas and Lewis would be kicking ass in the party worse than Jesus clearing the Temple of money-changers.

Flaherty's 2007 budget allows foreign corporations to arrange their affairs (hint: use an LBO and lend yourself the money) to become tax-exempt in Canada. Meanwhile there's no review to see if Canadian corporations are bringing home more than foreign corporations are taking out. In the old days, Lewis would have been on this like a bad smell at the pig trough.

When the NDP goes to hell, perhaps they'll be kind enough to take the Green Party with them.

Anonymous said...

Thank you Brent, Dr.Mike & Kephalos. It's pretty much impossible for anyone NORMAL to catch their breath now a days.
I find that I can actually sleep a little better knowing that there actually is some intelligent, helpful and thoughtful people left in this part of the world.
This part of the world used to be known as Canada.