Teck Cominco - Too Many Disappointments

I sold our position in Teck Cominco earlier today (02/25/2008) @ $37.50 per US ADR. We made a marginal gain on this position (6%) and it's possible with the ramp up in inflationary trends that TCK may ride the wave along with other commodity plays. But to put it simply, I was wrong in my thesis and want off this ride. It appears I overrated management in my initial assessment of the company. Perhaps I should have paid more attention to the evasiveness and defensive tone I noted originally.

The company's financial results lagged far behind 2006 results, with income and cash flow off markedly. While it is not fair to hold the company accountable for currency effects and price drops (most notably in zinc), it is more than fair to hold management to account for the myriad problems with operations and project pipeline.

One of my original premises was that the diversified nature of their operations would help buffer commodity price swings. This failed to come off this year for several reasons: inability to realize value in gold assets, the "stranded" nature of their metallurgical coal assets such that even current run-ups in coal prices won't boost earnings until Q3 2008, failure to close any deals for new asset platforms, distant timeline on oil sands combined with government issues. The end result being that Teck Cominco heavily tracked (or trailed as other copper miners, say FCX or PCU, seemed to hold up better) the price of copper and zinc.

Also, at time of entry, TCK had over C$5B of cash on the balance sheet. Now, that cash position is whittled down to ~$1.4B and it's hard to say that management has achieved their stated goal of diversifying into non-exchange traded commodities. They've added 3 copper mines and a troubled Galore Creek project. The Galore Creek re-evaluation casts serious doubts on management's abilities and due diligence. Less than 4 months after supposed due diligence on Galore Creek, we have to go back to the drawing board and write down $50M? From my view in the cheap seats, this looks really sloppy and reflects poorly on Don Lindsay's team.

Teck has also had operational issues all year at Antamina, their gold mines, Elk Valley. They've announced writedowns on the carrying value of the Pend Oreille and Lennard Shelf zinc mines as well as a write-off of their Tajera Diamond investment.

During last year's Q4 conference call, management testily defended their project pipeline, mentioning the following projects: - Fort Hills & Lease 14/22 oil sands, Pogo/Morelos gold, Highland Valley extension, Santa Fe/Carrapateena, Tejera/Nautilus/Zinc Ox, Petaquilla copper/gold. With the exception of Highland, it is a stretch to say that any notable progress has been made toward realizing value on these projects. The oil sands probably face extensive capital costs if current industry trends are any indication. I've discussed Teck's loss-making abilities mining gold in previous posts. Tejera is in bankruptcy protection. And the Petaquilla project is on a do-or-die timeline for the end of March as to whether Teck will proceed with their buy-in on the project. The capital costs for Petaquilla are prohibitive ($3.5B) and management gave every indication that this will be hard call on their end.

While the stock may still be cheap, part of my investment strategy emphasizes strong management whom I feel will deliver strong results and/or quickly recover if there is a stumble. At this point, Teck Cominco no longer fits in my portfolio. The portfolio page will be updated to reflect our divestment at the end of this month (Feb 2008).

DISCLOSURE: Please see our portfolio page for all disclosures.

This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.

The author received no compensation and is not affiliated with the company reviewed in this report with the possible exception of being a shareholder. The author reserves the right to buy or sell the stock as deemed personally prudent without further notification

The Enlightened American

Teck Cominco - Too Many Disappointments