Friday, July 03, 2009

Teck Partners With China Investment Corporation

Teck Resources (TCK) which has been in financial trouble (too much debt) made a strategic play by selling Class B shares for the equivalent US$1.5 Billion. The Vancouver based NYSE listed company is now welcoming China Investment Corporation (CIC, which will sit at the table with 17.2% equity interest and a 6.7% voting interest in Teck. The funds will be used to repay debt so the fundamentals should improve immediately. China Investment Corporation is a sovereign wealth fund.

The deal was announced when the US market was celebrating Independence Day. The Chinese have taken strategic steps to guarantee reliable supplies of critical metals. They have bought low so you may be sure they will sell high.

The deal creates a potential for ambiguity. The Chinese are not primarily interested in the stock. They want preferred access to metals and commodities. Teck knows they have a customer and just need to control margins. Other customers may find that previously eager salesmen do not return phone calls as quickly as they used to and lunch is out of the question.

Commodities and metals trading inhabit their own secret and arcane world. The products are fungible. They trade globally and no one regulator can even attempt to impose any form of regulatory discipline. The deal makes fundamental sense and China Investment Corporation has long been interested in developing this strategy. Other participants may find this to be a complicating feature.

Scotia Capital was the advisor. Philip Smith, Global Head of Investment Banking at the Bank of Nova Scotia unit, was quoted in the Wall Street Journal as saying “the investment bank had looked at "a number of different options" for CIC's investment in Teck. Scotia Capital concluded that “the optimal structure for both parties was straight common shares.” Hmmm