Article Tools
Don Lindsay says it himself. “The truth is, things went off a cliff.” As the chief executive of Vancouver’s Teck Resources Ltd. (TSX: TCK.B), which produces and develops coal, copper, gold and energy, he watched his company go into free fall after a major deal he orchestrated appeared to backfire. Last July, with the markets red-hot and coal at a record US$300 per tonne, Teck revealed it would acquire Fording Canadian Coal Trust for about US$14 billion. By the end of 2008, Lindsay had a company with $1 billion in cash but US$6 billion in debt due by the third quarter of 2009. Its stock tumbled from $42.85 the day the deal was announced (July 29) to $7.05 eight months later. What’s a CEO to do?
Well, he made a plan and stuck to it. “We didn’t know if markets would open,” Lindsay says. “We hoped and planned that the sun, moon and stars would line up.” He got lucky. They did. “And the planets did, too.”
By early May, Teck shares climbed back to more than $16, thanks to Lindsay’s continued deal-making. But he says that even though the shares have jumped nearly 400%, there’s still work ahead. “There’s no question about it. We were hit hard. But now we have to finish our plan. There’s still a lot to do, but we’ve certainly got much better.”
The past several months have shown ample evidence that Lindsay’s skills weren’t honed in underground mines drilling for ore, but in investment banks crafting deals. In April, Lindsay, the former head of CIBC World Markets, announced he had secured a bridge- and term-loan extension—effectively, Teck deferred US$4.4 billion due this year until 2011 and 2012. And when the company changed its name from Teck Cominco to Teck Resources days later, it marked more than just a new moniker: it also signalled a change in fortune. Analysts and investors heaved a sigh of relief because Teck could meet its greatly reduced 2009 debt obligation of US$1.9 billion.
Lindsay followed the financing with notice on May 5 that Teck’s remaining burden would be eased by issuing US$4.2 billion in high-yield five-, seven- and 10-year bonds. That postponed paybacks for at least another three years. The complicated series of financial transactions were designed to give the company some breathing room in an unstable financial market. It also bought time to sell assets instead of holding a fire sale. So far this year, Teck has announced it is spinning off $746 million worth of holdings, including two gold properties.
The weekend after the bond issue was announced, Lindsay’s clear blue eyes and boyish face show no sign of the stress that comes with carrying billions of dollars of debt. He laughs, recounts a story about his young daughters throwing pies in his face for a charity event, and hams it up during a photo shoot, when he’s asked to pose like a Sears catalogue model. He’s looking none the worse for wear, despite hauling Teck back from the abyss. And it really was the abyss. But these are brighter days, and Lindsay, after delaying interview requests for months, is finally ready to talk openly in an exclusive interview with Canadian Business, about what happened after he decided to buy Fording and the markets collapsed.
To start things off, he emphasizes that to understand the Fording deal you have to understand demand for a certain kind of coal. And that means knowing that China’s steel industry is in the process of consolidating. Its hundreds of inland steel plants will be a thing of the past when four monster facilities that are currently being built on its coast begin operations in 2011 through 2013. These massive plants need seaborne coal, the kind of hard coking coal transported by sea, of which Teck is the world’s second-largest producer.
Baosteel, China’s largest steel producer, visited Lindsay last May looking for 20 million tonnes. He initially thought he misheard, because that’s most of what Teck produces in a year. Two weeks later, Shougang, another large Chinese steelmaker, came calling and wanted another 10 million tonnes. Lindsay saw an opportunity. He went to the credit agencies, got Teck’s investment rating certified as investment grade, raised $1.5 billion in equity, reduced his debt, and then bid for the 48% of Fording Canadian Coal Trust that Teck didn’t already own. “At the time, this is the irony, people said the deal was too much in favour of Teck,” says Lindsay, his eyes gleaming. “They said Lindsay got too good of a deal. If you think about it, it was unbelievable. It was perceived that way for two months.”
Twenty-five banks agreed to do the financing, and Lindsay attributes that to record coal prices. While he secured US$300 per tonne for Teck’s coal in 2008, competitors later secured up to US$370, swaying bankers to believe in September that if there was a deal to be done, coal was the place to do it. And you may recall what was happening in the U.S. financial sector around that time. Merrill Lynch was swallowed by a one-time competitor, and Lehman Bros. was pronounced dead. Yet the banks were still willing to put money up for Teck.
By the time shareholders approved the deal on Sept. 30, however, the stock markets had completely collapsed. “We knew it was going to be a rough downturn,” says Lindsay. “No one knew it would be a global meltdown. But it was my job to see, and I didn’t see it. I thought we were being conservative.”
Teck’s stock plummeted as credit tightened, and with no announcement of how it would finance the billions of dollars of debt it took on for Fording, short-sellers had a heyday. “October was October,” Lindsay says. “It was the worst month in the markets for several generations.”
Ian Nakamoto, head of research at MacDougall, MacDougall & MacTier Inc. in Toronto, says Lindsay could either buy all of Fording or risk losing that opportunity forever when it came up for sale last summer. Teck already owned 52% of the company. “It’s easy to blame someone for an acquisition at the peak of the market,” says Nakamoto. “It was logical, because they knew the operations. But the timing was wrong.”
Lindsay and his board came up with a 12-step plan in November to limit the damage. “It’s working, and it’s going to continue to work,” he says. The first phase was to recognize that the market was in free fall—and that Lindsay couldn’t control when it would hit bottom. Instead, he had to focus on what he could control while waiting for the floor. His first step was to cut Teck’s $486-million dividend. While that might seem like an obvious thing to do, most companies don’t dare. “The reason I did it so quickly was because I wanted to send a message to the bank CEO level that I owe them money and I’ll pay them back,” Lindsay explains.
Rate this article
