Teck Cominco gets deeper into metallurgical coal

Teck Cominco has entered into an agreement with Fording Canadian Coal Trust under which Teck will acquire 100% of Fording’s assets, which consist principally of a royalty in respect of Fording’s 60% non-operating interest in the Elk Valley Coal Partnership. Elk Valley Coal is the world’s second largest producer of seaborne hard coking coal. Elk Valley Coal produces primarily high quality hard coking coal from its six operating mines in British Columbia and Alberta, Canada which it sells to steel mills mainly in Asia and Europe in addition to North and South America. Teck is the managing partner of Elk Valley Coal and owns a 52% effective interest in the partnership through its 40% direct interest in the partnership and its 19.9% interest in Fording units.

Under the terms of the transaction, Fording unitholders will receive $82.00 in cash and 0.245 of a Teck Class B subordinate voting share per Fording unit. Based on the 20 day volume weighted average price of Teck Class B shares on the New York Stock Exchange, the proceeds to Fording unitholders represent a 18% premium to the 20 day volume weighted average price of Fording units on the NYSE, in each case for the period ending July 25. In aggregate, Teck will pay approximately $12.4 billion in cash and issue approximately 36.9 million Teck Class B subordinate voting shares in consideration for the Fording assets. The cash portion of the consideration is expected to be primarily funded by a $9.8 billion fully underwritten bridge and term loan facility arranged with a syndicate of banks and the proceeds of the sale of Fording units held by Teck prior to closing.

The independent Fording Trustees have unanimously approved the transaction and have received an opinion from RBC Capital Markets to the effect that the transaction is fair, from a financial point of view, to Fording unitholders other than Teck and its affiliates. National Bank Financial has performed an independent valuation of Fording in compliance with National Instrument 61-101.

Teck’s CEO, Don Lindsay said: “This is a very important transaction for Teck, Fording and Elk Valley Coal. Fording unitholders are receiving a significant premium to the Fording unit price during a time when comparable coal companies have declined substantially from their highs. In addition, our detailed knowledge of the assets and the coking coal markets means that the ownership transition and integration will be seamless. For Teck, the transaction is expected to be immediately and strongly accretive to both earnings and cash flow.

“Based on expectations that the rate of growth in demand for metallurgical coal, especially the high quality coking coal that Elk Valley Coal produces, will continue to outpace relatively constrained growth in supply, we believe that the outlook for this business is strong. We look forward to having Fording unitholders become Teck shareholders and believe they will benefit greatly from ongoing exposure not only to the metallurgical coal business but the outstanding long term value represented by our diversified portfolio of assets.”

Following Teck’s purchase of the Fording assets, Fording will distribute $82.00 in cash and 0.245 of a Teck Cominco Class B subordinate voting share per Fording unit to Fording unitholders and their units will be redeemed. On closing, Teck will assume any residual liabilities for Fording. Fording will not pay distributions prior to closing of the transaction. Substantially all of Fording’s value is attributable to its principal asset, a royalty paid by its subsidiary, Fording LP, based on cash received from the Elk Valley Coal Partnership. The balance of Fording’s value is attributable to its direct interest in Fording LP, which holds a 60% interest in the Elk Valley Coal Partnership. The price paid by Teck for the royalty will be treated as a Canadian Development Expense for tax purposes, fully deductible against Teck’s taxable Canadian income using the 30% declining balance method.

Teck has today entered into an agreement with an affiliate of the Ontario Teachers’ Pension Plan Board under which Teachers, in order to facilitate the transaction, has agreed to amend Teck’s “top-up” obligations in connection with Teck’s September 2007 acquisition of 11.25% of the outstanding Fording units from Teachers. Teachers will, on completion of the transaction, receive compensation of $105 million for amending its rights, which would have otherwise expired on July 31, 2008.

Closing of the transaction is expected to occur by the end of October, 2008.