Teck made a major move this week in its continuing efforts to restructure the company’s debt load. Late last year Teck’s debt had soared to just under $10 billion US following a seemingly ill timed $14 billion takeover of Fording coal mere days before the collapse of commodity prices.
With a current agreement in place as a non-binding memorandum of understanding, Teck will sell a one third interest in the Waneta Dam. The deal is worth 825 million dollars to Teck. A pre-tax gain of approximately C$625 million is expected to be recorded on the transaction.
Constructed near the confluence of the Pend Orielle and Columbia Rivers in 1854, the Waneta Dam has a 490 megawatt capacity and generates on average 2,800 gigawatt hours of energy per year. To put that number in perspective, the dam annually generates enough electricity to power 250,000 BC homes. Teck’s Trail operations currently use two thirds of 1800 gigawatt house of energy per year for its lead and zinc smelting operations. The electricity required to run the Trail operations will be maintained by Teck through this deal.
Cheap electricity has been one of the driving factors and major competitive advantages behind Teck’s Trail operations, so maintaining an adequate and affordable electrical supply was crucial to making the deal with BC Hydro. Currently Teck’s Trail operations is one of the lowest operating cost zinc smelters in the world. Teck had been generating an additional revenue stream through the sale of surplus power generated by the Waneta Dam which will now cease following the sale. Teck believes that through continued lowering of production costs the Trail operations will remain viable without the added revenue through electricity sales.
External forces such as the worldwide economic slowdown of the past year which has seen a reduced demand for the Trail operation's product has affected the profitability of the smelter dramatically. While the demand for electricity is near constant, replacing electricity sales with more operating efficiencies may potentially open the smelter to a more volatile future.
“There will, of course, continue to be other factors that affect profitability. For example, we are in the midst of one of the worst recessions to hit us in our lifetime, and it is reasonable to expect that these factors will, from time to time, impact the operation’s profitability,” said Teck in a press release.
Daily operations at the dam will see little to no change as a result of the sale. Fortis BC, which has been contracted by Teck to operate the dam, will remain in place. The proposed Waneta dam expansion should not be affected by the sale either. The expansion project is an effort of the Columbia Power Corporation and the Columbia Basin Trust. Any decisions to proceed or not will remain in the hands of these organizations. The transaction between Teck and BC Hydro is expected to be completed by the end of the year.
It is speculated that the next move by Teck to reduce its debt might be a 20 per cent interest in its coal operations. Teck has recently made suggestions that they are looking to obtain in the range of three to five billion dollars for the coal stake. During the past month, the company has been in talks with potential buyers out of China.