Vancouver-based diversified miner Teck Cominco estimates its proposed acquisition of Fording Canadian Coal Trust could boost its 2009 core earnings by as much as 50%, CEO Don Lindsay said on Tuesday.

The deal will nearly double the group's exposure to metallurgical coal, "at a time of of strong industry fundamentals", he said.

Teck has offered to pay about C$14,1-billion in cash and shares for Fording's assets, in a deal that would make it North America's biggest exporter of metallurgical coal, and the second-largest in the world.

Fording, which owns a 60% stake in the metallurgical coal operations of the Elk Valley Coal partnership, has been conducting a strategic review since December last year, and received interest from a number of potential buyers, chairperson Michael Grandin said.

However, Teck Cominco, which owns the remaining 40% of Elk Valley and is the operator of the partnership, as well as already holding just under 20% of Fording Canadian Coal, was identified as the best fit.

The offer creates a “win-win situation”, Lindsay said on a conference call to discuss the transaction.

Teck Cominco, which is the world's second-largest zinc-miner, wants to diversify its portfolio towards nonexchange-trade commodities and reduce its exposure to zinc, after prices have fallen sharply, from above $2 000/lb in late 2006, to below $ 1 800/lb this month.

The group agreed in April to buy Vancouver-based junior Global Copper, which controls the Relincho copper/molybdenum deposit, in Chile.

A diversified portfolio was the best way to create long-term value, Lindsay said.

“The track record over the last few years has shown that there's a real benefit to diversification,” he commented.

The group's biggest earners so far this year have been copper and coal, which contributed 53% and 35% respectively to profit in the second quarter of 2008.

Lindsay said that long-term trends indicated that the economic development in emerging economies like China and India would keep demand high for steel and seaborne metallurgical coal.

The Elk Valley Coal Partnership, which produces coal from six mines in Canada's British Columbia and Alberta provinces, has benefited from surging demand for the steelmaking ingredient, and negotiated an average price of $275/t of coal for its 2008 contracts, compared with $93/t in the 2007 marketing year.

The partnership was created in 2003, by consolidating the metallurgical coal assets of several Canadian producers, including Fording Inc, Teck Cominco, Consol Energy and Luscar Energy Partnership.

Lindsay said that, as Teck has already been managing the assets for several years, there would not be any operational or management changes at Elk Valley as a result of the transaction.

Teck Cominco class B shares were up 5,07% on Tuesday afternoon, at C$42,46 apiece by 13:37 in Toronto.

Fording Canadian Coal units had gained 8,84%, to C$91,21 each.

THE OFFER

Tuesday's announcement represents the second proposed takeover of a North American coal company this month, after US iron-ore and coal producer Cleveland-Cliffs agreed to buy coal-miner Alpha Natural for about $10-billion in cash and shares.

Teck Cominco will offer $82,00 in cash and 0,245 of a Teck Cominco class B subordinate share for every Fording unit, the company announced on Tuesday morning.

On closing, the cash and shares will be distributed to the unit holders and the trust will be wound up.

In total, Teck expects to pay about $12,4-billion in cash and issue approximately 36,9-million Teck Class B subordinate voting shares.

However, the purchase price will be significantly offset by an expected $3,9-billion in tax savings, Lindsay said, $2,2-billion of which is expected to be realised in the first 14 months after the acquisition is completed.

One of the reasons Fording launched its "strategic review" last year, was a pending change in the taxable status of income trusts in Canada, which will take effect in 2011.

Teck Cominco has also agreed to make a 'top-up' payment of $105-million to the Ontario Teachers' Pension Plan Board, after Teachers' agreed to amend the terms of an agreement in relation to Teck's purchase of a 11,25% stake in Fording from Teachers' last year.

To subscribe to Mining Weekly's print magazine email subscriptions@creamermedia.co.za or buy now.