this year when commodity prices for coal and its other primary product, zinc plummeted. Teck is also a significant miner of copper, gold and other specialty metals.
Teck is the world leader in metallurgical coal production used primarily in the production of steel, global production of steel is falling. As a result, Teck’s customers have asked that some of their contracted deliveries for coal in 2008 be deferred until market conditions improve.
As a result of reduced revenue from its coal business, and a parallel drop in zinc sales, the company was forced to sell assets, including its 60% interest in the Lobo-Marte gold project in Chile to Kinross Gold Corporation for US$40 million in cash and US$70 million in Kinross common shares.
Freeport-McMoran (NYSE:FCX) has responded to weak global conditions by reducing copper production and sales by 5%, or 200 million pounds for 2009 and a $1.2 billion reduction in capital expenditures. They have also elected to suspend the dividend of their common stock.
Freeport-McMoran acquired Phelps Dodge in March 2007, which saw it incur more than $17.5 billion in debt, of which $10 billion has already been retired.
While these debt reducing strategies might seem sufficient now, the plain truth is that a protracted recession or depression means that revenue fall-off has a lot further to go. Each of these companies has a thresh-hold of income below which they will be forced to first sell more assets (for which there will be increasingly fewer buyers and therefore at deeper discounts) and second raise capital through the sale of equity. The only problem with that though is that if this is indeed the early stages of a depression (say, year one of four), then that’s going to be just as tough if not tougher than selling assets.
The endgame in this scenario would be some very big mergers with taxpayer dollars supporting them. While this will be very bad indeed for these companies’ investors in the short term, they could prove very beneficial to the surviving company’s investors in the long term.
What all investors need to bear in mind at this point is that any investment in the resource sector is going to take a long time to mature, but when it does (in the case of producing companies), the rewards will be spectacular. Whereas share prices are down for many of these companies 40 -60%, those are easily the gains that will be realized once this business cycle moves back into the growth phase.
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