PDP Technicals Alert To Buy Now, During The Cone Of Silence Period

How do you spend $2-trillion (U.S.)? Very slowly.

Karim Bardeesy

Globe and Mail Update Last updated on Saturday, Jul. 04, 2009 04:13AM EDT

How do you spend $2-trillion (U.S.)? Very slowly.

China's massive foreign currency reserves place it in an enviable position compared with other debt-ridden, import-dependent economies. But China's economy has slowed, it is worried about a depreciating U.S. dollar, and its trading partners are irritated that the country is keeping its own currency, the yuan, undervalued. So China is starting to move its $2-trillion in currency reserve savings – of which around two-thirds are denominated in U.S. dollars – into the real economy.

That's easier said than done. And it's not always in China's interests to do so.

China Investment Corp.'s (CIC) purchase of a 17.2-per-cent stake in Teck Resources Ltd. for $1.74-billion (Canadian) is just one in a series of recent investments by Chinese-run companies in foreign commodity producers. The deal comes just a week after Sinopec, China's largest oil refiner, agreed to buy Toronto-listed Addax Petroleum Corp. for $7.24-billion.

CIC manages only about one-10th of China's foreign assets. The biggest player is the People's Bank of China, the country's central bank.

China's holdings are so large – the next largest holder of foreign currency reserves, Japan, has around $1-trillion (U.S.) – that any moves it makes will have an impact on global markets. That's why, as much as it may want to diversify, it can't afford to do it quickly.

“It's a sort of financial Catch-22. They want to sell their U.S. dollars, but doing so reduces its value,” said Randall Morck of the University of Alberta.

Zhou Xiaochuan, head of China's central bank, wrote last week that the country is looking for a new global “reserve” currency that is more stable in the long term than the U.S. dollar. That would increase the bank's confidence that it can start safely shedding some of its foreign reserve holdings like U.S. Treasury bills with minuscule yields.

“There is an increasing suggestion from the government and Chinese think tanks to diversify [reserves] into equity investments. They want safety, but they also want a reasonable rate of return,” said Kenny Zhang of the Asia-Pacific Foundation, a think tank based in Vancouver.It's hard for the central bank to invest directly in companies. It can increase Chinese investment abroad and decrease reserves by facilitating lending to its major commercial banks and cutting interest rates.

There's also a way to unlock money by spending it at home. The Chinese savings rate has been very high of late – standing at 54.4 per cent of gross domestic product in 2006. The government has introduced a $586-billion stimulus package to spur the domestic economy. This inward focus can increase the appetite for foreign acquisitions.

“The Chinese are concerned about the future availability of various minerals and oil for their economy. They are attempting to lock in secure supplies by buying stakes in resource companies everywhere,” Prof. Morck said.

The country is diversifying, but slowly. The U.S. government reported in April that despite a record trade surplus for China of $114.3-billion in the fourth quarter of last year, China's foreign reserves grew by only $40.4-billion – suggesting that it was deploying some of its excess reserves abroad.

But it would take a lot of $1.7-billion deals, even if that's large to recipients like Teck, to make a major dent in China's stash of greenbacks.

TECK:$1.74-billion deal provides cash-strapped Tech

China's hunger for resources bolsters Teck

Donald Lindsay, president and chief executive officer of Teck Resources in his office on Burrard Street in Vancouver.

$1.74-billion deal provides cash-strapped Canadian firm with strategic partnership

China's unyielding appetite for commodities pushed Teck Resources Ltd. (TCK.B-T19.991.498.05%) and its CEO Don Lindsay into a near-death debt fiasco. Now, the Asian economic superpower is digging them out.

In May of 2008, Mr. Lindsay led a group of Teck directors to Shanghai where they witnessed China's economic explosion in full swing. The board members were so awed by the building boom they became converts to the notion that Chinese metals demand would remain strong for years to come.

Weeks later, they gave Mr. Lindsay the green light to go ahead with the $14-billion (Canadian) acquisition of Fording Coal – the top-of-the-market takeover that would leave Teck drowning in $9.8-billion (U.S.) in debt as the global economy collapsed.

Yesterday, China came to Teck's rescue, the final step in the copper, coal and zinc miner's self-titled “12-step plan” to kick its leverage problem and repair its balance sheet.

Teck unveiled a $1.74-billion (Canadian) private stock sale that will give China a 17.2-per-cent stake in Canada's largest base metals company.

The deal, struck with the hulking $200-billion (U.S.) sovereign wealth fund China Investment Corp. (CIC), will provide Teck with sorely needed cash to largely eliminate its crushing short-term debt load and a strategic partnership with the world's dominant commodity buyer.

“If you think about the market for our core products, China is obviously the single most important country by far in terms of demand. So getting a Chinese strategic investor was top of the list,” Mr. Lindsay said.

The Teck CEO expects CIC will help his company increase its coal sales to China, a key pillar in the company's strategic plan. Mr. Lindsay also said that China may help Teck fund development projects including a pair of its copper mines in Chile. Teck is also a partner in the Fort Hills oil sands project in Alberta that has suffered from staggering cost inflation and China could help Teck fund its share of the project.

As the world economy has slipped deeper into recession and crimped metals demand, China has moved aggressively to buy resource assets and secure access to copper, oil, iron ore and coal.

Despite the recent collapse of state-controlled Aluminum Corp. of China's (Chinalco) proposed $19.5-billion (U.S.) investment in Rio Tinto PLC (another miner riddled with debt as a result of a top-of-the-market takeover), China's Commerce Ministry said earlier this month that it will continue with its so-called “go abroad” investment policy.

Through various state entities, China has plowed billions into resources in the past eight months, including oil in West Africa and Iraq, zinc in Australia and iron ore in Canada. With the vast majority of its holdings in U.S. dollar-backed investments, China is looking for diversification with the resource deals.

“They are a deep-pocketed partner. I don't know if they are the deepest pocket in the world but it is pretty close … they are clearly shifting out of U.S. Treasuries into hard assets. This is just one step in that,” Mr. Lindsay said.

Several international mining firms were interested in taking a similar size stake in Teck but were rejected in favour of CIC and China. Mr. Lindsay believes the rival miners were interested in the stock as a precursor to a takeover. “That was something that was never going to be on the table,” he said.

CIC intends to be a “long-term passive financial investor” and will not take a seat on the board. The deal underscores China's expectation of continued demand for metals and Teck expects to tap its new partner for insight into the state of the Chinese economy.

CIC chairman and CEO Lou Jiwei, who signed the deal for CIC this week, is a member of China's government cabinet.

“We addressed him as ‘your Excellency.' He's one of the key people in the country,” Mr. Lindsay said.

Despite shareholder dilution, analysts and investors generally applauded the proposed transaction that will give CIC a 6.7-per-cent voting interest in Teck. The company's class B shares jumped 8 per cent yesterday on the TSX. Once the transaction is completed, the company's A class shareholders, which are dominated by the family of Teck chairman Norman Keevil and Japan's Sumitomo Metal Mining Co. Ltd., will hold a 61.8-per-cent voting interest down from 66 per cent.

In a report to clients, BMO Nesbitt Burns analyst Tony Robson said he was “surprised” by the CIC deal as Teck had previously stated it wasn't planning an equity issue.

However, the analyst viewed the transaction as positive because of the $1.5-billion in proceeds from the stock sale that Teck intends to put toward debt reduction.

“With recent asset sales, today's move has done much to correct the former severely weakened balance sheet,” Mr. Robson said in the report.

The CIC deal marks the final hurdle in an aggressive debt reduction plan hatched by Mr. Lindsay and other Teck executives at the depths of the market meltdown last November.

Teck has cut its dividend, laid off workers, sold $1.5-billion (U.S.) in assets, restructured its loans, cut capital spending and issued $4.2-billion (U.S.) in junk bonds to raise cash to reduce the loans from the Fording deal.

A former investment banker, Mr. Lindsay said he scribbled down the 12 steps comprising the plan on a note pad that is still sitting on the desk in his Vancouver home office.

“All along this was the last step. We hoped to get this strategic partnership with China and we did. So a lot of us are going on vacation now.”

B.C. pipeline bombed for sixth time EnCana spokeswoman confirms bomb went off early Saturday morning, less than a kilometre from site of Thursday's e

For the sixth time in nine months, and the second time in three days, a bomb has exploded near EnCana's natural gas pipeline in northeastern British Columbia.

The blast early Saturday morning took place less than a kilometre from where EnCana workers were trying to cap a gas well damaged in an explosion Thursday.

“Our crews were at the wellhead site, where they were working to stop the gas leak,” EnCana spokeswoman Rhona DelFrari said from Calgary.

“Around 2:30 in the morning they heard a loud bang, so they immediately went to the spot where they thought it was and that's where they discovered the explosion at the pipeline.”

The Mounties are labelling the bombings as domestic terrorism and have flown in a unit of its Integrated National Security Enforcement Team to investigate.

RCMP spokesman Corporal Dan Moskaluk said the EnCana crew, as well as a nearby resident, reported the explosion.

The blast caused a brief leak of potentially toxic sour gas but the pipeline's control system sensed the drop in pressure and triggered emergency shutdown valves to isolate that portion of the line.

It's not clear whether the EnCana repair crew was downwind of the leak but Cpl. Moskaluk said no one was hurt.

Some nearby residents evacuated their homes when they heard the blast, said Ms. DelFrari, but it was unnecessary.

The small amount of leaked sour gas dissipated instantly, she said, and tests of the air showed no signs of hydrogen sulphide, which can kill in small quantities.

“So there was no risk to the public,” said Ms. DelFrari.

It's the sixth bombing against EnCana gas-transmission facilities since October.

The bombings have all taken place along a 15-to-20-kilometre stretch of the pipeline near Pouce Coupe, just south of Dawson Creek on the B.C.-Alberta border about 1,050 kilometres northeast of Vancouver.

The string of unsolved bombings has left Pouce Coupe, which has less than 800 residents, edgy and suspicious.

“This is an attack on the entire community now,” said Ms. DelFrari. “This isn't just an attack on EnCana as a corporation. This person is putting everyone's lives in risk right now.”

Police suspect the bomber is someone who has a grudge against EnCana and who perhaps lives in the area.

The attacks began with three bombings shortly after a letter was sent to a Dawson Creek newspaper and to EnCana. It labelled oil and gas companies terrorists and demanded EnCana stop natural gas development in the area.

There was another explosion in January, then none until this week.

Most have targeted wells or pipelines carrying sour gas.

Cpl. Moskaluk said though no one has been hurt yet, the bombings have created stress in Pouce Coupe, as well as nearby Dawson Creek, which depends economically on energy development.

“Many have been questioned, many have been brought in for interviews,” he said.

“They're all looking at one another. You can imagine how that's eating away at people.”

Cpl. Moskaluk said police won't be releasing information on the type of explosives used or the bombs' construction. He could not say if the latest bomb had been planted before or after Thursday's blast.

He said police hope this sixth attack will trigger some tips to help them catch the bomber.

I think if somebody comes forward then I think there's a little bit of strength in numbers,” said Cpl. Moskaluk.

EnCana has offered a $500,000 reward for information and set up a special phone line for the bomber to call them but so far it hasn't rung.

Meanwhile, EnCana is maintaining bolstered, 24-hour security along the pipeline. But Ms. DelFrari admitted there's no way to ensure the bomber doesn't strike again.

“Let's face it, it's hard to patrol hundreds of kilometres of pipeline and we have about 150 wells in the Dawson area,” she said.