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Teck reaches ruling on rail transport costs

Teck Resources Ltd. has received an arbitration ruling that could cut its rail transportation costs by 16% for coal moved from southern British Columbia to the coast. In a decision by a federal arbitrator between a Teck subsidiary and Canadian Pacific Railway, westbound shipments from Tecks five mines in southeastern British Columbia will experience lower costs. The previous five-year agreement expired in March 2009 and Teck initiated final offer arbitration proceedings to establish rates and conditions of service thereafter. As a result of the decision, Teck expects its average transportation costs to fall to between $33 and $35 per tonne from previous guidance of $35 and $37 per tonne.
In a press release dated July 5, Teck estimated the arbitration could result in a savings of $70 million for the year starting April 2009. Details from the arbitration process, however, have not been released.
This news comes days after Teck announced a $1.7-billion private placement by China Investment Corp. That deal represented the largest Chinese investment to date in a Canadian mining company. During an analyst conference call on Friday, Don Lindsay, Teck chief, answered a question about whether this deal marked a change in strategy for Teck since Lindsay had been quoted in the past that Teck wasnt looking to raise equity. I think the most important aspect is the partner that were dealing with, the China Investment Corporation, of course, is Chinas sovereign wealth fund, said Lindsay. And China, for anyone in the commodities business, is without question the key market, the key country in our business. So, to enter into a strategic relationship and have them as a strategic investor, I think, is very important for any mining company.
In a note to clients released Friday, UBS analyst Brian MacArthur wrote: We believe the transaction is dilutive to both earnings and NAV under UBS prices. However, we believe this transaction further increases Tecks financial flexibility as it should allow the company to improve its financial ratios and therefore eliminate the restrictive financial covenants sooner. His Buy rating, however, is unchanged as is his 12-month target price of $21.00. Meanwhile, Credit Suisse analysts Ralph Profiti, David Gagliano and Edward Yew wrote: We view the transaction as a positive step towards debt repayment and management has demonstrated good execution on the deleveraging front. They have a Neutral rating on the stock, with a 12-month target price of $20.00.