The other night Lori and I were drowning our sorrows with a bottle of red wine - markets, markets, markets...drink, drink, drink.  The wine, called Portfolio 2006, was a diversified mix of Merlot, Cab, Cab Franc, Malbec and Petit Verdot.  It was doing a wonderful job of mellowing us out, but unfortunately the bottle it came in kept bringing my thoughts back to the markets, market, markets...

That’s because B.C.’s Laughing Stock Vineyards, whose owners have a background in investments, has cleverly designed their labels with stock market quotes from when the grapes were picked.  The date on our bottle was October 30th, 2006. 

As I poured the wine and admired the label I couldn’t help but notice that the prices held no resemblance to the quotes I had seen on my screen the day before. CIBC closed at $87.42 that day (currently $44).  Canadian Natural Resources was $58.10 (now $37), Telus was $64.00 ($36) and Cameco was $39.40 ($19).

Now we all have stocks we own, or companies we follow, that have been absolutely decimated in this market.  For me, the quote that jumped off the bottle that night was Teck Corp ($89.00 pre 2 for 1 stock split).  I’ve never had research responsibility for the stock, but my former firm owned it for years and because it’s based in Vancouver, I have friends connected to the company. 

Teck has always owned high quality assets, been well diversified (too diversified to get a fair valuation at times) and run with a clean balance sheet.  With regard to the latter, I remember being frustrated in the 90’s that Teck was under-levered and seemed to raise equity when it didn’t need it.  By 2007, Teck had risen to become Canada’s leading mining company, aided of course by the disappearance of Alcan, Inco, Placer Dome and Falconbridge.   

It is with this background that I find myself blown away by the decline of TEK.B.  From a high of $52 in mid-2007 (post split), the stock has dropped to the $4-5 range (its recent low was $3.25). 

How did that happen?  Quite simply - one decision and too much debt.  When Fording Coal put itself up for sale earlier this year, Teck was forced to make a decision.  Fording is a first-rate company and Teck already owned 20%.  To make a long story short, they stepped up and paid a big price to take over the rest of the company.  And to do that, they took on over $9 billion of debt, $5.8 billion of which is a bridge loan that needs to be refinanced.   Combine the debt and financing risk with considerably lower commodity prices, and in a matter of months Teck finds itself hanging on for dear life. 

For a company that has been a good operator for a long time and has always been fiscally conservative, this is hard to watch.  Teck is an extreme case, but it is happening everywhere.  In some industries, the economic order is changing before our eyes, depending on who is well financed and who is not.   It reinforces my view that this cycle will offer an opportunity like no other for the ‘strong to get stronger’.

I’ll be pulling for Teck to get through this.  In the meantime, I’m going to put our other bottles of Portfolio 2006 aside for a while.  The aging will do them good and time will bring the stocks prices back more in line with what’s on the label.  That will make for more enjoyable evenings.