CP Rail ‘enthusiastic’ about new Teck deal

Scott Deveau – FINANACIAL POST – October 7, 2010 – 8:35 am

The 10-year deal signed between Canadian Pacific Railway Ltd. and Teck Resources late Wednesday bodes well for the country’s second largest railway, said Walter Spracklin, RBC Capital markets anayst.

While the terms of the deal are confidential, Mr. Spracklin said he spoke with management and, based on their “enthusiastic” support of the plan and given that is it for 10 years rather than the usual five,  he assumes that freight rates likely improved and that CP expects to recoup some of its lost volumes in Kamloops, as well.

He also said he believes the rates for moving the coal from Teck’s five mines in southeast B.C. to Vancouver will not be tied to the price of coal and instead be based on other cost mechanisms.

“We expect a favourable market reaction to this announcement the Street had been largely divided over whether the parties would arrive at a mutually agreeable solution,” Mr. Spracklin said in a note to clients. “We believe this settlement will add further momentum to the shares.”

He said he also believes more investors are warming up to the view that CP may be able to execute on its strategy, the its current multiple does not reflect the potential upside.

He reiterated his “outperform” rating on the stock, with a $70 price target.

Benoît Poirier, Desjardins Securities analyst, said it was his understanding that price increases in the contract would be “inflation-plus” and, therefore, would be moderate.

But he said it does alleviate any concerns that CP’s rival, Canadian National Railway Co., would be able to pick up more market share, like it did in July 2009, winning work to move some of Teck’s coal after it was interchanged in Kamloops from CP.

“However, we understand that CN will still have a small role in the deal as Teck Resources wants to maintain flexibility over the long term as it increases its coal production,” he said.

Scott Deveau

Read more: http://business.financialpost.com/2010/10/07/cp-rail-enthusiastic-about-new-teck-deal/#ixzz11xDqQljo