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Feb 21, 2020

Teck takes nearly $1B hit on Fort Hills, warns of Frontier charge

Teck's virus warning 'a convenient excuse' for bigger headwinds: Money manager

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With time winding down for the federal cabinet to decide on whether to approve Teck Resources Ltd.'s proposal for a massive new oil sands project, the miner announced a big markdown to the value of its stake in another oil sands mine on Friday.

The Vancouver-based miner disclosed a $910-million after-tax impairment on its stake in the Fort Hills project, as a result of what it describes as lower market expectations for future oil prices.

Fort Hills is located approximated 90 kilometres from Fort McMurray in the heart of Alberta's oil patch. The project is co-owned by Suncor Energy Inc. (54.1 per cent), Total E&P Canada Ltd. (24.6 per cent), and Teck (21.3 per cent).

Teck is in a holding pattern on its $20-billion Frontier proposal, with Prime Minister Justin Trudeau's Liberal government having until the end of the month to determine whether the oil sands mine will be allowed to proceed. Teck says the project, which would have an average production of 260,000 barrels per day, could potentially generate up to 7,000 direct construction jobs and tens of billions of dollars in provincial and federal tax revenue. 

And in its fourth-quarter report Friday, Teck warned it would face a $1.13-billion impairment charge if the government rejects its plan for Frontier, which has become a flashpoint for controversy as the federal government seeks to balance economic and environmental concerns.

Indeed, in a letter to Trudeau earlier this month, Alberta Premier Jason Kenney said cabinet’s decision will have "far-reaching consequences" and warned if the project is blocked, it "would echo in global markets like a slamming door."

Putting political pressure aside, there’s some doubt on Bay Street about Frontier’s fate even if it receives Ottawa’s blessing.

“I don’t think [Teck will] build it,” said Brian Madden, senior vice president and portfolio manager at Goodreid Investment Counsel, on BNN Bloomberg Friday. “It’s not economic and I don’t think shareholders or the market will sanction them to splash out $10 billion, or whatever it’s going to cost to build this mine in the current oil price environment.”

The impairment tied to Fort Hills dragged Teck into the red for the quarter ending Dec. 31, with a loss of $891 million, compared to a profit of $433 million a year earlier. On an adjusted basis, Teck earned $0.22 per share, down from $0.86 in the fourth quarter of 2018. Analysts, on average, were expecting profit per share of $0.39.

“Ongoing global economic uncertainty negatively impacted commodity prices in the fourth quarter and that has continued into 2020, exacerbated by the effect on markets from the coronavirus and the impact of severe weather conditions in British Columbia, followed by blockades on rail lines,” said Teck CEO Don Lindsay in a release.

He added the company's focus is on "aspects of our business within our control."