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Nov 19, 2018

Winning Teck Resources' copper mine prize may come down to more than cash

Teck Resources

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With the second round of bids to secure a piece of Teck Resources Ltd.’s (TECKb.TO) US$4.7 billion copper expansion expected in the coming weeks, victory may come down to more than price.

Teck, which owns 90 per cent of Quebrada Blanca in northern Chile, would like to sell a 30 to 40 per cent stake to an outside investor. With the copper market widely forecast to go into deficit as soon as this year and the number of attractive new mine projects limited worldwide, interest in the sale is expected to be high, especially among Asian trading houses and existing mining companies.

“You either want someone with mining experience or potential off-take agreements,” Jeremy Sussman, an analyst at Clarksons Platou Securities Inc., said in a phone interview. “I think the good news for Teck is they’ll have both of those types heavily involved in bidding.”

Key Rationale

The expansion, known as QB2, in northern Chile is the biggest project on Teck’s plate now that its Fort Hills oil-sands project is nearing full production. Extracting top dollar would help Canada’s largest consolidated miner convince investors of the asset’s value, a key rationale behind selling a stake in a prime resource that Chief Executive Officer Don Lindsay has already signaled will be heading for at least one more expansion, and possibly even a ‘QB4.’

“It’s over a 100-year resource in a great country,” Lindsay said in a recent interview. “Right now, we think QB2 is the best thing that we can do to build the company for the long-term.”

Lindsay has previously stressed the need to ensure the value of Teck assets is fully reflected in its share price. QB2 is expected to produce about 300,000 metric tons of copper a year in its first five years. If a QB3 expansion follows, the asset would likely become the best project in Teck’s portfolio and one of the top-five copper mines in the world, Lindsay told analysts last month, producing about 500,000 tons of copper a year, plus molybdenum. “People are now starting to see the data on QB3, which is very exciting, and the perception of the project is changing quite dramatically.”

Teck’s Canadian stock is up about 16 per cent since those comments, although still down more than 12 per cent this year.

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The question is whether the winning bid will merely come down to the highest price. Asian trading houses such as Japan’s Mitsubishi Corp., Sumitomo Corp. and their subsidiaries are driven by the need to secure a stable supply of physical commodities.

Such a buyer might help Teck secure future demand; in 2017, about 60 per cent of Teck’s revenue came from Asia. On the other hand, most miners -- including Teck -- are predicting copper shortfalls, meaning finding customers is unlikely to be a problem. Meanwhile, partnering with an existing miner, the other likely option, would bring new operational skills to the table.

“I would say they would want a mining partner, just because of expertise,” said Andrew Cosgrove, an analyst with Bloomberg Intelligence. “But if there’s a wide enough discrepancy in price, because they’re already very familiar with the asset, they may decide to forgo that and just take the money.”

Operational experience is less important for a company of Teck’s size, says Sussman. “My gut tells me if you have the same exact offer from a reputable Japanese trading house, especially if have an existing relationship, versus an existing producer, you probably end up with somebody who can do offtakes.”

Share Structure

Teck has existing relationships with both Mitsubishi and Sumitomo. The Vancouver-based company is controlled by the Keevil family through a dual-class share structure in which most of the A-shares are held by Temagami Mining Co. Sumitomo owns 49 per cent of Temagami to the Keevil’s 51 per cent and two of Teck’s board members, Takeshi Kubota and Eiichi Fukuda come to the miner from Sumitomo. The Japanese company also holds a small interest in Teck’s Elkview steelmaking-coal operations in Canada, along with Korean steel producer POSCO. Mitsubishi, meanwhile, is one of Teck’s joint-venture partners at its Antamina mine in Peru.

Spokespeople at Sumitomo Corp., Mitsubishi Corp., and Teck declined to comment.

Selling a stake in QB2 would significantly reduce Teck’s future financial obligations, to the order of “a couple of billion dollars,” Lindsay told analysts during the third-quarter earnings call. Meanwhile, clarity on Quebrada Blanca is important to returning the company’s debt rating to investment grade, Scott Wilson, Teck’s treasurer, said on the call.