Teck forges ahead with Fort Hills, expects big reward when cyclical market rebounds

TORONTO (miningweekly.com) – Canadian diversified miner Teck Resources is aiming to end 2016 with more than $500-million cash in the bank despite funding its portion of the Fort Hills oil sands project construction, in Alberta, and dealing with low commodity prices across its core portfolio.

The Vancouver-based company, which is the largest producer of steelmaking coking coal in North America, with a significant holding of copper and zinc assets in the Americas, would rely on internal free cash flows from its core business units, excluding the Fort Hills project, to fund the remaining $1.2-billion of its share of $2.94-billion in capital expenses, placing significant strain on the company’s balance sheet during the commodity price downturn.

The company had managed to push its base metals and coal assets to a cash-flow positive position in the fourth quarter, an important part of its strategy to fund its portion of the C$13.5-billion Fort Hills project from existing facilities and internal cash flows.

Speaking during a webcast of Teck’s investor and analyst day in Vancouver on Wednesday, president and CEO Don Lindsay stressed that Teck had maintained a long-term mindset and was open to doing what was necessary to thrive. He noted that, in the event of markets worsening significantly over the course of the oil sands build out, Teck was in the enviable position of being able to pull many more levers than its peers could.

He mentioned that, beyond the ongoing focus on cost reduction, the company could consider selling some of its infrastructure assets and nonoperating assets. It could also agree to another precious metals stream transaction and, if need be, it had the option of selling royalties on each of its businesses, including the not-yet-producing Fort Hills project.

“We are doing due diligence on each of the options [to put] us in a position to act if we need to, but we will take our time to get it right, to decide which option is the best at the right moment,” Lindsay said.

He outlined the company’s priorities, stressing its target to hit positive cash flows from its core business this year, which would enable it to fund Fort Hills wholly from internal sources while protecting the company’s strong balance sheet. The company would aim at not drawing upon its $3-billion credit facility this year and preserving its $1.8-billion cash balance as at February 10, to end the year with more than $500-million cash in the bank, all the while evaluating further options to strengthen its liquidity.

“We are building a long-life company based on strong assets,” he said, noting that the company would not sell core assets whatever it did. Rather, it would get assets built during the downturn, as it was currently doing with the Fort Hills oil sands project. Lindsay outlined steps to navigate the extended low-price environment and emerge stronger, saying the company was building out its production-per-share profile.

He noted that the company was learning a lot as it progressed and the cyclical markets trended towards higher highs and lower lows.

Teck was developing the Fort Hills oil sands project in partnership with 50.8% owner and operator Suncor Energy and France-based Total, which controlled a 29.2% stake. The miner reported that all critical milestones were being achieved and the partners were focused on opportunities to manage capital cost in the current low-oil-price environment. Lindsay believed firmly in the project’s significant upside when the oil price turned favourably once more, looking forward to the project delivering significant free cash flows from 2018.

“A project exposed to a highly cyclical market like oil has the ability to pay back billions in a matter of two or three good years. You just don’t know when. When you look at a 50-year mine life, you are bound to get several of these good years,” he said.

To date, crude oil markets had bounced back more than 40% since hitting a low of $26.21/bl early in February.

Lindsay said the company was now focused on strong operating execution across its portfolio of long-life assets and resources.