Teck moves forward on major copper mine in Chile
VANCOUVER Teck Resources Ltd. has sold a 30-per-cent stake in its Quebrada Blanca Phase 2 project as it gives the go-ahead for construction of the transformative copper mine in Chile.
The Vancouver-based miner said it would sell the stake to Sumitomo Metal Mining Co. Ltd. and Sumitomo Corp. as part of a US$1.2 billion transaction that will improve the project’s economics and free up cash flow. “The partnering transaction further confirms that QB2 is one of the world’s premier undeveloped copper projects. And it significantly derisks Teck’s investment in the project,” said Teck president and CEO Don Lindsay in a conference call Tuesday.
He said the deal drastically cuts Teck’s equity requirements to US$693 million to finish the project, with no cash requirement between the deal’s close and late 2020.
The US$4.7-billion QB2 project, expected to start production in 2021, should annually produce about 316,000 tonnes of copper equivalent in its first five years to shift Teck’s production profile towards the critical metal.
“QB2 will be a cornerstone asset in Teck’s portfolio,” said Lindsay. “When it is built, our copper production will increase significantly, and this will help rebalance our portfolio over time with the contribution from copper eventually similar to steelmaking coal.”
Scotiabank analyst Orest Wowkodaw said in a note that the deal was a boost to Teck after it secured great terms with Sumitomo.
“We view this update as very positive for the shares given the significantly higher than anticipated project buy-in proceeds, sharply reduced funding commitment attributable to Teck’s balance sheet (including no capital outlay until late 2020), and overall improved project economics.”
Wowkodaw said the deal, along with US$2.5 billion of project financing, will materially reduce Teck’s balance sheet risk. He had expected Teck to have to fund about US$2 billion in the next two years to effectively wipe out free cash flow, but now expects positive cash flow per year of a similar amount.
The deal sees Sumitomo paying US$800 million up front for the 30-per-cent indirect interest in the project, plus a US$400 million contribution going towards capital costs of the project.
Teck will retain a 60-per-cent stake in the project. ENAMI, a Chilean state agency, will hold a 10-per-cent non-funding interest.
Jamie Koutsoukis, senior analyst at Moody’s Corporate Finance Group, said that the deal buffers the company from potential dips in commodity prices during construction. “By removing the financing portion and the risk that while they’re building QB2, if commodity prices were to fall, they’ve removed the risk that they don’t have the cash flows to fund it.”
She said she would like to see more financing details, and what it would do with the free cash flow, before considering a rating change.