ABOUT-FACE
WHY TECK RESOURCES IS MAKING ‘GREEN METALS’, NOT COAL, THE CORNERSTONE OF ITS STRATEGY.
When Teck Resources Ltd. reported its first quarter earnings in late April, its chief executive Don Lindsay emphasized that his company was focused on “green metals as they’re now called.”
Specifically, the Vancouver-based diversified mining company is touting its production of copper, a metal that’s expected to see significant demand growth as solar power, wind turbines, battery electric vehicles and various other ‘green’ technology, all of which use copper, account for an increasingly larger share of global energy.
“We have one of the very best copper production growth profiles in the industry and located in attractive jurisdictions,” Lindsay told analysts on April 28. “Accelerating copper growth is the cornerstone of our strategy and by growing our copper production, we rebalanced our portfolio toward what are now called ‘Green Metals’. ”
Moving into green metals marks an about-face for Teck, which for the past decade has derived most of its profit from steelmaking coal while investing heavily and growing its presence in the oilsands.
But last year, for the first time since at least 2010, copper grew to account for US$919 million in earnings, surpassing steelmaking coal, which accounted for US$816 million.
The pivot comes at a fortuitous moment, just as the price of copper touched a 10-year high at US$10,000 per tonne, up more than 105 per cent since March 2020, and as Teck is more than halfway through constructing a multibillion-dollar new copper mine in Chile, called QB2, expected to produce 316,000 tonnes per year.
Last year around this time, the entirety of Teck’s production portfolio — coal, copper, zinc and oil — had suffered double-digit price declines, and after the company’s stock sank to $9.07 per share last March, several shareholders called for Lindsay’s ouster.
Today, the company’s share price has recovered to more than $30, as of Wednesday afternoon, and Lindsay remains at the helm. But some of those same angry investors still want to know how Teck can truly call itself ‘a green metals company’ when half of its businesses include coal and oil?
In fact, the company is emerging as a test case in whether the market will ascribe full value to a company where fossil fuels, including not only steelmaking coal but also oil, sit next to copper.
“They are now saddled with two businesses that every environmentalist is going to hate,” said Bob Bishop, managing principal of Impala Asset Management, who last year met with Teck board chair Sheila Murray and called for Lindsay’s removal.
According to Capital IQ, his firm held 243,000 shares as of December 2020, approximately 0.05 per cent of the company down from more than 14 million shares in 2018.
Bishop said he calculates the standalone value of the copper and zinc business — after QB2 is completed, expected in mid-2022 — would be as high as US$22 billion.
That’s nearly double the company’s current total market capitalization of around US$11.44 billion and he says the market won’t recognize the full value of its assets because some investors are always going to be deterred by Teck’s fossil fuel holdings.
Indeed, Norway’s sovereign wealth fund and a growing list of other large investors have set policies against investing in oilsands companies, which would include Teck.
Bishop singled out its oil business in particular as a “blackhole” — noting Teck has spent billions of dollars on oilsands mines that have consistently lost money.
As for steelmaking coal, he acknowledged that it had at least been consistently profitable in prior years but that it still detracts from their ESG, or environmental, social and governance, standing.
“They will debate it, but it is true,” said Bishop.
Lindsay, who declined to comment for this article, has repeatedly said the company may divest its oilsands energy division, but only when it can receive full value.
Teck has a 21.3 per cent stake in the 180,000-bpd Fort Hills oilsands mine, which is operated by Suncor Energy Inc., and though oil prices have risen enough that the project is no longer losing money, it is not yet operating at full capacity. Output at the mine stood at 120,000 bpd in the fourth quarter of last year, Suncor said.
At the annual meeting in late April, Lindsay said he’d like to see production rise above 200,000 bpd. At that point, possibly, the oil business “could be rolled into another company as part of a consolidation play and taking back shares. It could be spun out directly to our own shareholders. It could be sold for cash and the cash devoted to either reducing debt or our copper growth strategy,” Lindsay said.
Steelmaking coal appears to play a clear role, even as Lindsay describes green metals as the cornerstone of the company’s new strategy.
Last quarter, Teck invested $523 million in QB2. But it also invested $157 million to upgrade the Neptune Bulk Terminal, a port facility from which it exports steelmaking coal.
Lindsay has faced questions about the long-term outlook for steelmaking coal, especially in China, where Teck has been exporting to after that country’s political tensions with Australia disrupted its supply.
Earlier this year, two provinces in China, Tangshan and Handan, which together account for eight per cent of global steel production, announced environmental measures that will curtail steel production in order to reduce pollution. In part, this would be accomplished from closing coal-fired blast furnaces and switching to electric arc furnaces that rely on scrap metal.
James Campbell, an analyst with commodity research firm CRU Group, wrote in a note this week that demand for steelmaking coal is expected to drop as a result.
Although it is unclear if the drop in demand will be enough to significantly affect Teck, Real Foley, senior vice president of logistics and marketing for Teck, acknowledged to analysts that China is shifting toward using more scrap metal in their steelmaking, which uses electric arc furnaces and would diminish coal demand.
But he downplayed the impact. “That will probably take some time to get there just in terms of scrap availability,” said Foley.
Lindsay has made clear that he thinks producing steelmaking coal will be attractive to investors with ESG criteria, saying it is “absolutely something the world needs for a low-carbon future.”
Nonetheless, for months, he’s been emphasizing Teck’s future is in ‘green metals,’ and that the company has a pipeline of copper projects it could develop.
Even now, as QB2 is under construction, his company is working on a pre-feasibility study of QB3, a further expansion of the same copper ore body in Chile. Lindsay said it would be years still before Teck makes a decision about whether to build QB3, but that its copper projects alone could easily satisfy growth over the coming decade.
“As we move forward together, we will continue to provide value for our shareholders, support the global transition to a low-carbon economy and provide the metals and minerals essential for our modern world,” he told shareholders at this year’s annual meeting.