Teck Resources' Carmen de Andacollo mine in Chile.
Teck Resources Ltd. is selling a stake in a large Chilean copper project for US$1.2-billion to a Japanese mining company in a deal that will see Canada’s biggest diversified miner proceed with a major expansion of its copper business.
On Tuesday, Vancouver-based Teck said its board had approved the US$4.7-billion construction of Quebrada Blanca Phase 2 (QB2) after selling a 30-per-cent share in the project to Sumitomo Metal Mining and Sumitomo Corporation.
Teck will put the proceeds raised from Sumitomo toward the construction of QB2, which it hopes to have in production in about three years. After those funds are exhausted, two-thirds of the future costs of construction will come from Teck and one-third from Sumitomo. Chile’s state-owned Empresa Nacional de Mineria (ENAMI), which owns 10 per cent of the project, has no funding commitments.
Teck says QB2 should produce about 316,000 tonnes of copper equivalent a year for the first five years, which would put it in the top 20 worldwide.
During a conference call on Tuesday, a number of analysts congratulated Teck’s chief executive Don Lindsay for getting a higher than expected price for selling part of QB2.
In an interview, Shane Nagle, analyst with National Bank Financial, said the consensus value for the entire project was about US$1.2-billion.
With cash coming in from Sumitomo to fund near-term mine construction costs, this deal allows Teck to deploy more of its existing capital toward paying down debt, increasing dividends or making share buybacks.
Since the great financial crisis, global mining companies have been increasingly teaming up in joint ventures. Apart from spreading the risk on building new mines, joint ventures lower the cost of raising capital.
Teck’s Class B shares rose by 2 per cent on the Toronto Stock Exchange to close at $28.78 apiece. Year to date, the miner has lost 12 per cent of its value. Mr. Nagle says that overall Teck is operating well and generating significant profits from its core steelmaking coal business. He puts the downside in the stock mainly down to “general resource investor fatigue.”
QB2 is expected to broaden Teck’s exposure to copper significantly over the next few years. In the most recent quarter, steelmaking coal accounted for about 47 per cent of Teck’s revenue, with copper accounting for roughly 19 per cent.
Copper prices have fallen some 16 per cent this year to about US$2.74 a pound. According to TD Securities Inc. commodity strategist Ryan McKay, the weakness is mainly owing to fears over a lingering trade spat between China and the United States. In September, U.S. President Donald Trump imposed a 10-per-cent tariff on Chinese imports. China is the world’s biggest consumer of copper, accounting for about 50 per cent of demand. Despite the tariffs, imports from China have remained “quite strong” Mr. McKay said, and global inventories have been drawing down substantially.
“The underlying physical demand seems resilient so far,” he said.
“It’s the speculators that are really pretty bearish on the metal and that’s weighed on prices.”