In late January, Teck Resources Ltd. TECK-A-T decided it needed to update investors on its prospects after a series of near-biblical natural disasters across its operations.
Floods cut the rail lines that connect Teck’s mines in British Columbia to ports, the company explained. Disease, in the form of soaring COVID-19 cases, swept through its work force, adding up to US$1.1-billion to the cost of a project in Chile that was already over budget. All that seemed to be missing was a plague of locusts.
Teck detailed these challenges in a news release issued a month before reporting its year-end financial results, because they represented material changes in its business. These releases are the equivalent of “We need to talk – now” requests from your boss or spouse. Nothing good tends to come of them.
Yet since releasing seemingly apocalyptic news, Teck’s stock price has continued a two-year-long rally. The Vancouver-based miner’s salvation this quarter, and as chief executive Don Lindsay continues to transform the company into a leading global copper producer, is coal.
Teck is the world’s second-largest producer of coal used for steelmaking, not burned for power or heat. That’s owing to Mr. Lindsay’s career-defining decision to acquire a collection of coal mines for $14.1-billion back in 2008. And steelmaking coal is having a moment.
For a variety of reasons, including China’s politically-motivated decision to ban coal imports from Australia, the price of steelmaking coal has soared in recent months. Previously, analysts projected the commodity would fetch somewhere in the range of US$215 to US$250 a tonne this year.
The biggest surprise in Teck’s recent release turned out to be good news: Steelmakers were paying US$445 a tonne when the company published its update.
Surging commodity prices mean experts have upgraded the outlook for Teck, despite bad weather and the pandemic. Mining analysts at RBC Capital Markets now forecast steelmaking coal prices will remain higher than expected through at least the first half of this year. They said even after the significantly increased capital spending outlined in Teck’s recent update, the company is projected to generate $3.3-billion of free cash flow in 2022.
If current strong prices for steelmaking coal persist, along with copper and zinc – which Teck also mines – the analysts said Teck will have $8.9-billion in excess cash by year end. That scenario may be unlikely, but it’s not impossible, they said. And all that money would pay for Mr. Lindsay’s plans to transition Teck into a leading global copper miner, while also funding the cost of turning steelmaking into a more environmentally-friendly business.
Teck is spending an estimated US$6.6-billion to expand its Quebrada Blanca copper mine in Chile, a project short-handed as QB2. That’s up from US$5.2-billion when Teck launched the project four years ago. When completed later this year, QB2 will be the world’s second-largest copper mine, with a 28-year lifespan and potential for further expansion.
QB2 promises to change the way investors value Teck, shifting it from a coal play, with all the negative environmental trappings that come with the commodity, to a base metal miner that gets far more respect in stock markets. Teck can only afford this project, with its cost overruns, because its steelmaking coal business is prospering.
Teck is also dedicating money and expertise to reducing greenhouse-gas emissions from steelmaking, with approaches that include carbon capture and storage. Mr Lindsay kicked off a TD Securities mining conference last month with a presentation that said: “Teck’s strategy will ensure we are well-positioned for changes in demand for mining commodities driven by the transition to a low-carbon world.”
For some investors, the fact that Teck pulls a single shovel of coal out of the ground makes the company a pariah, even if the commodity is still essential to more than 70 per cent of the world’s steelmakers.
That sort of sentiment weighs on the company’s valuation. Mr. Lindsay has openly admitted the company looked at selling or spinning out its coal business in the past. Last fall, The Globe and Mail reported the CEO held talks with rival coal producers Lundin Mining Corp. and Glencore PLC.
However, Mr. Lindsay ended up sticking with steelmaking coal, earmarking the cash from the business to fund an investor and environmentally-friendly future. Surging commodity prices mean that decision gave Teck a cash cushion when floods came, and a pandemic raged.
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