Morningstar | Sumitomo's Investment in QB2 on Favourable Terms for Teck
Sumitomo’s decision to partly fund the Quebrada Blanca 2 copper project is a modest net positive for Teck Resources. Sumitomo will inject USD 1.2 billion of equity into the QB2 joint venture to earn 30%, diluting Teck’s interest to 60% from 90%. Total QB2 capital expenditure is estimated at about USD 5.1 billion, with Teck and Sumitomo financing the balance on a two-thirds/one-third basis. On a 100% basis, the mine should produce nearly 250,000 tonnes of copper a year at a cash cost of about USD 1.40 per pound before royalties over a 28-year life. In the first five years, output should average about 290,000 tonnes a year at a cash cost of around USD 1.30 per pound. When ramped up, we expect Teck’s 60% share of QB2 to add about 13% to annual group revenue and 15% to EBITDA. First production is planned for 2022, and we expect full production in 2023.We raise our fair value estimate to USD 17.80 per share from USD 17 mainly due to QB2. With the favourable investment from Sumitomo and some incremental improvements to the development, we now think the project detracts from our Teck fair value estimate by only USD 0.30 per share versus USD 1.20 previously. This factors in a 100% chance that QB2 proceeds. Our prior estimate for QB2 to detract from the Teck valuation reflected the high capital expenditure, middling position on the cost curve, somewhat unfavourable fiscal terms, and an unchanged USD 2.30 per pound midcycle copper price. We previously assumed a 50% probability of the project going ahead.
With market concerns around slowing growth in China, rising interest rates, potential trade disruptions, and the lower zinc price, Teck shares are down about one third from their January 2018 peak. Teck is now approximately 20% overvalued. Remaining overvaluation primarily reflects our expectation for coking coal prices to decline from favourable levels as supply responds, China’s steel consumption slows, and a greater proportion of steel demand is satisfied by scrap.
Teck’s share of QB2 is now incorporated into our forecasts for group financials and capital expenditure.
Teck Resources is engaged in mining and related activities including exploration, development, processing, smelting and refining. Co.'s major products are steelmaking coal, copper and zinc. Co. also produces precious metals, lead, molybdenum, electrical power, fertilizers and other metals. Co. also owns an interest in certain oil sands leases and have partnership interests in an oil sands development project and wind power project.
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