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Morningstar | Teck Resources’ Investor Day Positive, Raising our FVE to USD 20.50 per share. See Updated Analyst Note from 07 Apr 2019

Many small pluses from no-moat Teck Resources’ annual investor day add up to underpin a 12% rise in our fair value estimate to USD 20.50 per share. On the plus side, Teck progressed its five so-called satellite deposits. Collectively, copper resources for these deposits nearly doubled to 25 million tonnes since 2016. Zafranal and San Nicholas have advanced meaningfully and now look likely to go ahead. Teck is also looking to incrementally expand its coal, oil sands, copper and zinc operations. Here, the firm is focused on debottlenecking, processing plant expansions and technology such as automation to drive fixed cost leverage and economies of scale.

On the markets front, a couple of developments will also benefit Teck in the near term. Massive discounts saw the Western Canadian Select, or WCS, oil price trade more than USD 40 per barrel below West Texas Intermediate price late last year. At its worst, the WCS price was less than CAD 10 per barrel, scarcely believable. Discounts have since normalised and WCS has recovered to above CAD 70 per barrel. Teck expects oil sands to turn a profit in the first quarter of 2019 versus an operating loss of CAD 165 million in 2018. Zinc smelter treatment charges have also just increased 65% to USD 245 per tonne of concentrate. This should see Teck’s Trail smelter return to profit in 2019. It lost money in the second half of 2018.

The list of potential improvements at Teck is long, each small, but collectively meaningful. Teck sees potential to raise coking coal output by about 5% to 27 to 28 million tonnes from 2020. The firm may also add a further 1.8 million tonnes if the Mackenzie Redcap mine is approved. At the 21.3%-owned Fort Hills oil sands operation, Teck sees potential to debottleneck production. Management aims to lift its share of output to 15.5 to 17.0 million barrels of oil, or mmbo, a year from 14 mmbo. This should drive economies of scale and help the aspirational operating cost goal of CAD 20 per barrel.

It’s a similar story at Teck’s copper and zinc mines. At the flagship Red Dog zinc mine, a 15% increase in mill throughput should more than offset the natural decline in ore grades. In copper, the company hopes to raise mill throughput at Carmen de Andacollo and Highland Valley by 10% and 5% respectively. Teck is also studying the potential to incrementally expand its low cost Antamina mine.

Across the board, Teck is looking to drive productivity through technology. Real time data collection, processing and automation are seen as key enablers, particularly for mining equipment productivity. Ore sorting is another area of focus to improve the ore grades being processed and reduce water and energy use. This focus on technology is similar to peers such as BHP and Rio Tinto. There may also be longer-term upside at the Quebrada Blanca Phase 2 mine, or QB2, currently in development. Teck is already exploring potential for a Phase 3 expansion. The aim is to increase scale and throughput and lower unit costs to make a greater proportion of the extensive low-grade resource economic.

Of what Teck calls its satellite deposits, the 80% owned Zafranal and 100% owned San Nicolas projects in Peru and Mexico are most advanced. Collectively, the addition of these two deposits account for approximately one-third of the increase in our fair value estimate. Production is expected from both from 2023/2024. Zafranal should produce 128,000 tonnes of copper a year for the first five years at an average cash cost of USD 1.20 per pound. San Nicolas should add about 71,000 tonnes of copper and 70,000 tonnes of zinc a year on average for the life of mine. Forecast cash costs of USD 0.21 per pound are impressive but reflect the strong byproduct credits, mostly from zinc. The expected cash costs after byproduct credits are somewhat deceptive though with more than half forecast revenue to come from zinc, gold and silver. Looking at EBITDA, we expect the mine to deliver margins of 44% by midcycle, in line with the rest of the copper business. With 50%-owned Neuva Union now in joint venture with Newmont, we think the odds of its advancement have improved. It’s another modest positive for the fair value estimate.