Shortly after walking away from its Frontier oil sands project in Alberta, Teck Resources Ltd.’s chief executive Don Lindsay admitted the company is facing a “perfect storm” as it grapples with multiple problems across its businesses – from coal, to copper, to energy.
After months of speculation on whether the federal government would approve Frontier, Teck pre-empted any need for the Liberals to make a decision on the undeveloped heavy-oil project, by voluntarily withdrawing its application on the weekend.
In a letter to the federal Environment Minister, Mr. Lindsay blamed the company’s decision to shelve the Frontier project on the absence of a cohesive national framework that reconciles resource development with environmental concerns. Against that backdrop, Teck said there was “no constructive path forward" for Frontier.
Frontier’s boosters, such as Alberta Premier Jason Kenney, had argued that approving the $20.6-billion project was key to reviving the ailing provincial economy, while its detractors argued that giving it the go-ahead would endanger Canada’s attempts to meet international emissions benchmarks.
However, it was clear that Teck was in no position to immediately move ahead with Frontier. It hadn’t proven Frontier’s viability, and in fact Mr. Lindsay himself had recently raised concerns about its economics.
While the outcome on Frontier has renewed the debate over responsible resource development in Canada, and raises questions about how open the country is to large-scale investment, it has little actual impact on Teck’s existing business.
Scotia Capital Inc. analyst Orest Wowkodaw wrote in a note to clients on Monday that the Frontier withdrawal has “no impact" on his outlook for the miner.
Like many other analysts on Bay Street, he ascribed zero value to Frontier.
In light of Frontier’s “challenged economics,” “weak returns” at Teck’s existing oil sands operation (Fort Hills) and lack of pipeline capacity, Frontier’s development was “a very low-probability event,” he wrote.
Of much more import to investors is Teck’s current financial condition. The base metal miner’s shares have lost more than half of their value over the past year, as it grapples with cost overrurns at two major projects, a weak outlook for its core metallurgical coal business and the damaging impact of the coronavirus. The spread of the virus is hurting the share prices of many commodity-sector companies, whose fortunes in part depend on the global macro-economic picture.
“All these factors created a perfect storm,” Mr. Lindsay told a gathering of investors at a mining conference in Florida on Monday.
At the moment, the market is particularly concerned about a ratcheting up in capital costs at Quebrada Blanca Phase 2 (QB2), a new copper mine Teck is building in Chile. Originally budged at US$4.7-billion, Teck in recent months has made it clear that its original estimates were too low. Teck is dealing with unforeseen problems with obtaining permits and “social unrest” in the South American country that have set back the timeline for finishing its construction.
Despite repeated calls for clarity on the cost overruns by analysts, Mr. Lindsay remained tightlipped on Monday, reiterating that the company will divulge the details at the end of March before its April 1 investor day. One mitigating factor is the weakness in the local currency, which he says will help ease the impact on Teck of the QB2 cost overruns.
Still, uncertainty over the new copper mine – and other factors, such as Teck’s recently downgraded coal forecast for 2020 – is spooking some would-be investors.
Michael Sprung, president of Toronto-based wealth-management company Sprung Investment Management Inc., has followed Teck for decades, but he doesn’t currently own any shares.
“There is too much uncertainty,” he said.
Mr. Sprung says he’ll wait for clarity before even considering buying the stock, and added that it’s “a bit of a relief” that Teck is pulling the plug on Frontier and won’t be putting any more money into a project with poor economics.
A number of analysts cut their target stock price for Teck on Monday, including Scotia Capital, TD Capital Inc., Credit Suisse and Eight Capital.
Shares in Teck fell by 2.7 per cent on the Toronto Stock Exchange on Monday to close at $14.06 apiece.
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