Teck Resources Ltd. is diversifying further into oil sands mining through the $435-million acquisition of SilverBirch Energy Corp., its partner in the massive Frontier project in the resource-rich Athabasca region of Alberta.
The deal signals Vancouver-based Teck's goal to mine more than its main metals of copper, coal and zinc at a time when commodity prices across the board are volatile amid escalating concerns of another major global economic slowdown.
Investors worry commodities consumption will drop as a result of Europe's ongoing debt crisis, a stagnant U.S. economy and growing signs that China's economy is slowing.
Teck is hoping to balance its resource portfolio by streamlining its oil sands assets through the purchase of Calgary-based SilverBirch, its 50-per-cent partner in the Frontier project.
The move gives Teck full ownership of Frontier, which is expected to produce 2.8 billion barrels over the life of the project, and provides it with more flexibility to potentially pursue a project partner to help fund the huge cost, estimated at about $23-billion over four phases.
"This transaction strengthens the Frontier project," Teck chief executive officer Don Lindsay said in announcing the transaction on Monday. "The ownership structure is simplified, our exposure to oil sands leases not amenable to mining is reduced."
Teck also has a 20-per-cent interest in the Fort Hills oil sands mining project in Alberta, with Total E&P Canada Ltd. and Suncor Energy each holding about 40 per cent. SilverBirch was created when Total bought UTS Energy Corp.'s stake in Fort Hills and put UTS's other projects into the new smaller company.
Teck, once best known as a producer of zinc, has been moving into other commodities in recent years as part of an ongoing diversification strategy. That includes building new copper mines in places such as Chile and its now-infamous deeper move into coal in 2008 with the $14-billion purchase of Fording Canadian Coal Trust, during what turned out to be the eve of the global financial crisis.
The company has since bounced back, helped by the dramatic recovery in commodity prices, and continues to diversify with an eye to what's in demand in China, the world's largest consumer of commodities.
To buy SilverBirch, Teck will pay $8.50 per share in cash and one share of a new company, SilverWillow Energy Corp., that will hold SilverBirch's in situ assets, which are those drilled and not mined with trucks and shovels.
Teck will contribute $25-million in working capital to the new company, as well as its 50-per-cent interest in several oil sands leases it now jointly owns with SilverBirch.
Teck shares fell 2 per cent on the Toronto Stock Exchange on Monday as investors appear to worry about the huge price tag of the project, which breaks down into an estimated $14.5-billion in its first two phases, and $8.4-billion for the last two.
Still, some analysts believe the investment will pay off, particularly if Teck brings on a deep-pocketed partner.
"We would tend to view the acquisition as a good use of cash for the company," Dahlman Rose & Co. analyst Anthony Young said in a note on Monday.
"While it will be an extremely long time period before these assets begin to produce any cash flows or meaningful returns to investors, we believe that management is setting the stage for the company to have a significant presence in the energy markets, over the long term."
Frontier is expected to produce 74,000 barrels per day of bitumen in 2021, rising to more than 277,000 barrels per day by 2030.
SilverBirch CEO Howard Lutley said the timing was "appropriate" to unload the Frontier project, and brings value to the company's shareholders.
SilverBirch was not expected to be able to handle the huge cost of building Frontier, and the company said it began a global strategic review of its operations last year.
Its shares jumped 33 per cent on the TSX Venture Exchange on Monday, which was beyond the offer's price, suggesting investors believe a higher bid is possible.
Still, many analysts aren't convinced.
"Given that Teck is buying out its partner, we believe the possibility of a second bidder on SilverBirch is very limited," said Desjardins Securities analyst John Hughes, also noting that Teck currently owns about 9 per cent of SilverBirch.
If the Teck offer is approved, the deal is expected to close in April.
With files from Carrie Tait in Calgary