BofA ML analysis of TCK.B
Summary:
Teck Resources Ltd
QB2 potential delays are not material to our TCK valuation
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TCK temporarily withdraws QB2 environmental application
Teck Resources (TCK) announced it has temporarily withdrawn its Social and Environmental Impact Assessment (SEIA) application for its Quebrada Blanca Phase 2 project (QB2). TCK stated that it is in the process of reviewing comments by regulators, after which the company plans to resubmit QB2 SEIA application. TCK continues to work towards a 2016 start-up for QB2; however, this will depend on the timely receipt of necessary approvals.
Our take: Potential delay immaterial to TCK valuation
QB2 represents 3% of our TCK NAV, with commercial production commencing in 1Q17. Therefore, a potential start-up delay of up to 6 months would be relatively immaterial to our TCK valuation. We understand Chilean regulators want to obtain more information on hydrology and vegetation in the project area.
QB2 background: QB to contribute 50% TCK 2018 Cu prod'n
TCK completed its QB2 feasibility study in April 2012. QB2 capex is estimated at $5.6 bn (100% basis) including 13% in contingencies. The project's base case metrics include: 135 ktpd throughput, 200 ktpa copper production (0.49% grade), 5 ktpa moly production (0.018% grade) at $1.38/lb C1 cash costs (Chart 1 shows QB's impact to TCK's copper production profile, Chart 2 has QB's copper production, costs). QB2 copper cash costs at $1.38/lb rank it at the 54th percentile on the 2012 global cash cost curve. For our latest detailed update on QB2, see our note following our tour of TCK's South American assets (22 April 2012).
What's ahead: QB2 next steps, catalysts for TCK shares
As noted in our recent TCK update following our tour of TCK's South American assets, labor availability is going to be QB2's main risk, in our view. Also, the use of a desalination plant should reduce risk of achieving design recovery rates, albeit at an increased cost. Next steps and potential catalysts for QB2: (1) receipt of SEIA approval following resubmission, expected 2H12, (2) discussions are under way with power suppliers, and (3) financing options are under consideration with the potential for an additional funding partner.
TCK thesis unchanged, maintain Buy rating
We expect TCK shares to benefit from improving 2H12 met coal prices. We like the TCK story due to: (1) its exposure to commodities BRIC economies need for urbanization and industrialization (+80% of EBITDA from copper and met coal), (2) TCK growth in met coal and copper production projected at 28% and 18% over the next three years, with the potential for future upside (Relincho), (3) Valuation - TCK is currently trading at 0.4x our NAV vs. our global diversified miner peer average of 0.7x and copper average of 0.8x, and (4) TCK's dividend yield (2.6%, above industry average) and potential to complete buyback program.