Diversified Canadian miner Teck Resources Ltd (NYSE:TECK) is benefiting from a recovery in the steelmaking coal industry. Downturns in that commodity and others took a heavy toll on results a few year back, leading investors to worry about the strength of the miner’s balance sheet, especially given the heavy investment it was making in a new mining project. That project, however, is expected to come online at the end of 2017, and it’s why I think the best is yet to come for Teck Resources Ltd.
A couple of years ago, when commodities were still in a deep downturn, investors were concerned that Teck’s debt level was too high. Adding to that concern was the company’s 20% stake in the Fort Hills Oil Sands project. Operator Suncor Energy (NYSE:SU) owns roughly 50% of the oil mining project, with Total‘s stake accounting for the remainder. This oil investment was approved in late 2013, a little more than six months before oil prices started a precipitous fall from which they have yet to fully recover.
In other words, while Teck’s core businesses of metallurgical coal, copper, and zinc were struggling, it was going to have to pay big bills for its share of a more than $15 billion construction project. The economics of that project, meanwhile, looked increasingly dismal as oil prices fell from over $100 a barrel into the $30 a barrel range. It’s no wonder that investors were worried.
Teck, however, has been busy working on the debt issue — the company has trimmed its debt by over 20% so far this year. Debt is down nearly 35% from the end of 2015, when the company’s debt burden hit a peak. This issue is no longer as big a concern as it once was. That’s particularly true now that commodity markets have rebounded in a notable way. To put some numbers on that, copper prices were up 20% year over year in the second quarter, zinc prices advanced 35%, and met coal prices doubled.
Lower debt levels and improving commodity prices, however, are only half the story. The other piece is that the Fort Hills Oil Sands project is more than 90% complete. Basically, Teck’s commitment to pay for its share of the construction costs of the Fort Hills project is coming to an end. Better yet, first oil is expected in late 2017. The project should ramp up to roughly 90% of full capacity (194,000 barrels per day) in the 12 months following first oil.
In 2018 Fort Hills will change from a cash drag to a top-line contributor. And, assuming everything goes as planned, the contribution will increase throughout the year, meaning that there are likely to be additional benefits in early 2019, too. Suncor, meanwhile, has explained that oil sands projects aren’t as expensive to operate as many investors believe, which is why Teck expects the project to be a net benefit even at today’s oil prices, which seem stuck in the $40 to $50 a barrel range.
Even better, once oil starts flowing, Teck will suddenly go from three main commodities to four. That increases its diversification in a big way and gives it yet another avenue to grow the business in the future. Note, too, that the Fort Hills project has a 50 year reserve life, which means it will be contributing to Teck’s business for decades.
The heavy lifting is almost over
So the best is yet to come for Teck because the Fort Hills project is nearly complete. Once it is, oil will start flowing and Teck will begin to benefit from what has been, and will continue to be up until first oil, a financial drag. There won’t be a huge benefit this year, but 2018 and early 2019 could be really exciting. However, late 2017 is when you need to be looking for oil news out of Teck — that’s when a lot of good things should start happening.