Teck Announces US$1.2 Billion Quebrada Blanca Transaction; QB2 Construction to Proceed
Tuesday, December 4th, 2018
Teck Resources Limited (TSX: TECK.A and TECK.B, NYSE: TECK) (“Teck”) recently announced that Sumitomo Metal Mining Co., Ltd. (“SMM”) and Sumitomo Corporation (“SC”) have agreed to acquire a 30% indirect interest in Compañia Minera Teck Quebrada Blanca S.A. (“QBSA”), which owns the Quebrada Blanca Phase 2 (“QB2”) project. The Teck board has also approved the QB2 project for full construction, with first production targeted for the second half of 2021.
The consideration payable by SMM and SC consists of:
- US$1.2 billion contribution for a 30% indirect interest in QBSA
- US$800 million earn-in contribution
- US$400 million matching contribution
- US$50 million to Teck upon QB2 achieving optimized target mill throughput of 154ktpd by December 31, 2025, subject to adjustment
- Contingent contribution of 12% of the incremental NPV of a major expansion project (“QB3”) upon approval of construction, subject to adjustment
- 8% contingent earn-in contribution
- 4% matching contribution
“QB2 is one of the world’s premier undeveloped copper assets and this transaction further confirms the value of the project,” said Don Lindsay, President and CEO of Teck. “This partnership significantly de-risks Teck’s investment in the project, enhances our project economics and preserves our ability to continue to return capital to shareholders and reduce bonds currently outstanding.”
The combination of proceeds from the transaction and proposed project financing reduces Teck’s share of equity contributions toward the un-escalated US$4.739 billion1 estimated capital cost of the QB2 project to US$693 million2 with Teck’s first contributions not required until late 2020. In light of the significant reduction in QB2 funding required from Teck due to the transaction proceeds and Teck’s reduced project interest, the Teck Board will consider an additional return of capital to shareholders following closing of the transaction.
“QB2 will be a long life, low-cost operation with major expansion potential, including the option to double production or more, to become a top five global copper producer,” said Lindsay. “The copper growth from QB2 will, over time, help to balance our portfolio so that the contribution of our copper business could be similar to our world-class steelmaking coal business.”
Added Lindsay: “We are delighted to have Sumitomo Metal Mining and Sumitomo Corporation as partners and we look forward to building on our long and productive history of working together.”
- Implied value ascribed to Teck’s 90% share of QB of approximately US$3 billion
- Reduces Teck’s estimated share of remaining equity contributions to US$693 million2, with no Teck cash contributions expected between closing and late 2020
- Based on the partner contribution and funding structure, expected IRR for Teck of between 19 – 24% post-tax on an unlevered basis and between 30 – 40% on a levered basis giving effect to project financing3
- Capital expenditures for QB2, after project finance proceeds and initial SMM/SC contribution, to be funded two-thirds Teck, one-third SMM/SC; Enami has 10% non-funding interest
- Post-transaction project ownership: 60% Teck, 30% SMM/SC, 10% Enami
- 316,000 tonnes of copper equivalent production4 per year for the first five full years of mine life; top 20 global copper producer
- Low all-in sustaining costs (“AISC”) of US$1.38 and C1 costs of US$1.28 per payable pound of copper produced during the first five full years of mine life
- Initial mine life of 28 years utilizing less than 25% of the current reserve and resource; vast deposit with extension and expansion potential
- Launching a scoping study to assess QB3 development options with potential to double production or more, which would make the mine a top 5 global copper producer
- Positioned for construction with strong and experienced execution team in place, major permits in hand, engineering nearly 80% complete, and contracting and procurement well advanced
- Demonstrated, industry-leading technology to enhance safety, productivity and sustainability, including an integrated operations centre located in Santiago, autonomous haulage fleet, and the first large-scale use of desalinated seawater in the Tarapacá Region to eliminate freshwater use in operations
(1) On a 100% go forward basis from January 1, 2019 in constant Q2 2017 dollars and a CLP:USD exchange rate of 625, not including escalation (estimated at US$300 – $470 million based on 2 – 3% per annum inflation), working capital or interest during construction. Includes approximately US$500 million in contingency. At current spot CLP/USD rate of approximately 675 capital would be reduced by approximately US$270 million.
(2) On a go forward basis from January 1, 2019. Assumes US$2.5 billion in project finance loans and without deduction of fees and interest during construction, and US$1.2 billion contribution from SMM and SC.
(3) Sanction Case economics; see below for further details. Range based on copper price of US$3.00 – $3.50/lb. Sanction Case includes 199Mt inferred resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserve. Inferred resources are subject to greater uncertainty than measured or indicated resources and it cannot be assumed that they will be successfully upgraded to measured and indicated through further drilling.
(4) Copper equivalent production calculated assuming US$3.00/lb copper, US$10.00/lb molybdenum and US$18.00/oz silver without adjusting for payability.