Teck Sells 30 Percent of Quebrada Blanca Expansion to Sumitomo

Base Metals Investing

With full construction approved, Teck is aiming for first production from its Quebrada Blanca expansion by the second half of 2021.

Canada’s Teck Resources (TSX:TECK.A,TSX:TECK.B,NYSE:TECK) has announced the process to bring a partner into its aging Chilean copper operation has concluded, with the company agreeing to carve off a 30-percent slice of its Quebrada Blanca copper mine expansion for Sumitomo Metal Mining (TSE:8053).

In its Tuesday (December 4) release, Teck said that with the US$1.2-billion transaction, the board of the company had given the green light to the Quebrada Blanca phase 2 expansion project (QB2), which would increase the project’s life by 25 years.

With full construction approved, Teck said it would be aiming for first production from QB2 by the second half of 2021.

Multiple companies had been in the game to become a partner with Teck at QB2, with Australia’s Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) among them.

President and CEO of Teck Don Lindsay said that the QB2 project in northern Chile was “one of the world’s premier undeveloped copper assets and this transaction further confirms the value of the project.”

“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 QB2 project envisages 316,000 tonnes of copper produced annually for the first five years of operation, with the mine’s 28-year life utilizing “less than 25 percent of the current reserve and resource.”

The project had received regulatory approval early in August this year.

Under the agreement, Sumitomo would acquire 30 percent of the company that owns QB2 (Compañia Minera Teck Quebrada Blanca) by paying US$800 million in an earn-in contribution, and US$400 in a matching contribution.

Sumitomo would also pay US$50 million to Teck when QB2 achieves mill throughout of 154,000 tonnes per day by the end of 2025.

Finally, the agreement also stipulates a contingent contribution of 12 percent of the incremental net-present value (NPV) of a further expansion of the project — Quebrada Blanca phase 3 (QB3), “upon approval of construction.”

Teck said that 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 billion estimated capital cost of the QB2 project to US$693 million with Teck’s first contributions not required until late 2020.”

The company added that “in light of the significant reduction in QB2 funding required from Teck,” and a lower project share, the board would be exploring an additional return of capital to shareholders.

After the transaction, Teck would own 60 percent of QB2, Sumitomo 30 percent and state-run Chilean company Enami would retain a 10 percent non-funding interest.

Lindsay said that “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.”

In Q3 of 2018, Quebrada Blanca produced 6,500 tonnes of copper. The operation is rapidly depleting, producing 35,000 tonnes of copper in 2016, and 23,000 tonnes of copper in 2017 — necessitating the development of QB2.

Teck was trading at C$28 on Tuesday, up 2.81 percent as of 3:00 p.m. EST.

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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.

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