Teck announces US$1.2 billion Quebrada Blanca transaction; QB2 construction to proceed
Teck Resources Limited (TSX: TECK.A and TECK.B, NYSE: TECK) (“Teck”) 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
About the QB2 Project
The QB2 project is a long-life, low cost copper asset. Its large resource base provides great potential to significantly expand and extend the mine life beyond the current development. The deposit is open in several directions, with further resource expansion potential and a consistent grade profile. QB2 will produce clean copper and molybdenum concentrates. The project is expected to generate strong economic returns with C1 cash costs well inside the lower half of the cost curve, at US$1.28 per payable pound of copper produced for the first five full years. Sustaining capital is expected to be low due to the exceptionally low strip ratio, which averages just 0.44 tonnes of waste per tonne of ore mined in the first five full years and 0.70 over the life of mine. The low ratio of waste to ore results in low operating and equipment replacement costs, contributing to low all-in sustaining costs (“AISC”) of US$1.38 per payable pound of copper produced for the first five full years of mine life.
The social and environmental impact assessment for the QB2 project was approved in August 2018, and early field work commenced in September. The project scope includes the construction of a 143,000 tonne per day concentrator and related facilities, which are connected to a new port and desalination plant by 165 kilometre concentrate and desalinated water pipelines. Teck has agreed with SMM and SC to cover their share of the cost of power under the existing power purchase agreements in excess of QBSA’s needs until the earlier of the startup of the first grinding line in the mill or September 30, 2022. The target date for project completion and the start of commissioning and ramp up is the fourth quarter of 2021. Full production is expected in the middle of 2022.
Various aspects of the QB2 project have been optimized and updated based on additional technical and engineering work completed since the 2016 feasibility study, in anticipation of the decision to sanction the project. Capital and operating costs have been re-estimated. The capital cost for development of the project is now estimated at US$4.739 billion as of January 1, 2019 (in constant Q2 2017 dollars, not including working capital, escalation or interest during construction, and assuming a CLP/USD exchange rate of 625). Detailed engineering for the project is nearly 80% complete, and procurement is well advanced, increasing confidence in the capital cost estimate and construction schedule.
The QB2 project has a 28 year mine life and includes 199 million tonnes of inferred resources within the life of mine plan. The majority of this inferred material is not scheduled to be mined until late in the mine life and is displacing lower grade economic material within the pit. Teck refers to the planned development of the QB2 project that includes these inferred resources as the "Sanction Case". Key information regarding a reserve-only case is included in this news release for reference. Inferred resources 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. Based on Teck’s understanding of the deposit and history of resource to reserve conversion, the Sanction Case is regarded as a realistic and financeable development plan.
This mine plan is constrained by the current capacity of the tailings facility and exploits less than 25% of the total defined reserve and resource. Average annual copper equivalent production over the first five full years of operation is estimated at 316,000 tonnes. The significant resource outside the Sanction Case mine plan provides the potential for expansions in future years and the mine facilities have been designed with this in mind. All mineral resource and mineral reserve estimates in this news release are as at November 30, 2018.
Approximately 36,000 meters of additional drilling has been completed since the 2016 feasibility mine plan was developed. The results of 24,000 meters of that drilling have supported the reclassification of tonnage from inferred to measured and indicated resource categories, and have outlined significant additional inferred resources. The updated mineral reserve and resource estimates for the QB2 project, as at November 30, 2018, are set out in Appendix A. In addition, approximately 12,000 meters of additional drilling has been completed since the cut-off date for the Sanction Case mine plan. Teck currently expects the results of that drilling, when incorporated, will support further reclassification of additional tonnage from the inferred to the measured and indicated resource categories.
Teck is a diversified resource company committed to responsible mining and mineral development with major business units focused on copper, steelmaking coal, zinc and energy. Headquartered in Vancouver, Canada, its shares are listed on the Toronto Stock Exchange under the symbols TECK.A and TECK.B and the New York Stock Exchange under the symbol TECK. Learn more about Teck at www.teck.com or follow @TeckResources.
About Sumitomo Metals Mining Co., Ltd. (SMM)
SMM, founded in 1590, aspires to be a global leader in non-ferrous metals focused on copper, gold and nickel, with its integrated operations of three core business sectors, mineral resources, smelting and refining, and battery materials.
About Sumitomo Corporation (SC)
SC is a global trading and business investment company with 109 locations in 65 countries. The entire SC Group consists of more than 900 companies.
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