Diversified Canadian miner, Teck Resources Ltd (NYSE: TECK), is getting a big boost lately from improving met coal sales. While that key market has, rightly, taken center stage lately, the company's energy division is gearing up for big news of its own later this year. Here's what you need to know about the progress of Teck's plans to further diversify its operations.
Coal's big day
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Teck mines for three main commodities, which gives it a diversified revenue stream. That's been important in recent years because of a deep downturn in the mining space. To put some numbers on that, in 2014 coal accounted for about 14% of gross profits, with copper and zinc roughly splitting the rest. In 2015 coal made up 15% of gross profits, with copper at 33% and zinc 51%. Those two sets of numbers show how the businesses shift around, with one segment of Teck's business often offsetting weakness in the others.
But there were big changes in 2016. Gross profit in coal increased nearly seven times over the last year as steelmaking coal prices began to recover in dramatic fashion. In 2016 coal made up a massive 58% of gross profits, with copper at around 8% and zinc at around 35%. This is further evidence of the benefit that Teck's diversification offers, but also makes it pretty clear why coal is the story of the day.
But there's another division at Teck... energy. This business hasn't contributed at all to gross profit so far. However, that's going to change later this year if everything goes according to plan, adding a fourth commodity to help further diversify the company's business.
The oil patch
The big investment in the energy business is Teck's 20% interest in the Fort Hills Canadian oil sands project. Suncor Energy (NYSE: SU) is running the venture and owns roughly 51%, with France's Total controlling the rest. So far it's been a big money drain since its still being built. But as of the second quarter, the project was 92% complete, with 90% of the staff needed to run the project already hired. First oil is expected in late 2017.
Once that milestone is hit, Fort Hills should ramp up to 90% of nameplate capacity over the following 12 months. The project is expected to mine and process 110 million tonnes of oil sand per year, producing, on average, around 194,000 barrels of bitumen per day. That said, 2017 won't see much of a contribution from the energy business -- but in 2018 Teck's energy business will be increasingly important. The year-over-year benefits will likely spill over to 2019, as well, assuming the ramp up to full capacity is spread over a full year.
At this point, it's hard to suggest what the dollar benefit will be because oil prices have been volatile and there's no way to tell what oil will trade at in the next week, let alone in a year or more from now. That said, Teck expects the project to be a net benefit even if oil prices stay in the $40 to $50 per barrel price range that they've been stuck in recently. That remains true despite the market's generally negative view of oil sands projects.
But one thing is certain: Teck's business will go from three main commodities to four, further diversifying its revenues. That's a good thing since it should help to further smooth out results over time. That diversification benefit, meanwhile, will last for a very long time -- the life of the Fort Hills project is currently estimated at 50 years.
Sum of the parts
The big news for Teck today is coal, but very shortly the energy business is going to start to take center stage. The story will get more and more interesting as 2018 progresses and Fort Hills ramps up, with the potential for a 2019 benefit, as well. So you should start to pay closer attention to Teck's energy business as the Fort Hills project gets ready to start producing oil later this year... with the biggest strategic benefit being the addition of a fourth major commodity to this diversified miner's operations.
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