Teck doubles down on Chile copper mine investment with an eye on electric vehicle demand

Vancouver’s Teck Resources is buying out a minority partner in a major copper project in Chile at a cost that could reach as high as $262.5 million.

The total price tag, however, will depend on copper prices — often considered a barometer for global macroeconomic growth because it is used in so many products — and which at the moment are sliding as the U.S. and China slap tariffs on one another, and fears of a trade war escalate. 

“A company’s decision to build or not build (a mine) — these are long term forward-looking decisions,” said Alex Terentiew, an analyst at BMO Capital Markets who monitors Teck.

Terentiew said copper prices, which stood around US$3.06 per pound on Thursday, are not dropping off in a worrying way. In a note, he forecast a “skew of risk to the upside” for copper prices, based on a growing need in China for concentrates.

Under the deal announced on Wednesday, Teck increases its stake in Quebrada Blanca Phase 2: an open pit copper mine in northern Chile’s high desert expected to produce 300,000 tons of copper per year for its first five years.

Teck’s shares on the Toronto Stock Exchange rose 3 per cent to $34. Copper rose 1.4 per cent on Thursday as concerns over the prospect of a trade war between China and the U.S. eased.

The company has said it hopes to complete permitting and sanctioning for the project later this year. If built, at an estimated cost exceeding $5 billion, it would offset production declines at Quebrada Blanca Phase I — which dropped off 32 per cent in 2017 to 23,400 tons — and are expected to halve again later this year.   

Copper, one of four business units at Teck besides steelmaking coal, oil and zinc, is a priority for the company.

"The big opportunity for us is to take the very strong cash flows from coal and from zinc and to deploy those into the copper growth projects," Andrew Golding, senior vice president of corporate development said at a CIBC conference in Whistler in January.

Under the deal announced Tuesday, it is buying out a 13.5 per cent interest in Quebrada Blanca held by Inversiones Mineras, S.A., a private Chilean company, thereby increasing its ownership to 90 per cent. 

The deal has three stages: First, Teck pays a $52.5 million cash deposit, followed by a $60 million payment upon final approval of the social and environmental impact assessment, and then an additional $50 million payment when copper production starts at the mine — the date of which has not yet been set.

Plus, if copper prices exceed $3.15 per pound for the first three years, Teck could an additional $100 million. 

ENAMI, a state agency in Chile, owns the remaining 10 percent interest. BMO analyst Terentiew said past comments by Teck chief executive Don Lindsey suggest the company will sell some of its stake to reduce its risk profile.

“Whether they sell down to 70 or to 60 percent, obviously it all depends on the partner, what the partner's willing to pay" and other factors, he said.

At the Whistler conference in January, Golding said the company is bullish on copper in the medium and long term, and not just because it is used in electric vehicle batteries.

"If electric vehicles do take off, we see that as being the icing on the cake," he said. "The demand is not dependent on the battery technology in the way it might be for cobalt, lithium, or nickel - really, the copper will be going in to the cars themselves, and into the charging infrastructure that would have to be strengthened around the world."

Capital Economics, a UK-based research house sees the electrification of vehicles as a ‘game-changer’ for demand for copper, lithium and cobalt.

"A pick -up in electric vehicle sales could have significant repercussions for metals demand and, potentially, prices," said Simona Gambarini, commodities economist at Capital Economics.