Teck Hopes to Join Glencore in Dividend Boost as Metals Soar
By Danielle Bochove, Bloomberg News
Teck Resources Ltd. may become the latest miner to loosen its purse strings for shareholders as commodities recover from the worst slump in a generation.
The Vancouver-based producer of steelmaking coal, zinc and copper will consider changing its dividend policy in April as a means of further rewarding shareholders who have already seen a sixfold surge in the stock this year, Chief Executive Officer Don Lindsay said.
At current prices, Teck generates “well over” $1 billion in cash a quarter, he said in an interview with Bloomberg TV Canada. Its first priority for that money will be reducing debt to $5 billion or less, a goal he says will be achieved in the first quarter or soon after.
Once that’s accomplished, the dividend is expected to be a priority for the board: both raising it and potentially changing its structure. In doing so, Canada’s largest diversified miner would join large miners including Glencore Plc and Vale SA in starting to increase payments as they emerge from the downturn more streamlined and profitable.
“We’re a commodity-based company in a world that’s that much more volatile,” Lindsay said in the interview. Rather than offer a stable dividend that rises over time with production capacity, shareholders would be better served by a regular base dividend that’s “topped up” at year-end if commodities outperform. “I think that’s probably a structure that people will be more comfortable with.”
It’s a dramatic change of direction for a CEO who until recently was grappling with a prolonged commodities rout that ravaged all its revenue streams. Lindsay, who has headed the company for a dozen years, began major cost-cutting efforts in 2013. In the past two years, the company has shed 2,000 jobs, written down billions of dollars in assets, cut its debt and pushed back maturities, and sold production streams on two of its mines. Teck had $6.6 billion in total debt at the end of last quarter, down from $7.2 billion a year earlier, according to data compiled by Bloomberg.
What the company hasn’t done, despite pressure from some shareholders and analysts, is sell off core assets or dilute its shares with equity sales. Unlike many of its competitors, it maintained a small dividend throughout the recent downturn. Nor has Lindsay succumbed to pressure to change course on the Fort Hills energy project in Alberta, an oil-sands joint venture led by Calgary-based Suncor Energy Inc.
As a result, Teck is poised to generate cash across its portfolio for “generations,” Lindsay said. “In the end, I think what we’re trying to build is a great Canadian resource company.”
Teck’s dramatic stock rally — making it by far the best performer on the S&P/TSX Composite Index this year — has been fed by strong tailwinds for everything it sells. So far this year, metallurgical coal has rallied 263 percent, zinc 68 percent, and copper 24 percent.
Heading into 2017 and beyond, Lindsay is very bullish on zinc, noting that concentrate supply is so tight that smelters may run out. The last time this happened, in 2006-2007, prices almost tripled inside nine months, averaging $1.47 he said. “Ten years later we think it will be north of that.”
Meanwhile, prices of metallurgical coal, which has accounted for the largest chunk of Teck’s annual revenue, probably will fall — but not until companies are able to ramp up supply. “It’s going to be two or three quarters before you see that supply re-balancing occur. That will keep prices pretty high.”
Longer-term, the company sees $150 a ton for metallurgical coal as a “pretty safe long-term price,” and Teck wouldn’t bring on any new production if it didn’t think it would be at that level or higher, Lindsay said. It will take a while for prices to drop to that level, he added.
Copper at about $2.65 a pound is looking frothy and could slip back to between $2 and $2.25 next year, Lindsay said. That said, he believes the metal will be in deficit by 2018 or 2019. And fundamentals could continue to take a back seat to sentiment, which has been driving copper higher, he said.
With the company likely to continue to generate strong cash flow across its portfolio, it’s focused on its internal pipeline including Fort Hills. Its C$3 billion capital spend on the oil-sands project will be completed this year and 2018 will be the first year of full production.
The first full year of “decent” cash flow from Fort Hills will be 2019, Lindsay said. How much money is made at the site depends on the price of West Texas Intermediate, the differential with Canadian oil prices and the Canada-U.S. dollar exchange rate, he said. “At current prices it would certainly be cash-flow positive.”
Beyond Fort Hills, Teck is focused on the longer-term potential for copper prices by expanding its Quebrada Blanca mine in northern Chile in a project dubbed QB2.
While spinoffs are not on the cards right now, it could make sense someday if a single segment became over-valued or was no longer a good fit for the company.
“Everything is for sale at a price,” Lindsay said. “We look at those things all the time.” But for now, the priority is building a diversified portfolio with a focus on internal expansion over acquisitions, he said.
“More value comes from building if you can build roughly on time and on budget,” he said, as long as they resist adding too much global capacity. “If there’s one thing we know in this business it’s that you always make more money on price than volume.”
Projects like Fort Hills and QB2 will be around for 50 years or more, Lindsay said. “They’ll be around for a couple of generations. So getting those built, and part of the portfolio, is really what we’re about.”