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January 9, 2012 Dear Friend,
Today Teck announced it would acquire
the other 50% share of the Frontier and Equinox oil sands projects
from partner SilverBirch Energy for C$450 mm plus a swap of Teck's
eight deep "in situ" leases plunging deep beneath the Birch
Mountains to the west of the Athabaska River. Teck is an open pit
mining company, and "in situ" steam assisted gravity draining
bitumen recovery techniques are a more delicate method to recover
hydrocarbons. Teck largely severed its past joint venture, and
streamlined and simplified decision-making, communications and speed
as it no longer will wait for a junior partner to plan or fund
ideas.
We fully expected the eventual sales price for SilverBirch Energy to be larger than $2.00 per barrel because current crude oil prices are considerably higher than in 2010 when its predecessor UTS Energy sold 20% of Fort Hills to Total S.A. for $1.35 billion or about $2.00 per barrel. Predecessor UTS Energy had funding from "earn in" capital coming in from Teck and Petro-Canada, whilel SilverBirch Energy's 50%-50% straight up equal joint venture with Teck for Frontier and Equinox proved to be an insurmountable burden. Yours truly owns 34,600 shares of SilverBirch and, while it is nice that its share price rose today, we hoped to sell out above $20 per SilverBirch share. It is possible that Teck enhances the Frontier and Equinox projects, increasing the 2.8 billion barrel bitumen resources or managing the $14.5 billion cap ex project well. It is possible in 2015 or 2016 it sells a 25% or 50% stake in the Frontier/Equinox project, after detailed engineering, permitting and firm quotes of large portions of the equipment budget, for over $4.00 per barrel or over ten times the price paid to SilverBirch Energy. Teck can apply is muscle and benefits from being a $21 billion market cap with $4.5 billion in cash balances. Alternatively, it is possible that an interloper, such as Minmetals Resources or Sinopec, outbids Teck, in which case Teck would enjoy a financially stronger partner able to match fundings. We raised our price target to $100 from $95, and noted that after Frontier/Equinox is developed in 2020 and fully operational by 2024 our earnings estimates are 23% larger with 100% rather than 50% ownership of Frontier/Equinox. Current copper prices near $3.40 per pound are below our $4.00 estimate, while met coal is above our $200 per tonne estimate and lead and zinc are slightly above our $0.80 per lb estimates for 2012. These factors weigh on our $3.40 per share 2012 earnings estimate for Teck. Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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