Raymond James on Teck:

A few comments from their latest report, PT reduced to $31 but hey, all is good right?

Lower coal price puts pressure on copper project development timeline. We pushed out two longer-term copper projects (Relincho and Galore Creek), as our projected balance sheet for Teck deteriorated somewhat post our coal price revision and we are now skeptical that Teck will have the capacity to bring those two projects without levering its balance sheet to a unsustainably high levels. Our revised start-up date for Relincho is now 2021E (previously: 2020E), and for Galore Creek – 2023E (previously: 2021E). Recall that we previously pushed QB2’s start-up date to 2018E (from 2017E), following Teck’s CEO Don Lindsay indicating at a recent investment conference that a Board decision on the project is at least 18 months away.

There was no impact to our NAV estimate as a result of project timeline pushback, as we continue to value QB2, Relincho and Galore Creek at $0.02/lb for attributable share of copper in the ground. Our valuation therefore leaves upside potential should long-term commodity prices improve, or enhancements to the projects be made.

Dividend is safe for now, but any changes to it will depend on Teck’s long-term projects. We estimate that Teck’s balance sheet could come under pressure if it decides to go ahead and build all of its long-term projects, which could force the company to reconsider its dividend policy. We presently estimate Fort Hills’ and Frontier’s attributable pre-production CapEx at $2 bln and $7 bln, respectively, whereas for the three copper projects, we project start-up CapEx of $6.2 bln for QB2, $4.6 bln for Relincho, and $5.7 bln for Galore Creek ($2.8 bln, or 50% of total, on attributable basis).

Should commodity prices remain weak, we see Teck requiring financing over the next several years. While Teck’s liquidity needs appear to be well above its base metal producing peers, the timing and the size of the ultimate capital raise will depend on coking coal spot price (coal division presently accounts for 47% of Teck’s minesite NAV), and its Board’s decision on its long-term oil and copper projects, which, in the case of Relincho and Galore Creek, are at least several years away.

An ability to preserve the balance sheet by delaying or cancelling projects is an important consideration that we believe is sometimes overlooked. As such, if we assume that all long-term projects are delayed indefinitely and exploration budgets are reduced by 50%, we see a significantly different picture, in which Teck no longer needs to raise material financing, as its capital-intensive oil and copper projects are pushed indefinitely into the future. The assumptions underlying the exhibits below are found at the end of this section.

To build out the oil sands and QB2, Teck may have to lever up. We believe QB2 is Teck’s top copper project at the moment, and we expect Teck’s Board to approve it around the end of 2014. Looking closer ahead, a positive go-ahead decision on Fort Hills by the project’s operator, Suncor, will likely be announced. With Fort Hills and QB2, in our view, part of Teck’s development plan, and assuming Relincho and Galore Creek are put on hold, we expect the company could need to borrow over $5 bln to fund its share of capital costs. The incremental debt would raise Teck’s debt / total capitalization to over 40%, from 31% currently. Under our current commodity price deck, Teck would have no cash cushion by 2017E, meaning that the company will likely have to raise at least some capital to maintain a nominal cash balance cushion to cover ongoing operating expenses.