Pulled this off the Teck board on SH, credit: "retiredcf"

I just hope Teck is leaning to #2 and has us in mind....

August 17, 2017 

Teck Resources Limited 

Update Meeting with Management 

Impact: Positive, FCF & Growth Investment thesis intact

We had the opportunity to meet with Andrew Stonkus (Sr. VP Marketing/ Sales) and Scott Wilson (VP, Treasurer) recently to review Teck's financial, marketing and operating strategies. Key themes include: 

1. 1. The desire to maintain a strong balance sheet while embarking on the next phase of mine development; 

2. 2. Constantly reviewing the capital allocation alternatives, whether it be ownership levels in core assets, prioritizing development projects and/ or returning excess capital to shareholders; and 

3. 3. Confirming some of the favourable supply/demand trends and marketing opportunities in Zn and coking coal. 

Preparing the balance sheet for QB2. With a target Debt/EBITDA ratio of circa 2x, which would likely drift higher over the QB2 construction period, we expect Teck to fund its share of the $4.7B in capex from operating cash flow and growing free-cash flow, excluding ~$2B in potential project debt. We would expect a QB2 sanction by mid-2018 and ahead of that point we expect Teck to buy out the 13.5% stake held by IMSA (RBC estimate ~ $150M), to hold 90%, and subsequently announce the buy-in of a second minority partner. 

A number of alternatives for any excess capital. While a supplemental dividend is possible early next year, post the $1.2B Waneta Dam sale, management seemed to play down the potential size, given the uncertainty of commodity prices and other capital priorities, and we maintain our view that something in the $300-$400M range could be feasible in the current commodity price environment. We could see Teck consider adding one of its feasibility stage projects (such as the San Nicolas Zn-Cu project) to the development pipeline, rather than increase any regular or special dividend, and we do not expect a share buyback while the company has a significant development pipeline. We could see Teck increase its 20% Ft. Hills stake modestly, should the Total E&P Canada's 29.2% holding be sold at an attractive valuation/discounted price. 

Zinc fundamentals improving and coking coal markets remain firm. Management maintained its positive outlook for zinc markets, highlighting the continued drawdown of inventory levels, physical evidence of lower stockpiles and trading partners seeking to begin 2018 contracts several months ahead of schedule. Steel producers do not appear to be deterred from buying coking coal at the current levels, and may be restocking ahead of potential seasonal disruptions and the recent mine force majeure closure in Queensland. The company believes the steel market in India, currently 10% of sales, has the potential to grow and provide an opportunity away from its traditional SE Asian clients