Diversified Canadian miner Teck Resources Ltd (NYSE:TECK) is on the cusp of a big change. It's likely to start slowly, and there might be some stumbles along the way, but as 2018 progresses, the impact of decisions made back in 2013 will start to bear fruit. Here's what you should expect from Teck Resources in the coming year.
Commodities rule the day
Teck Resources' most important production today comes from metallurgical coal, copper, and zinc. As a commodity producer, the only thing you can expect from Teck is continued volatility when it comes to these materials. There's not much any commodity producer can do about the often volatile nature of commodity prices. And since 2017 has been a pretty good year for commodities, it's uncertain whether the markets can produce continued commodity price advances in 2018.
Even though it's important to keep this fact in mind as we head into the coming year, I could say that about almost any commodity company. But there's something different taking shape at Teck that will materially alter its business -- a new mining project is set to start producing by the end of 2017, with production ramping up throughout the next 12 months.
There's oil in them hills
That new project, known as Fort Hills, was started way back in 2013, when Teck (which has 20% ownership of the project) and its partners Suncor Energy (NYSE:SU) (50.8% ownership) and Total SA (NYSE:TOT) (29.2% ownership) gave the mine a final green light. Suncor, the lead on the project, has been building ever since, with the project set to come online in late 2017 or early 2018.
But notice the names, here: Teck, Suncor, and Total. Teck may seem like an odd fit with two oil companies, but Fort Hills is a Canadian oil sands play. That means it's essentially a mining endeavor, not a drilling effort. Oil sands are oil-ladened sand that gets dug up and processed with heat and chemicals to release the oil. That makes Fort Hills look a lot like a mining business -- and right up Teck's alley.
The project is expected to increase production throughout 2018. The end goal for the year is to get up to around 90% of nameplate capacity, roughly 194,000 barrels of oil a day, by December 2018. Teck's take will be 20% of that oil. It won't be a huge business for the miner, but it will be notable.
There is some risk involved. Because the facility is new, there could be start-up bumps along the way. Yet the project is expected to have a 50-year lifespan, so it will be contributing to Teck's top and bottom lines for a long time. Any short-term setbacks shouldn't be material long-term issues. And, once built, oil sands projects tend to be fairly cheap to operate, so this is a viable project, even at today's relatively low oil prices.
Teck stands to gain more from the project that its partners. Consider: The benefit to Suncor and Total will be getting more of something they already produce. However, Teck will start getting oil, something it doesn't currently produce. That will take its business from three commodities to four, materially increasing its diversification. By the end of 2018, Teck will be a very different business than it was when Fort Hills broke ground.
As the oil starts to flow, Teck will benefit from a new revenue stream that didn't exist before. But those revenues will start flowing just as its expenses for building Fort Hills start to subside. In other words, revenues will go up as costs come down at Fort Hills. I expect 2018 to be a pretty good year for Teck from a fundamental business standpoint. In fact, you might even consider it a transformational year.
Watch the right thing
Teck's financial results in 2018 will largely depend on what happens with commodity prices, as you would expect. But that's not where the real excitement is at Teck today. As you watch Teck throughout 2018, pay close attention to the progress of its new oil business. Teck is on track to fundamentally change its business in 2018, and I think for the better. The market doesn't seem to have figured this out just yet, so now is a great time for deep dive.