Teck Resources Ltd. (NYSE:TECK) investors will likely look back fondly on 2017. Although it was a bit of a roller-coaster ride, the miner's shares ended the year with a hefty 30% gain. But that's not the only good news: There were some notable events that led to that gain and one that teed up a brighter 2018. Here's why 2017 was a year to remember for Teck.
Teck's big businesses in 2017 were in metallurgical coal, copper, and zinc. Those are all commodities driven by supply and demand. As the prices of this trio move up and down, investor sentiment shifts along with them. Last year was no different. A huge commodity rally at the end of 2017 helped to push Teck's stock from a mid-single-digit gain to the 30% it ended with on Dec. 31.
There's not much Teck can do about commodity prices even though they are a key driving force for the stock. This is a fact that will remain true in 2018 as well. While commodity prices were the main impetus behind Teck's 2017 stock price gain, don't get too caught up in that. There are other things going on at the company that you need to know about, and it's those fundamental changes that are likely to be most memorable as 2018 unfolds.
Nearing the end
The bigger news in 2017 for Teck was that a new mining project was nearly complete. Now up and running, the Fort Hills Oil Sands mine should start to ramp up to 90% of its nameplate capacity of 194,000 barrels of oil per day as 2018 progresses. Teck owns around 20% of the project, with oil sands expert Suncor running it and controlling 53%. France's Total owns the rest.
There are two significant things to note here. First, Teck will be adding a fourth major commodity to its business. That will materially increase the diversification of its portfolio -- Suncor and Total will just be getting more of something they already produce. This, however, isn't a case of a miner trying to become an oil driller because oil sands are, indeed, mined. So Teck is staying within its core competency. Also, the mine has an expected 50-year life span, so it will be adding to the top and bottom lines for a long time to come.
The next issue you need to keep in the back of your mind is that Fort Hills will be ramping up throughout the year. It actually began operations in late 2017, but each successive quarter should see an increasing contribution from the project. Clearly, oil prices will play a big role in how much of a contribution Fort Hills makes to Teck's results, but that's no different than the other commodities it produces.
Fort Hills, then, is the really big story from 2017. But there's a second level of impact here. This mine was being developed through a deep commodity downturn. That forced Teck to keep increasing its long-term debt at a difficult time so it could afford its share of the costs. For example, between 2014 (Fort Hills was given the green light in late 2013) and 2016, Teck's long-term debt increased by 25%. That's a big jump over just a couple of years.
Since the start of 2016, however, as the costs for Fort Hills have started to drop and Teck's other businesses have thrown off more cash because of the commodity rally, Teck has trimmed its long-term debt by roughly a third. So now that Fort Hills is up and running, Teck will not only get a boost to the top line, but its expenses will be lower as well. That notably includes its interest costs.
Setting up for a good year
Commodity prices could turn 2018 into a good or bad year, depending on which way they go. Fundamentally speaking, however, Fort Hills has set 2018 up to be a great one. Watch closely throughout the year to see the progress being made at that project. And don't forget to make note of the financial impact of the end of the construction phase. As you look back at 2017, the price jump is probably going to stand out most, but if that's all you remember from the year, you'll have missed the more important news.