Company Analysis: Teck Resources Limited | November 9
2011
| Submitted by Amit Chaudhuri | BSEN-777 |

Table of Contents

1. Company Profile ----------------------------------------------------------------------------- 3

2. Recent History ------------------------------------------------------------------------------- 3

3. Business Description ------------------------------------------------------------------------ 4

4. Financial Analysis --------------------------------------------------------------------------- 5

5. Strategy & Leadership ----------------------------------------------------------------------- 7

6. Future Outlook--------------------------------------------------------------------------------- 8

7. References-------------------------------------------------------------------------------------- 10

Company Profile
Teck Resources Limited, formerly known as Teck Cominco Limited, was formed in 2001 following the merger of Cominco and Teck Corporation. It is a Canadian based integrated mining, mineral processing and metallurgical company. Seven years ago in 2001(1) when the Teck Cominco merger was completed, two strong Canadian companies with a tradition of excellence in mining and metal refining were brought together. In October of 2008 (1), the management of the company announced the launch of a simplified brand name, Teck, and the formation of five business units specializing in copper, metallurgical coal, zinc, gold and energy.
The company has expertise across the full range of activities related to mining, including exploration, development, smelting, refining, safety, environmental protection, product stewardship, recycling and research. Presently they are actively exploring in countries throughout the Americas, Asia Pacific, Europe and Africa. The company’s product portfolio comprises of copper, metallurgical coal, metallurgical zinc, gold, molybdenum and various specialty metals. This diversified product portfolio could help Teck Resources to target a larger customer base thus increase its revenues. The company owns and holds interests in 13 mines in Canada, US, Chile, and Peru and metallurgical complex in Canada. Additionally Teck Resources holds interests in various oil sands development assets.

Recent History
The company’s recent history has involved a lot of acquisitions. In 2008 the company acquired Global Copper Corp and 100 percent assets of Fording Canadian Coal Trust. In 2009, the company changed its name to Teck resources Limited. The company owns 20% interest in the Fort Hills Energy Limited Partnership, which is developing the Fort Hills oil sands project in Alberta, and a 50 percent interest in certain other oil sands leases in the Athabasca region of Alberta. The company is also active in exploration for gold. On January 25, 2010, the Company sold its 60% interest in the Agi Dagi and Kirazli gold projects in Turkey to Alamos Gold Incorporated. On September 22, 2010 Teck signed a joint venture agreement with Suncor Energy Products Inc. to develop the Wintering Hills wind power project. In October 2010, Teck Resources and Canadian Pacific announced a 10 year agreement for Westbound Coal Exports.(1)

Company Analysis: Business Description
Presently, Teck Resources operates in five segments, namely Copper, Zinc, Coal, Energy and Corporate. In the subsequent section, the five segments have been briefly explained.
Copper: The Copper segment of the company includes, interests in the Highland Valley Copper mine located in south central British Columbia, the Antamina mine located in the north central Peruvian Andes, the Quebrada Blanca mine located southeast of the port city of Iquique in northern Chile, the Andacollo mine located southeast of the city of La Serena in Chile and the Duck Pond copper-zinc mine located in central Newfoundland. In 2010, the company produced 313,000 tonnes of copper. For the fiscal year ended December 2010, Copper segment reported revenue of CAD2.6 billion, indicating an increase of 17.2 % over that in 2009. The segment accounted for 28 % of the company’s total revenue in 2010(1).
Zinc: The Company’s Zinc segment includes, trail refining and smelting complex located in south central British Columbia, the Red Dog mine located in the northwest Alaska, the Pend Oreille mine in Washington State just south of Trail complex and the Lennard Shelf operation in Western Australia. The main markets for zinc concentrates are Asia and Europe and main markets for refined zinc are the US and Asia. It also provides recycling solutions for metal-bearing scrap and residue. In the year 2010, the company produced 645,000 tonnes of zinc concentrates and 278,000 tonnes of refined zinc. For the fiscal year ended December 2010, the Zinc segment reported revenue of CAD2.4 billion, indicating an increase of 15.6% over that in 2009. The segment accounted for 25.4 % of the company’s total revenue in 2010 (1).
Coal: Teck Resources is the world’s second largest exporter of seaborne steelmaking coal and largest producer of steel making coal in North America. This segment includes operations of six metallurgical coal mines in British Columbia and Alberta. The company’s coal mines produce mainly hard coking coal used in the production of steel and small amounts of thermal coal. The principal markets for metallurgical coal are the seaborne steelmaking coal markets in China. In the year 2010, the company produced 23.1m tonnes of Coal. For the fiscal year ended December 2010, Coal segment reported revenue of CAD4.4 billion, indicating an increase of 19.3% over that in 2009. The segment accounted for 46.5% of the company’s total revenue in 2010 (1).
Energy: The Company’s Energy segment includes 20% interest in the Fort Hills oil sands project and 50% interest in various oil sands leases. These properties are located in the Athabasca region of Alberta, Canada. In the year 2010, the company produced approximately 2.1billion barrels of recoverable bitumen. Subsequently, the company signed an agreement with Suncor to develop the wintering Hills wind project.
Corporate: This segment includes initiatives in other commodities that provide administrative, technical, financial and other support to all business units.

Financial Analysis
The general economic condition in the last 5 years has been weak. It is difficult in these conditions to forecast commodity prices or customer demand. Credit market conditions have also increased the cost of obtaining capital. In the subsequent section a high level analysis of the company’s financial performance in the last 5 years have been discussed.
2007
In the year 2007, Teck Cominco had operating profits of $2.7 billion and net earnings of $1.6 billion which was the second highest in the company’s history following their all-time records set the previous year. The copper operations generated 34% of total revenue and 49% of their operating profits in 2007 (2). The US dollar continued to decline against most other currencies, falling 11% against the Euro. The Canadian dollar rose 18% against the US dollar, from 86 cents USD at the end of 2006 to as high as $1.10, and finished 2007 at $1.01 (2). Since most of the company’s products are typically sold in US dollar prices and, with costs at many of the operations reported in Canadian dollars, the unit costs relative to the selling prices have gone up significantly during the year. A major trend that affected the mining industry in 2007 was the steep escalation of construction and operating costs.
2008
The year 2008 started out reasonably well for Teck Resources. The price of copper was at US$3.02 per pound, similar to that of much of the preceding two years. The price of oil was US$100 a barrel, and would increase up to US$140 by mid-year (3).The strength of rising expectations for a better life of people in emerging world markets and the limited capacity of the industry to respond quickly on the supply side led observers to conclude that resource commodities would eventually grow after a couple of decades of relative stagnation. At the same time there were some potential storm clouds on the horizon. The sub-prime mortgage loan crisis had surfaced with the first bank failures in Europe five months earlier, in August 2007. Early problems in the credit markets were appearing with the collapse of the asset-backed commercial paper market.
The rescue of Bear Stearns in the spring of 2008, the bailouts of AIG and the early assistance to Citibank had averted the looming crisis for a time but when Lehman Brothers was allowed to fail in September, the world suddenly encountered an unprecedented credit freeze. The impacts from this chain of events were not limited to the U.S. and Europe. Virtually every segment of the world’s economy has been hit hard. The latter half of 2008 will be remembered as a year of unprecedented volatility for the world economy. Commodity markets were affected dramatically by prices and consequently demand fell quickly and steeply in the latter part of the year. Mining companies around the world including Teck were forced to respond to this rapid collapse with swift and decisive action.
Teck Resources responded with a comprehensive plan to manage the debt that they took on to complete the acquisition of Fording Canadian Coal Trust’s assets. The first steps in this plan were announced in November and included some strategic decisions around their five segments: * Suspending dividends to create an estimated annual savings of $487 million; * Reducing planned capital expenditures by $730 million for 2009; * Withdrawing from the Petaquilla copper project in Panama, thereby eliminating any funding obligations associated with the project; * Reducing refined zinc production by 20% at their Trail Operations, allowing them to increase power sales from their Waneta hydro facility; * Selling their interest in the Lobo-Marte gold property in Chile to Kinross Gold Corporation for a combination of US$40million in cash and 5.6 million Kinross shares; * Initiating other asset sale processes (3).
The impacts on Teck have certainly been severe and remain a major challenge for the company. In my opinion, the future will belong to those resources companies, in mining and in oil, that are able to emerge from this financial crisis with their long life resources largely intact. Although volatility will likely persist in the near term, these fundamentals suggest that demand for steel-making coal and other commodities will continue to grow over the mid to long-term at a healthy rate. Managing the US$9.8 billion debt associated with the Fording transaction has been the number one goal for 2009 (3). Since then, the company has grown through various acquisitions and development of a diversified range of commodities.
2009
The year began with a recession in global financial markets and credit crisis that may have been the worst in living memory for most of us. There were constant fears of a possible depression. It ended with the recession largely over in much of the world, but at a cost of continuing unemployment, government deficits and shell-shocked financial institutions. While shares of all mining companies were affected, the impact was particularly severe for Teck Resources. The company was left with a large acquisition debt including a US$5.8 billion short term bridge loans due to the completed acquisition of 60 percent of Elk Valley Coal Partnership that they already owned (4). This left the company with more bridge loans in a year. Among all the financial downturns, Teck Resources was able to record an operating profit before depreciation of $3.7 billion, compared to $2.8 billion in 2008 and net earnings of $1.8 billion, compared to $659 million in 2008 (4). The earnings in 2009 were higher due to increased operating profits from each of its business units. The coal segment benefitted from the acquisition of Fording’s sixty percent interest in Teck Coal in October 2008 (4). The copper and zinc business units contributed higher earnings in the year due mainly to significant positive pricing adjustments, which offset the lower average base metal prices.
2010
Teck Resources was able to record revenues of $9.3 billion and operating profit before depreciation of $4.5 billion (5). As a result, Teck had a strong balance sheet going into 2011 and was able to re-establish solid investment grade credit ratings. Their net debt ratio fell from 31% at the end of 2009 to a healthy 20% at the end of 2010, well below their target debt ratio of 25 to 30% (5). The company was able to successfully complete the repayment of the acquisition financing related to the Fording acquisition. Despite a global economy that was still struggling to recover from the 2008 credit crisis, the company was able to repay the full debt amount of $9.8 billion in less than 18 months. Additionally Teck Resources completed the previously announced sales of a number of noncore assets, generating proceeds of approximately $1.2 billion (5).

Strategy & Leadership
The leadership of Tech Resources Limited is comprised of Norman Keevil who is the Chairman of the Board since 1963. During the last 4 years, the primary strategy of Teck Resources has been to maximize their cash flows through prudent capital and operating expense control. To this effect, Teck Resources strategically deferred new project capital expenditures during the global recession. This has helped the company to eliminate their debts and achieve balance sheet ratios that would be consistent with an investment grade rating. The company has also strived for improved performance in all respects of their work through pursuit of their Operating Excellence Program and ongoing development of their next generation of management.
During 2009, the company started the second phase of Courageous Safety Leadership program (5). Courageous Safety Leadership is an ongoing program that instills safety awareness and teaches people to take proactive steps to avoid incidents that can lead to accidents. Additionally Sustainability is central to the core values that drive the company’s approach to business and responsible mining. The company has always tried to maintain healthy communities and safe environments for their workers. One of the prime long-term goals for the company has been to reduce emissions through energy efficiency improvements and increased use of renewable energy. People, Reserves and Financial Strength has been the core strategy for the leadership of Teck resources Limited.

Future Outlook
In the last 35 years Teck has grown from a market capitalization of just $20 million to over $30 billion (6), with some inevitable ups and downs in commodity prices. The company plans to focus on strong operating and development engineering and the need to continuously augment and improve their ore reserve base. The foundation of the company is built upon long-life assets in low risk jurisdictions and a strong balance sheet to fund future growth. The strong cash flows will enable the company to invest in new projects. New projects could provide Teck Resources an opportunity of increasing its global customer base and its revenues.
The key products of the company like copper, steelmaking coal and zinc are among those most in demand in the developing world. In steelmaking coal, Teck is the number one producer in North America and the number two seaborne exporter in the world. The company is also the top three global zinc miners in the world. The company has the potential to double their production of copper over the next five to six years. The aspirations of millions of people in countries like India, China and Brazil to meet high standards of living will lead to increasing annual consumption per capita in various materials like copper, zinc, nickel, iron, coal, and energy. China, in particular, is one of the top consumers with its GDP growth projected at 7% and industrial output growth at 11% (6).
The company stands to benefit from increasing opportunities and heightened interest in renewable sources of energy. The industry is expected to increase its capacity base to 1,378 GW by 2013(1). The above opportunities for Teck Resources will come with some challenges to the company. Teck Resources will encounter strong competition from other mining companies in connection with the acquisition of properties. Mining is subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring due to mineral exploration and production. The company will face stringent government regulations in its mining and exploration activities.
Despite the dramatic changes in the economy in the past few years, Teck Resources will be well placed with their strategy geared towards long-term trends rather than short-term fluctuations. In making decisions for the future, the company should rely on their core competencies.

References

1. Financial and Strategic Analysis Review: Teck Resources Limited (2011, October). Retrieved on November 4 from http://research.thomsonib.com.ezproxy.lib.ucalgary.ca/gaportal/ga.asp 2. Teck Resources Limited (2011). Challenge creates Opportunities: Teck Cominco 2007 Annual Report. Retrieved on November 5, 2011 from http://www.teck.com/Generic.aspx?PAGE=Teck+Site%2fInvestors+Pages%2fFinancial+Reporting+Pages%2fAnnual+Reports&portalName=tc 3. Teck Resources Limited (2011). Teck Cominco 2008 Annual Report. Retrieved on November 3, 2011 from http://www.teck.com/Generic.aspx?PAGE=Teck+Site%2fInvestors+Pages%2fFinancial+Reporting+Pages%2fAnnual+Reports&portalName=tc 4. Teck Resources Limited (2011). Challenge creates Opportunities: Teck Cominco 2009 Annual Report. Retrieved on November 5, 2011 from http://www.teck.com/Generic.aspx?PAGE=Teck+Site%2fInvestors+Pages%2fFinancial+Reporting+Pages%2fAnnual+Reports&portalName=tc 5. Teck Resources Limited (2011). Teck Cominco 2010 Annual Report. Retrieved on November 5, 2011 from http://www.teck.com/Generic.aspx?PAGE=Teck+Site%2fInvestors+Pages%2fFinancial+Reporting+Pages%2fAnnual+Reports&portalName=tc 6. A Wright Investor’s Service Research Report: Teck Resources Limited (2011, September). Retrieved on November 4 from http://research.thomsonib.com.ezproxy.lib.ucalgary.ca/gaportal/ga.asp