Some snippets below

Among base metals, copper continues to be the metal of choice. While Teck’s copper projects can provide the company with significant growth, their current suite of projects generate low IRRs (by our estimates) and have high capital intensities, with low to moderate grades. As such, enhancing the copper project portfolio with better grade and higher return projects should be a growth pursuit, in our view.

Maintaining an investment grade rating and debt to cap of 25% – 30%. Regardless of where and what Teck invests in, the company intends to maintain an investment grade rating, which we understand would allow for a debt to total cap (debt + equity) ratio of up to 40%. In Teck’s view, however, a debt to cap level of 40% is too high, and the company would prefer to be in the range of 25% – 30%. The current ratio is 28%. For strategic acquisition purposes, however, Teck would consider going above this range, but would focus on returning to the 25% – 30% level thereafter. Assuming a 40% debt / cap represents the maximum debt capacity achievable, we estimate $5 bln in additional debt capacity is available.

Costs of Production – In-line with the Base Metal Peers’ Average

Cash cost accounting – a messy and often meaningless number. Traditionally, many miners present their costs of production on a cash cost per pound or ounce of production. In our view, however, this metric is often a useless measure of performance since the inputs are not always known, timing of recognition of sales and costs is at times difficult to forecast, and it can also be misleading, or confusing at best, especially when substantial by-product credits are made, generating a negative operating cash cost. We also note that cash cost accounting is not an IFRS measure, so standards for its use have not been established.

To circumvent this exercise in accounting, we have calculated cash costs on a pounds of payable copper equivalent basis (company-wide, with the exception of Teck, where we focus on Teck’s base metal operations only). As cash costs for a copper mine cannot be directly compared to those for a nickel, zinc, or other metal mine, it is our opinion that by converting all of a company’s production to pounds of payable copper, using our metal price forecasts, we can eliminate, or significantly reduce, the differences between each mine within a company.

Total company-wide costs are included in our methodology. To help capture the true cost of producing a metal, we use each company’s total operating costs (on-site costs, off-site treatment, refining and freight costs, and all royalty payments), plus payable taxes as the numerator. Using this methodology, and converting by-product metals to Cu-Eq, we believe that a more accurate and realistic estimate is derived of the costs to produce a pound of metal.

Teck’s all-in cash costs of production are in-line. As shown in Exhibit 24 below, we calculate Teck’s all-in costs of production to average $3.10/lb CuEq over the next 10 years, and a lower $2.44/lb over the life of the company’s operations. The higher nearterm costs reflect the upfront development capital invested to bring projects like QB2 into production, while over the longer-term, costs are more reflective of operating expenses, taxes, and sustaining capital expenditures.

Big, capital intensive, IRR-challenged projects. All three of Teck’s copper projects are large-tonnage, low-grade deposits, with IRRs of 5% – 7%. We note, however, that while Relincho and Galore Creek are at least 1 to 3 years away from a construction go-ahead decision being made, our IRR estimates are as of 4Q12E, and therefore include all predevelopment costs incurred over the next couple of years, costs that we believe most miners exclude from their NPV/IRR analysis.

Among the major copper projects under development by Canadian-listed miners, Teck’s three projects are in the upper half in terms of capital intensity per tonne of payable copper equivalent (CuEq) production (Exhibit 27), and per tonne of annual mill throughput (Exhibit 28). The four largest copper projects considered in our analysis each have capital intensities of $25 – $35/t CuEq, or $120 – $200/t of annual throughput.