Teck Resources Limited is ill-equipped and ill-prepared to take on such a mega-project due to its relative inexperience in oil sands, limited bandwidth for such a project and the sheer scale of the project itself relative to Teck’s market capitalization and capex budget.
The Frontier project represents an investment of $20.6 billion, an amount far in excess of the total market capitalization of the company.
If the project moves forward, it appears that substantial changes in the company’s capital structure will take place. The company has not outlined what those changes might be.
Teck’s Frontier Oil Sands Mine Project, which is now before the Canadian Environmental Assessment Agency Joint Review Panel, offers a weak financial case with little chance of remaining a going concern for the 41 years promised in the application. Based upon current oil price and cost projections the project, which is expected to cost $20.6 billion, is not commercially viable. From now until 2026, the first year of commercial operation, neither oil price increases nor production cost declines for oil sands are likely to be sufficient to improve its financial prospects. The project can expect financial distress for its entire life cycle.
The Frontier project faces a series of severe financial headwinds that will likely block any upside potential. These headwinds include high costs to produce oil sands and pressure on revenues, as described below:
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