Teck Q2 results: QB2 guidance cut, coal exit decision drawing close. Buy

Q2 EBITDA came in at $1.48bn (2% below consensus), driven by lower copper production and sales. Copper and zinc net cash costs are tracking above FY23 guidance, but are expected to improve in H2 on higher volumes. The key update was on QB2 where FY23 copper production guidance has been cut from 150-180kt to 90-110kt due to construction and commissioning delays; while Teck continues to expect the operation to reach nameplate production by the end of 2023, the revised guidance will be a stretch, in our view. While the update on the EVR disposal process was very limited, management did emphasise that negotiations are ongoing with "multiple counterparties" and our impression is that a disposal plan could be announced within the next few months. Post results, we make minor model adjustments with our QB2 estimates now reflecting the new 2023 guidance and the bottom end of the guidance range for 2024. We leave our TP unchanged at $48. Buy.

(1) On EVR, we believe that Teck is considering two main separation options: a reworked version of the original proposal (minority stake sales and an equity spin out) or a trade sale to Glencore following the company's pivot to a cash bid for EVR. Management stated that any deal must reflect the inherent value of the assets and ensure continued responsible operations in the Elk Valley. While not disclosed, our assumption is that Glencore has offered $8.2bn in cash (the same value as per the initial merger proposal) and we believe this sets a relatively high bar for any competing plan.

(2) QB2 is behind schedule due to construction delays, but management reiterated the target to achieve a production rate of ~300 ktpa by the end of the year, with the ramp up of Line 1 currently going to plan.

(3) FY23 production, cash cost and capex guidance was reiterated with the exception of QB2 and Red Dog (lower lead production).

(4) Teck received regulatory approval for Zanfranal (first five years copper equivalent production 133 ktpa) from the Peruvian environmental authority in May and detailed engineering work is set to commence in H2.

(5) At San Nicolás (first five years copper equivalent production 63 ktpa), the JV agreement has been signed and the EIA is expected to be submitted in Q3'23. A feasibility study is targeted for completion in H1'24.