I just listened to the Teck investor call on the Fort Hills deal.
Don Lindsay said it was a strategic diversification for Teck because it is a consumer-driven product, and that fits in well with China's plan for a consumer-driven economy. That doesn't mean much to us, but I thought it was interesting how closely tied Teck remains with the economic plans of China.
He answered questions near the end and people were trying to calculate the IRR of the project, and Teck normally does not release that information. Don said that after everyone did their work the only thing they would know for certain is that they were wrong.
This is the important bit for us. He said that mining is cyclical and you make all your money back in 2-3 years. So, the most important consideration for Teck to work on a project is the ratio of mine life to payback. For example, with this Fort Hills project they are looking at a 50 year duration and expect to hit that payback cycle about 5 to 6 times so it will be very profitable for them.
Scaft Creek has a mine life of 21 years according to our current Feasibility. That gives them approximately 2.2 payback cycle periods beyond the original payback. Don Lindsay said they aim for 3. Now, if the feasibility can be improved as expected by Elmer and the mine life increased--Schaft Creek would suddenly be much more valuable to Teck and their investing partners.
Way back in 2011 DL said this about how they judge whether a project should go ahead:
Right now, as you analyze these large, $4 and $5 billion projects, the result you get in your NPV and your RR is all over the map. So in the end you have to make a judgment as to whether the world is going to need that particular project.
So in those cases, you look and say, well first of all, what is the quality of the resource? What is the grade? What is the mine like? Is it going to be around for several cycles? Will you have 5 or 6 cycles longer than the pay back periods of the project itself? Is it in a geopolitically safe jurisdiction where you know that if you invest your capital, you can get your capital out and get your return? Can you keep your workers safe? Can you meet the local sustainability requirements, and will the communities benefit? All these kind of qualitative decisions become very, very important and is a judgment call.
I think the doability of building a project, actually construction challenges that a project has, what elevation is it at? What is the terrain like? What other sort of engineering challenges there might be. Those become very critical when making the final decision. Our Board spends an awful lot of time on these issues. That the tightness of the market is pushing us to look at projects that have more and more challenges associated with them, and when the calculation is done it shows numbers that are 7% [IRR], as you point out or, sometimes not even that high. But in the end, the world is short copper and a lot of these projects should be built because world is going to need it.
