Teck to buy SilverBirch Energy

Teck Resources (TCK-T, TCK-N) is raising its exposure to Alberta’s oilsands with plans to purchase SilverBirch Energy (SBE-V) in a cash and stock deal worth $435 million. The acquisition will give Teck the rest of the Frontier oilsands project that it doesn’t already own. The diversified miner, better known for its copper, zinc and coal assets, also holds a 20% stake in Fort Hill oilsand projects belonging to Suncor Energy and Total SA, 90 km north of Fort
McMurray. 

Frontier is 110 km north of Fort McMurray on the west side of the Athabasca River and is slated to produce more than 74,000 barrels per day of bitumen in 2021, rising to more than 277,000 a day by 2030. A total of 2.8 billion barrels are expected to be produced over the project’s anticipated 30-year life. The project includes Equinox and envisions a truck-and-shovel oilsands operation. 

Under the proposed transaction, SilverBirch shareholders will receive $8.50 in cash and one share of new company SilverWillow Energy for each share of SilverBirch they own. The new company will hold most of the assets of SilverBirch with the exception of its 50% interest in the Frontier project. The cash portion of the consideration to SilverBirch shareholders represents a 31% premium to the 20-day, volume-weighted average trading price of SilverBirch’s shares on the TSX Venture Exchange. Holders of 39% of SilverBirch shares support the offer, and Teck also owns another 9.4% of the company’s shares. 

“The transaction continues to send the message that oilsands will be a significant business segment in the long-run,” writes Dave Kaiser, a senior investment advisor at Canaccord Wealth Management.

Mining analysts Anthony Young, Daniel Scott and Anthony Rizzuto of New York-based Dahlman Rose view the acquisition as a “good use of cash for the company.” 

“While it will be an extremely long time period before these assets begin to produce any cash flows or meaningful returns to investors,” they say, “we believe that management is setting the stage for the company to have a significant presence in the energy markets over the long-term.”

The analysts forecast Teck will generate $1.8 billion in free cash flow this year and hold a buy rating on the stock with a price target of $47 per share. Teck’s shares closed at $37.61 per share, down 74¢, or 2%, with 1.2 million shares changing hands. Shares of Calgary-based SilverBirch surged 33%, or $2.39, to close at $9.59 per share with 1.8 million shares traded. 

“We believe that Teck paid twenty-eight cents per barrel of contingent resource,” they continue. “We have observed oilsand deals occur at much higher levels, but those deals have occurred after the company has received additional permits and for assets that are closer to production . . . as Teck Resources progresses through the permitting process, we believe that the value of these assets could significantly increase.”

Teck’s management believes the transaction will strengthen the Frontier project and enable it to “explore new potential partnerships and other alternatives” to develop the multi-billion project. 

If the proposed acquisition is approved, SilverWillow will wholly own SilverBirch’s Audet properties, the Birch Mountain and Jordan leases and will get $25-million in working capital from Teck. The Audet lands – 110 km northeast of Fort McMurray and 40 km north of Cenovus Energy’s proposed Telephone Lake project – hold an estimated 1.69 billion barrels of discovered bitumen initially-in-place. 

Kaiser of Canaccord Wealth Management points out in his note that the firm’s oil and gas analyst Phil Skolnick estimates that SilverWillow’s value is $25 million, or 50¢ per share “assuming the worst-case scenario that the in situ assets are not commercially viable.” 

“But applying a ten- to thirty-percent recovery factor to the 1.7 billion bbl of bitumen in place, at thirty cents per bbl [the value Teck is applying to SilverBirch’s mining assets] would imply that SilverWillow is worth one dollar fifty to three dollars fifty per share. Skolnick believes the market will significantly risk this asset and put the valuation closer to fifty cents to one dollar fifty per share.”