Teck to buy SilverBirch Energy

Teck Resources (TCK.B-T, TCK-N) is raising its exposure to Alberta’s oil sands with plans to purchase SilverBirch Energy (SBE-V) in a cash and stock deal worth about $435 million. The acquisition will give Teck the rest of the Frontier oil sands 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 Suncor Energy’s and Total SA’s Fort Hills oil sands project, 90 km north of Fort McMurray.)

Frontier is about 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 (Lease 14) and envisions a truck-and-shovel oil sands operation.

Under the proposed transaction, SilverBirch shareholders will receive $8.50 in cash and one share of a new company, SilverWillow Energy Corp., 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 twenty-day volume weighted average trading price of SilverBirch’s shares on the TSX Venture Exchange. 

Mining analysts Anthony Young, Daniel Scott and Anthony Rizzuto of New York-based Dahlman Rose & Co. 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 wrote in a flash note, “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.  In Toronto, Teck’s shares closed at $37.61 per share, down 74¢ or 1.93% with 1.2 million shares changing hands. Shares of Calgary-based SilverBirch surged 33.19% or $2.39 to close at $9.59 per share. 

“We believe that Teck paid $0.28 per barrel of contingent resource,” they continued. “We have observed oil sands 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. Thus, as Teck Resources progresses through the permitting process, we believe that the value of these assets could significantly increase.”

Teck’s management reasons that the transaction will strengthen the Frontier project and will enable the company 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 about 40 km north of Cenovus Energy’s proposed Telephone Lake project-hold an estimated 1.69 billion barrels of discovered bitumen initially-in-place.