Water problems at Suncor Energy’s massive Fort Hills mine cast shadow over stock, analysts say

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CALGARY — Water is flowing into the most valuable part of Suncor Energy Inc.’s massive 194,000-barrels-per-day Fort Hills oilsands mine, adding a fresh problem for a mega-project that has struggled to reach its full potential.

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Calgary-based Suncor confirmed it is dealing with water issues at Fort Hills, a $17-billion oilsands mega project completed in 2018, on an earnings call July 29 when an analyst asked about the problem. The company declined to answer Financial Post questions about how many mining trucks it has pulled out of the affected area or how much water is in the mine.

“Water management in oilsands is a very common issue. Anytime you have soft-rock mining, you are getting some egress of water from some ground sources and such into the mine. We have procedures to be able to manage it, some events are more challenging than others,” Suncor chief executive Mark Little said during the earnings call.

“Is water an issue? Yes, it always is and we manage it accordingly,” he said, adding that he “doesn’t expect this to be a fundamental issue.”

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Two days before Suncor’s conference call, Vancouver-based Teck Resources Ltd. disclosed the water issues at Fort Hills during its earnings call on July 27. Teck owns 21.3 per cent of the oilsands project.

Teck is a mining company and the fact that they brought it up sounds like it’s more than just routine

Phil Skolnick, a New York-based analyst with Eight Capital

“There has been a slower-than-planned ramp-up of contract overburden stripping as well as challenges around managing groundwater inflow from deep subsurface aquifers,” Teck’s chief executive Don Lindsay said on his company’s second-quarter conference call. Overburden is the soil and subsoil above the bedrock and ore.

“They said it was routine, but I haven’t heard of this issue before,” said Phil Skolnick, a New York-based analyst with Eight Capital.

“It’s interesting that Teck brought it up. Teck is a mining company and the fact that they brought it up sounds like it’s more than just routine,” he said.

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Skolnick added that Teck’s decision to proactively disclose the problem while Suncor waited for a question from analysts “creates skepticism” about Suncor’s description of the issue and leaves questions hovering over the stock.

Suncor shares have traded down roughly four per cent, or 95 cents, to $24.76 per share since the earnings call. By comparison, the S&P/TSX Capped Energy Index is down by a little less than two per cent over the same time period.

JP Morgan analyst Phil Gresh in a research note said the south side of the mine, where the company is dealing with “slope instability” issues, represents 60 per cent of the project’s asset base.

“While management is confident in the 2022 plan for Fort Hills, we think that investors may view this as a ‘show me’ situation,” he said.

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Suncor, Canada’s largest integrated oil company, announced in a press release on July 28 that work was needed to stabilize the slope of the barrier between the northern border of the Syncrude Canada Ltd Aurora oilsands mine, which Suncor operates, and the southern border of the Fort Hills mine.

As the company moves overburden to solve the problem, the company revised its full-year production guidance for the project to between 45,000 barrels per day and 55,000 bpd, down from between 65,000 bpd and 85,000 bpd.

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Suncor also increased its estimated operating costs for Fort Hills by 46 per cent to between $37 per barrel and $42 per barrel, from a previous target of between $25 per barrel and $29 per barrel.

The company said it would be able to ramp up to full production at Fort Hills in early 2022 — a disappointing timeline for investors.

Suncor completed work at Fort Hills in 2018, but shortly thereafter was hit by the Alberta government with production quotas, which limited oil production in the province amid a shortage of export pipelines and a resultant collapse in local oil prices, frustrating the mining project’s launch toward full production.

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