Teck Resources – A Little Too Volatile

Teck Resources is a producer of copper, zinc, steelmaking coal, and energy. It is the largest North American producer and the world’s second-largest exporter of seaborne steelmaking coal. Teck also ranks amongst the biggest global producers of mined zinc and an important producer of copper.

The company operates one of the world’s largest fully integrated zinc and lead smelting and refining facilities. The company has operations across Canada, the U.S., Chile, and Peru and has interests in 12 operating mines, one metallurgical complex, and oil sands operation. 

Teck enjoys leadership positions in the businesses it operates and it owns an attractive portfolio of long-life assets. Coal is its most profitable business. Teck Resources’ business units consist of steel-making coal (46% of 2019 revenue), zinc (25%), copper (21%), and energy (8%). Asia is its largest market accounting for nearly 60% of revenues, followed by the Americas (27%) and Europe (15%).

• Opportunity Score: 15
• Ticker: TSE:TECK.B
• Sector: Basic Materials
• Industry: Other Industrial Metals & Mining
• Market Cap: 11.09B
• P/E: 0.00
• Dividend Yield: 0.75%
• Payout Ratio (Earnings): 100.00%
• Canadian Dividend Aristocrat: NO
• Chowder Score: Members Only
• Dividend Growth: Members Only
• Dividend Growth Fit: 1/10
• Dividend Income Fit: 1/10

Revenue Growth & Market Exposure

With over a century’s experience, Teck Resources has developed deep expertise in exploration, development, mining, and minerals processing. The company’s core operations are in copper, zinc, and metallurgical coal. It also has an exposure to the oil business with its stake in the Fort Hill oil sands.

Teck has a diversified geographic footprint across the Americas (22% of 2017 sales), Europe (17%), and Asia (61%). A large footprint in Asia positions the company for growth in demand for steelmaking coal and other metals owing to huge infrastructure requirements in the Asian countries.

Teck is the largest North American producer and the world’s second-largest exporter of seaborne steelmaking coal. It is one of the largest global producers of mined zinc and an important producer of copper.

The company also operates one of the world’s largest fully integrated zinc and lead smelting and refining facilities. It is difficult to replicate Teck’s operating assets, large geographical presence, and economies of scale. A competitive R&D team focusing on advancing technologies also helps Teck to stay ahead of its peers.

The world’s growing demand for infrastructure should help Teck Resources increase its bottom line. Copper is a vital component in power generation and transmission, construction, and electronics. The annual production of steelmaking coal is also expected to be higher in the future owing to the increasing population and growing demands. 

Teck anticipates a decline in Q2 sales as clients consider delaying purchases. The pandemic has had a significant negative impact on the commodity markets. Teck has a 21% interest in the Fort Hills oil sands mine and the latest oil price drop is also concerning. But most of Teck’s sites are operating, a few at reduced production. Its steelmaking coal operations also exceeded sales guidance in the latest quarter. Teck’s QB2 is a long-life, low-cost operation with major expansion potential and has the potential to rebalances its portfolio over time.

Dividends

The company has a strong history of returning cash to shareholders, with ~28% of free cash flow being returned in the last 15 years. Teck’s dividend policy accounts for an annual base dividend of $0.20 per share, with a supplemental dividend in the fourth quarter each year based on free cash flow generated by the business, outlook, and capital expenditure. It has returned close to $6.5 billion to shareholders in dividends and share repurchases, in the last 16 years.

Teck sports an annual average dividend yield of 1.5%, but has a high payout ratio. It has achieved a dividend growth rate of 25% CAGR in the last three years. Teck Resources’ steelmaking coal business is a cash cow generating significant free cash flow.

The company focuses on long-life assets that are cash flow positive through all phases of the commodity price cycle and deliver superior returns. In addition, it also maintains good relationships with banks and debt capital markets and has easy access to capital on competitive terms.

Teck is also investing in technology, the latest one being its RACE21 program that is targeting to generate $1 billion in annualized EBITDA by the end of 2021. The company has also implemented a cost reduction program to achieve $610 million in savings through to the end of 2020. It continues to deploy digital technologies across the mining value chain to improve productivity and lower costs.

Teck ended the quarter with $5.8 billion in liquidity, including $525 million in cash. It has successfully reduced its debt burden in recent years down to $3.2 billion and has no significant debt maturities due before 2035. 

As Canada’s largest diversified resource company, Teck Resources is favorably placed to leverage its operating and commercial expertise and contribute towards a continued supply of mined materials for global needs. Growth in renewable energy systems and zero-emission electric vehicles should act as a tailwind for global demand for copper.

Competition

Teck competes with other leading basic materials stocks like Goldcorp, Agnico Eagle Mines,  Goldcorp generates its operating cash flows from the sale of gold, silver, lead, zinc, and copper. Agnico Eagle is a leading mining company in Canada. Teck’s investments in oil sands crude production also grants it an edge over the competition as these oil sands have the capacity to produce oil consistently for decades with relatively low operating costs.

Bottom Line

Teck should benefit from rising demand for copper as manufacturing resumes, with major economies now opening up. The company expects future growth on the back of various initiatives like expanding RACE21, building QB2, enhancing steelmaking coal logistics chain, and reducing costs. It is well-positioned for a low-carbon economy.