TECK RESOURCES LTD. $10(Toronto symbol TCK.B; Conservative Growth Portfolio, Resources sector; Shares outstanding: 576.3 million; Market cap: $5.8 billion; Price-to sales ratio: 0.7; Dividend yield: 1.0%; TSINetwork Rating: Extra Risk; www.teck.com) is a leading producer of metallurgical coal, a key ingredient in steel making. Its six coal mines (five in B.C. and one in Alberta) account for 11% of global demand.
Asian customers buy 75% of the company’s coal. In 2015, coal accounted for 37% of its revenue and 34% of its earnings.
Teck also produces zinc (34%, 31%), which prevents rusting when added to steel. The company is a major supplier of copper (29%, 35%), and produces other metals, including gold, lead and molybdenum (which is used in steelmaking).
The company’s revenue fell 28.3%, from $11.5 billion in 2011 to $8.3 billion in 2015. That’s mainly because coal prices are down 90.3% in the past five years. Prices have also fallen for copper (down 37.5%), and zinc (down 12.1%).
Due to lower commodity prices, Teck’s earnings dropped 92.1%. That’s a fall from $4.18 a share (or a total of $2.5 billion) in 2011 to $0.33 a share (or $188 million) in 2015. Cash flow per share also fell 61.4%, from $7.84 in 2011 to $3.03 in 2015.
In response to lower commodity prices, Teck is aggressively cutting its costs. It recently announced that it would eliminate 1,000 jobs. If you include the 1,000 jobs it has already cut, Teck has reduced its workforce by 18% since the start of 2014. These moves will save it $300 million in 2016.
The company now plans to spend $2.0 billion on new projects and upgrades in 2016. That’s down 11.8% from $2.2 billion in 2015. Teck also suspended its plan to expand the Coal Mountain mine in southeastern British Columbia. The project will now close by the end of 2017.
Oil sands project has long-term appeal
The only new project that Teck is working on is the Fort Hills oil sands development north of Fort McMurray, Alberta. Teck owns 20.0% of this project; Suncor (see page 37) owns 50.8% and will operate Fort Hills. France’s Total SA owns the remaining 29.2%. Fort Hills is now over 50% complete, and should start up in late 2017.
Teck’s share of Fort Hills’ remaining costs is $1.2 billion. Of that total, it expects to spend $950 million in 2016.
Concerns over the cost of Fort Hills, combined with the recent weakness in oil prices, have contributed to the drop in Teck’s shares. However, the company’s mining expertise will help keep Fort Hills’ operating costs low. In addition, the project’s reserves should last 50 years.
As of February 10, 2016, Teck held cash of $1.8 billion, or $3.12 a share; it can comfortably afford to meet its Fort Hills’ commitments.
However, investors are also concerned about the company’s long-term debt of $9.6 billion, which is a high 1.5 times its currently depressed market cap. But, it doesn’t have to start repaying these loans until 2017 when $600 million U.S. of bonds come due. Teck also has access to $3.0 billion U.S. in untapped lines of credit until 2020.
In addition to cutting its costs, Teck is raising additional cash with new mineral streaming deals.
Streaming deals cut Teck’s risk
For example, the company recently sold its share of silver from Chile’s Antamina mine to Franco- Nevada Corp. (Toronto symbol FNV). Teck owns 22.5% of Antamina, which mainly produces copper, zinc and molybdenum.
Franco-Nevada paid Teck $789 million upfront. Teck will also receive additional payments equal to 5% of the spot price for each ounce of silver the mine produces. Once Teck has delivered a total of 86 million ounces, it will reduce the amount of silver it delivers to Franco-Nevada by a third. Based on Antamina’s current production levels, it will take roughly 30 years to reach this threshold.
Teck has also sold 100% of the future gold produced from the Carmen de Andacollo copper/ gold mine in Chile. Teck owns 90% of this mine; a state-controlled firm owns the remaining 10%.
Under this deal, Royal Gold (Toronto symbol RGL) will receive a maximum of 900,000 ounces. After it has reached that limit, Royal Gold will get 50% of the mine’s gold production. In exchange, Teck received an upfront payment of $162 million U.S. It will also receive ongoing monthly payments equal to 15% of the monthly average gold price.
New dividend rate seems sustainable
The company has also cut its semi-annual dividend by 66.7%, to $0.05 a share from $0.15. The new annual rate of $0.10 yields 1.0%. The cut should save $115 million a year.
Teck’s cost reductions should give it an advantage over its higher-cost rivals when negotiating new coal contracts. Moreover, it sells its commodities in U.S. dollars, so it benefits when these sales are converted into Canadian dollars.
The company will probably lose $0.02 a share in 2016, but profits could rebound $0.28 a share in 2017. Cash flow per share should also improve to $3.50 in 2016, and the stock trades at a low 2.9 times that forecast.
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