TECK RESOURCES LTD. $35 (Toronto symbol TCK.B; Conservative Growth Portfolio, Resources sector; Shares outstanding: 586.0 million; Market cap: $20.5 billion; Price-to-sales ratio: 1.8; Dividend yield: 2.3%; TSINetwork Rating: Average; www.teck.com) is a leading producer of metallurgical coal, a key ingredient in steelmaking. Coal accounted for 49% of Teck’s 2011 revenue and 57% of its earnings. The company also produces copper (27%, 28%) and zinc (24%, 15%).
Teck continues to benefit as the recovering global economy pushes up commodity prices. As well, in 2008, the company bought the 80.05% of Fording Canadian Coal that it didn’t already own. This purchase has further spurred Teck’s growth.
Quick rebound from downturn
Teck’s revenue rose 85.5%, from $6.2 billion in 2007 to $11.5 billion in 2011. Earnings fell from $1.6 billion, or $3.87 a share, in 2007 to $659 million, or $1.47 a share, in 2008, as the recession cut commodity prices. However, earnings quickly rebounded and rose to a record $2.7 billion, or $4.50 a share, in 2011.
If you exclude unusual items (such as gains on asset sales), earnings per share would have jumped 63.9%, to $4.18 in 2011 from $2.55 in 2010. Cash flow per share fell from $4.57 in 2007 to $3.67 in 2008, but turned around in 2009 and soared to $7.84 in 2011.
The company is using its rising earnings to increase drilling and add to its reserves. For example, in 2011, proven and probable reserves jumped 55%, to over one billion tonnes, at its six coal mines (five in B.C. and one in Alberta). At current production rates, these mines should last from 6 to 75 years.
Move into oil sands has big potential
Teck is also investing in new projects that cut its reliance on coal, copper and zinc. In April 2012, it paid $435 million for SilverBirch Energy Corp. (Toronto symbol SBE). That gave Teck 100% of the Frontier and Equinox oil sands projects in Alberta. Frontier should begin operating in 2021. Teck will then develop Equinox.
The company will also spend $475 million to extend the life of the mill at its Highland Valley Copper project. Teck aims to complete this project in 2013. In addition, it is spending $210 million at its Trail zinc and lead smelting facility. This will increase its capacity to recycle electronic waste. Teck should complete these upgrades in 2014.
Balance sheet a foundation for growth
Teck can comfortably afford these outlays. Its long-term debt of $6.7 billion is a moderate 33% of its market cap. The company also holds cash of $4.4 billion, or $7.51 a share.
Weaker copper and coal prices will probably cut Teck’s 2012 earnings to $3.93 a share. The stock trades at 8.9 times that estimate. That’s a low p/e ratio in light of Teck’s high-quality reserves. The $0.80 dividend yields 2.3%.
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