TECK RESOURCES LTD. $37 (Toronto symbol TCK.B;Conservative Growth Portfolio, Resources sector; Shares outstanding: 586.0 million; Market cap: $21.7 billion; Price-to sales ratio: 2.0; Dividend yield: 2.4%; TSI Network Rating: Average; www.teck.com) is a leading producer of metallurgical coal, a key ingredient in steel making. Its six coal mines (five inB.C. and one in Alberta) should last from six to 75 years.
Asian customers buy 60% of the company’s coal. In 2011,coal accounted for 49% of Teck’s revenue and 57% of its earnings.
Teck also produces copper (27%, 28%), which its clients in Asia and Europe use to make electrical wire, auto parts and components for electronic devices. As well, Teck is a major supplier of zinc (24%, 15%), which prevents rusting when added to steel.
Teck’s revenue jumped 80.7%, from $6.4 billion in 2007 to $11.5 billion in 2011. That’s largely because it bought the 80.05% of Fording Canadian Coal that it didn’t already own in 2008. Increasing urbanization in Asia also spurred strong demand for commodities like coal and copper.
Earnings fell 35.0%, from $1.7 billion in 2007 to$1.1 billion in 2009. That’s because the recession cut commodity prices and offset the benefits of the Fording purchase. Teck sold shares to help pay back the short-term loans it needed to buy Fording. Dueto more shares outstanding, earnings per share fell47.0%, from $4.00 in 2007 to $2.12 in 2009.Commodity prices quickly recovered, and savings from a restructuring plan helped push up Teck’s earnings to $2.5 billion, or $4.18 a share, in 2011.
Cash flow per share fell from $4.57 in 2007 to$3.67 in 2008, but turned around in 2009 and soared to $6.10 in 2011.
Quarterly contracts cut Teck’s risk
Beginning in 2010, Teck began negotiating coal prices with its customers on a quarterly basis instead of annually. That gives it more flexibility to adjust its production to better match demand.
Teck sold its coal at an average of $193 U.S. atonne in the third quarter of 2012. Based on recent deals involving other coal producers, the price likely fell to $170 U.S. in the fourth quarter.
However, Teck’s coal tends to burn more steadily than coal from its main competitors. That lets it charge higher prices. As well, demand for its higher-quality coal should keep rising, particularly as Chinese steelmakers modernize their blast furnaces. Moreover, the company continues to do good job of controlling its costs. That helps it stay profitable if coal prices fall.
Teck is also putting itself in a good position to take full advantage when coal prices rise again. It aims to reopen its Quintette coal mine in northern B.C. in the second half of 2014. That would increase its annual production by around 12%.Quintette’s reserves should last for 12 years.
The company is also adding to its copper operations, including an expansion that could double the output of its 76.5%-owned Quebrada Blanca mine in Chile. This project would cost $4.8 billion U.S., but it would add 30 years to the mine’s life. If Teck goes ahead, it could start up in 2017.
In addition, Teck is evaluating a second copper project in Chile called Relincho. This wholly owned mine could raise the company’s annual copper output by 50%. Its reserves would last 22 years.
Oil sands holdings get little attention
Teck continues to invest in projects that help it diversify beyond coal, copper and zinc. It owns20.0% of the Fort Hills oil sands project; Suncor(see page 16) owns 40.8%, while Total S.A. holds39.2%. Depending on oil prices and pipeline capacity, this project could start up in 2017.
Teck also owns 100% of the Frontier and Equinox oil sands projects. Frontier should begin operating in 2021. Teck will then develop Equinox.
Due to the recent declines in coal and other commodity prices, Teck cut its projected 2012capital expenditures to $1.8 billion from its earlier forecast of $2.1 billion.
Teck’s strong balance sheet will continue to support its expansion. On September 30, 2012, its long-term debt was $7.5 billion, or a manageable35% of its market cap. The company continues to redeem high-yield bonds related to the Fording purchase. That will hurt its short-term earnings, but it will also cut its long-term interest costs. Teck also held cash of $3.9 billion, or $6.71 a share.
Earnings could jump in 2013
Teck’s 2012 earnings probably fell to $1.60 a share. The stock trades at 23.1 times that figure. However, lower costs could push up its 2013earnings to $2.75 a share. The stock trades at a more reasonable 13.5 times that estimate. It also trades at8.4 times its likely 2013 cash flow of $4.40 a share.
The higher earnings and cash flow would let Teck keep increasing its dividend. The current annual rate of $0.90 a share yields 2.4%.
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