Teck Resources recently sold its metallurgical coal mines in Western Canada. Metallurgical coal is a key ingredient in steelmaking.
The company is using the cash to pay down debt and reward investors. More importantly, the sale leaves management to focus on its copper and zinc operations. The long-term outlook for both metals is strong, as they are crucial components of electric-powered vehicles (EVs). In addition, power utilities will need new copper transmission lines as more car owners plug their vehicles into the power grid.
The firm is also phasing out its multiple voting shares, which further strengthens its appeal with investors and could make it an attractive takeover target.
The stock trades at 24.1 times the company’s forward earnings forecast, a reasonable multiple considering its growth potential and its stellar 226.6% return over the last 5 years.
TECK RESOURCES LTD. (Toronto symbol TECK.B; www.teck.com) has now sold all its metallurgical coal business, operating as Elk Valley Resources (EVR), in two transactions. In January 2024, it sold 23% of EVR, split between buyers Japanese steelmaker Nippon Steel Corp. (20%) and South Korea’s POSCO (the remaining 3%). Teck received $1.3 billion U.S.
In July 2024, Teck sold the remaining 77% to Switzerland-based mining company Glencore plc for $7.3 billion U.S.
Following the sale, Teck now focuses on its copper and zinc mines in Canada, the U.S., Peru and Chile. Those properties include the Quebrada Blanca copper mine (60% owned) in northern Chile. The other investors are Japan’s Sumitomo Corp. (30%) and the Chilean government (10%).
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As the reserves of the main mine are running out, Teck and its partners recently started up a second phase at the site called QB2. This project should double the company’s copper production. As well, it has an initial mine life of 27 years.
In all, Teck’s share of QB2’s total construction costs will range from $8.6 billion U.S. to $8.8 billion U.S., including $500 million U.S. to $700 million U.S. in 2024.
The company’s other major operations include Highland Valley Copper (100% owned). It produces copper and molybdenum (which is used in steelmaking) at an open-pit mine near Kamloops, British Columbia.
Teck also owns 100% of the Red Dog zinc and lead mine in northwest Alaska. The mine’s reserves should last until 2031. The company is now looking at nearby areas that it could develop into a new mine.
Mining Stocks: Sharply lower earnings are not a long-term concern for Teck Resources
In the three months ended June 30, 2024, Teck’s revenue (including the coal business), rose 10.1%, to $3.87 billion from $3.52 billion a year earlier. That’s entirely due to higher copper prices and rising production from QB2.
Coal accounted for 54% of Teck’s revenue in the latest quarter, followed by copper (35%) and zinc (11%). After the sale of the coal business, copper will supply roughly 80% of its revenue, with zinc accounting for the remaining 20%.
Earnings in the quarter, before unusual items, dropped 35.2%, to $0.79 a share (or a total of $413 million) from $1.22 a share (or $643 million). The lower earnings are due to higher operating and depreciation costs at the recently opened QB2 mine, as well as higher interest expenses.
Teck Resources ended the quarter with cash of $918 million, while its long-term debt was $6.04 billion, or 16% of its market cap. The company now plans to use $2.0 billion U.S. of the $7.3 billion U.S. it received from the sale of the final 77% of its Elk Valley coal operations to pay down that debt. As a result, in July 2024, it retired $1.4 billion U.S. ($1.9 billion Canadian) of its outstanding loans.
Teck is also returning some of those proceeds to its shareholders. The company now plans to buy back a further $2.75 billion of its class B subordinate voting shares. That’s on top of an earlier plan to spend $500 million on share buybacks. That should ultimately boost the share price
As well, the company paid investors a special dividend of $0.50 a share on September 27, 2024. It will also continue to pay its regular quarterly dividend of $0.125 a share; the annual rate of $0.50 yields 0.7%.
Teck’s earnings will probably rise about 11%, from $2.57 a share in 2024 to $2.84 in 2025. The stock trades at a reasonable 24.1 times that 2025 estimate.
Investors will also benefit from Teck’s plans to phase out its dual-class share structure by May 12, 2029. At that time, all outstanding class A shares (100 votes per share) will automatically convert into class B subordinate voting shares (one vote per share) on a one-for-one basis. The class B shares will then become common shares. That enhances the stock’s appeal with investors.
Recommendation in The Successful Investor: Teck Resources Ltd. is a buy.
