Teck Resources (NYSE:TCK) is a diversified miner with a heavy emphasis on coal, copper and zinc. It will need strong metallurgical coal prices to repeat its results.
(All amounts are Canadian dollars, which is currently just about at par with the US dollar. Tonnes as well - 1 tonne to 1.1 tons.)
Teck was hit hard by the credit crunch in 2009. Having used the proceeds of $9.8 billion raised through debt to buy the 60% it didn't already own of Fording Canadian Coal Trust in July 2008, Canada's largest metallurgical coal producer, the sudden fall in commodity prices meant Teck almost went bankrupt on the back of this enormous debt. However, Teck managed to cut costs and seek equity financing (in the form of a 17% stake for China Investment Corp) in 2009.
Teck released its unaudited 2011 statement (full pdf of results) which gives us a good opportunity to review the corporation's health. Teck is now sitting around $40 a share, just about where it was in 2008 before the crash in 2008-2009.
- Market Cap - $24 billion
- Yield - 1.7%
- Debt - $7 billion
Teck is the second largest exporter of metallurgical coal in the world. It is among the largest producers of zinc, although copper, of which it is a junior producer in global terms, produces far more revenue.
With cash on hand of $4.4 billion, its debt problems of 2009 appear now to be a distant memory. Annual revenues of were $11.5 billion (up 25% from 2010), leading to an annual profit of $2.7 billion (up 47% from 2010), or $4.52 EPS.
Annual copper production was 321,000 tonnes for 2011, basically flat over 2010. Teck expects (pdf) this to reach 350,000-375,000 as a new project comes online and to eventually creep up over 400,000 in five years, with several advanced exploration stage projects entering production by the end of that time frame.
Teck produced 22,785,000 tonnes of metallurgical coal in 2011, slightly down from last year, produced currently through six mines. However, coal production is relatively scalable and, as such, the production results reflect Teck's ability to sell coal. If market conditions warrant, Teck is considering reopening the mothballed Quintette Mine in British Columbia. Teck sold their coal for an average of $257/tonne in 2011, historically a strong price.
Production increased at both Teck's mine in Trail, British Columbia and Red Dog, Alaska operation. Trail refined 291 tonnes of zinc and Red Dog produced 572 tonnes of zinc. However, Teck foresees flat production from Trail and a slight drop at Red Dog in 2012.
Teck also produces lead and silver, but not in quantities that warrant its examination in this piece. Teck has interests in the oil sands, but none are particularly near production yet.
Coal accounts for over half of the corporations profit before depreciation and amortization. (Coal produces $2.8 billion, Copper $1.369 billion and Zinc $708 million.) If you are going to invest in Tech, you need to have faith that coal prices will remain strong; and not only coal, but also metallurgical coal. Metallurgical coal is sold at a premium to thermal coal due to its ability to create the intense heat needed for steel making. Metallurgical coal costs more than twice as much as thermal coal, and there is some reason to continue to be optimistic about the strength of metallurgical coal prices, although they are not quite as strong as last year. The price in Q4 2011 was $285 per tonne, but has dropped to $220 per tonne in 2012.
Don't be too fooled by Teck's low P/E, resting around 9 on its most recent results. Competitors, such as Peabody (NYSE:BTU), trade for similar P/E, and the risk of a drop off in demand for coal, especially from China, appears to be factored into the numbers. $40 a share, down from $50 a year ago, looks like a reasonable price to pay for Teck Resources if you believe metallurgical coal prices will remain strong. Zinc and copper prices may help offset the drop in the price of coal. So could floods in Queensland, a major coal producing region in Australia. Last year during floods in Queensland the spot price of metallurgical hit $350 a tonne. (Although, producers cannot take advantage of spikes too much, as most coal is sold in advance of production.)
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