It's rather difficult to support additional upside after the stock has risen as much as Teck Resources (NYSE: TCK) in a short period of time. Previously, I was a bit early with optimism towards the company. It worked well for me, although I was really surprised with the strength of the rebound. As it often happens, the market exaggerated things both on the upside and downside.
Back in January, you could have read articles like this one, titled "Crude at $10 Already a Reality for Canadian Oil-Sands Miners". This led to the perception that Teck Resources was throwing money into the fire with its Fort Hills project. Now the situation is different - the bull momentum is strong across commodities and especially commodity-related equities, and the fear of missing out drives their prices higher.
In this information environment, people tend to draw current trend lines in commodities all the way up to the sky and bet on related equities. From a media point of view, we witness the same process that was going on in January, just the emotions are opposite - from doomsday scenarios to rosy optimism. In this environment, it's always good to look at the real numbers to see how things are really going on. This opportunity is provided by Teck's first-quarter report.
Met coal and zinc bottomed
Things won't get worse for met coal and zinc and the bottom is already behind in all likelihood. Second-quarter met coal price benchmark price increased by $3 in comparison with the first quarter, and further production curtailments will ultimately follow as the prices are just too low for the higher end of the cost curve.
Teck Resources also approached its bottom in costs, and they were unchanged in comparison with the fourth quarter of 2015. In U.S. terms, costs even decreased from $58 per ton to $57 per ton due to weakening Canadian dollar. In the second quarter, Teck Resources expects to sell roughly the same amount of met coal like in the first quarter. It's still too early to call for definitive upside in met coal, as the strength of demand would have been evidenced by increased sales. However, I don't think it can get worse on this front.
The situation also straightened out in zinc. The first-quarter realized zinc prices was $0.75 per pound in the first quarter, but recent market indications point to a $0.85 price. Although zinc remains volatile and can still have some downside, it is unlikely to test $0.65 once again - there are no fundamental catalysts for such a move unless China go broke.
Copper is a swing mover but costs improve
Copper prices had their ups and downs since the beginning of the year. They traded in a wide range mostly between $2.00 and $2.30 per pound. The perception of the situation in China changes and so do the prices. Teck Resources' realized copper price for the first quarter was $2.11 per pound, heavily influenced by low prices at the beginning of the quarter.
Meanwhile, cash unit costs dropped from C$1.37 in the fourth quarter to C$1.29 in the first quarter, driven by the decline in adjusted cash cost of sales. Copper costs remain healthy and provide a buffer to swinging copper prices. Going forward, copper will likely be the main determinant of Teck's earnings as I believe that it will have bigger volatility than met coal or zinc.
Once again, Teck Resources reported that everything was going according to plan at Fort Hills. The project is on schedule and is set to deliver first oil in the fourth quarter of 2017. With oil prices at their current levels (don't forget about the discount for West Canadian Select oil which is currently around $14 per barrel), there is significant uncertainty whether the project's economics will work.
However, there is already one significant takeaway - Fort Hills cash outflows did not break Tech Resources' finances despite pressure on the other fronts, and the company still has the $3 billion credit facility available. Fort Hills is a long-term project, and, frankly, no one knows what oil prices will look like in 2020 or 2025. In my view, copper price swing will have bigger impact on Tech Resources valuation than oil price adventures, although the market might have a different opinion.
This was a strong report by Tech Resources. However, the recent upside in the company's shares was driven not only by improving fundamentals, but also by the big flow of money into everything commodity-related. This hot money might exit at any time if they feel that current momentum cannot be sustained. Taking some money off the table looks like a good option to me at this point.
Disclosure: I am/we are long TCK.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.