Teck Cominco Will Withstand Near-Term Pressure

Teck Cominco’s warning that earnings will be hit “severely”, due to lower zinc and copper prices, as well as a strong Canadian dollar seems to have been a reactive compilation that has complimented the decline in Teck’s stock from a high of around $54 to a recent low in the $32 range. This is a haircut of $22 or 41% from the high. The analogy I have to try to analyze and/or understand comes down to the simple question on principle question: “Is the drop in the stock justified compared to the drop in the actual commodities and/or rise in the C$, relative to the value (as well as potential) that exists within the company itself?

The not so simple answer is that this is a well-run and efficient company that has been caught up in a commodities inflationary expansion cycle, with expectations that have overlooked the true fundamentals and are associated with the long term efficient growth and viability. Teck has been attempting to broaden the future earnings base across a plain of different commodities (the most recent disappointment has been its halted gold play with Novagold). Its earnings ultimately will be affected by 3 main variables that are fluid and vulnerable to broad based changes:

1. Rising Canadian Dollar - This is a reflection of the selling pressure on the US$, which in the months ahead may intensify as interest rates are lowered further. This trend for the US$ will only reverse once the confidence in the U.S. economy is restored, primarily the housing and finance sectors (I fail to believe/understand that Teck is not hedged on the C$ rise). 2. Commodities Re-Adjustments - Though commodities are for the most part a declining resource, there is a re-adjustment to supply, demand and prices as there is the real potential for a U.S. economic decline affecting worldwide markets. Whether it is a real threat or purely sentiment, it is going to affect future purchasing decisions. 3. Expansion/Development Costs- There are several models and projects focused on developing and expanding mines/oilfields etc…based on higher commodities prices, these are feasible at the higher prices, but when commodities tend to drop and costs overruns occur, this will impact the financial viability of projects and companies future costs per pound/ounce/barrel etc….This can also be deemed a long term positive for commodities in terms of having a balanced and stable supply and demand scenario, when new projects are not initiated due to costs.

The conclusion is that Teck and other commodity plays may be somewhat pressured in the near term, which in my opinion has set up a new round of opportunities to purchase the equities as longer term investments. This is based on low P/E values (even readjusted, Teck should trade at around a P/E of 9), cash positions, longer term price increases and the ultimate scenario of depleting resources that should accelerate during the next decade as population growth intensifies and the middle class grows.

I may only be speculating (I also speculated on Alcan a few months before it was bid) with my last point, but it is based on the patterns within the resource sector that have/are already occurring (Rio Tinto, BHP, Alcan, Falconbridge, Inco, Phelps). The fact is that efficient, profitable and well run companies like Teck are becoming an extinct breed due to the mega giants that are being formed globally. This leaves me to only theorize that at these or lower price levels, Teck will not be dancing alone any more, it will ultimately become a partner, with a new kind of dance, within a globally intensified commodities market place controlled by mega cap companies. If Teck fails to revisit its fundamental value naturally (even accounting for the decline in commodities prices, its undervalued) and declines further, it may sooner, rather than later become vulnerable to a hungry global giant willing to pay a high reward for this dance partner.

Disclosure: Long Position in Teck Cominco.