For the past two years, volatile commodity prices have played a big part in determining fortunes of the mining industry companies. Uncertainty and anticipation have brought profits for some and disappointment for others. In the meanwhile, Teck Resources (TCK) has managed to beef up its operations and streamline its processes to be at the forefront mining industry. In this article, I provide a succinct analysis of TECK's recent developments in the mining industry as well as on the stock market. So if you're looking to invest in the mining sector, is Teck the right stock for you?
Teck Resources has been in operation since 2001, when Teck and Cominco merged. TCK's expertise lies in the mining and mineral development business. It primarily focuses on the extraction of zinc, coal, and copper, as well as energy production. It is currently Canada's largest diversified resource company. The company controls thirteen mines across North and South America, and has overseas operations in Europe, Africa, and Asia Pacific. China Investment Company is now reinforcing its long-standing partnership and association with Teck Resources and Sumitomo Metal Mining (OTC:STMNF) from Japan, by choosing to invest in their collaboration.
At the start of 2012, Teck expanded its existing coal reserves by 55%, primarily through additional drilling and coal mine development. The total amount of coal reserves currently exceeds one billion tons. This number is likely to rise even further, as the company plans to continue with its expansion in South America. Advanced feasibility reports suggest that annual coal production has the potential to increase by approximately 31 million tons over the next few years. Furthermore, in Q1 2012, Teck acquired SilverBirch Energy (OTC:SBEXF) for $435 million, which will expand the company's expertise in pre-production oil sands.
Since 2010, Teck has been looking to invest profits into new ventures and projects. These opportunities include a modernization project for Highland Valley Copper, the announcement of a $210 million investment at its Trail Operations, an additional investment of $125 million for a new acid plant. Feasibility reports have also been generated for Quebrada Blanca, Phase 2, and Relincho. Based on the quality of its operations, the company has been included in the Dow Jones Sustainability World Index for the second consecutive year. It is also a member of the United Nations Global Compact LEAD.
The company's strong product development is complemented by its consistently increasing numbers in both revenue and profits. Teck had revenues of CAD$11.7 billion in 2011, compared to revenues of CAD$9.4 billion in 2011, a 23% year-on-year growth. In 2011, total net income soared to CAD$2.71 billion, which is 43% higher than 2010. The 2011 EPS of CAD$4.50 is far above the figure of CAD$3.13 for 2010.
Dynamic rates of Teck's key indicators
|Gross Revenue||Net profit||EPS||Dividends||Financial Leverage|
Note: data marked in bold in the 2011/2010 line make a strong, positive impact on the company's future in 2013.
As of October 3, 2012, Teck's P/E ratio of 8.8 was well below the industry average. The 52-week range spans from $25.76 to $43.99. The ttm ROE of 11.2% is relatively low, when compared to the industry average of 20.00. Its beta of 3.44 demonstrates the volatility of the metals and minerals industry. The company's EPS for the last three years has followed a positive trend and currently stands at $3.29. The company's borrowing activity to finance growth has been responsible, with a debt/equity ratio of 0.4 that is lower than the industry average.
The chart below shows Teck's performance relative to two major global indices - the S&P 500 and the Dow Jones Industrial Average, as well as to competitors. It is evident that over the last five years TCK has performed in line with the market trends. The peaks and valleys indicate the volatility of the Teck's quote price line, highlighting its sensitivity to market conditions. Over Q3 2012, the company was experiencing instability in its stock quote due to weak metal and coal prices in the international market.
The chart above also shows that Teck's competitors, except BHP Billiton, have been experiencing lower share values over the past year. This is due to a decrease in commodity prices.
What does the future hold?
As more coal mines have started production, the globally weak prices of coal and metals made lowered revenue in 2012. For this reason, Teck's production witnessed an increase leading up to Q3 2012; however, its performance has dwindled for the last three quarters overall. It remains a concern that low prices will continue in Q4 of 2012 as well. I expect the prices for these commodities may increase as a result of heightened demand from developing countries. In reality though, America and most of Europe are still suffering from the effects of the global financial meltdown, in the form of decreased demand. It would be overly optimistic to expect a change of fortunes in Q4 2012, especially when Asian giants - China and India - are also posting less than anticipated growth rates.
Make or break for investors?
Out of 16 Wall Street's analysts estimating the company, ten indicate a "Buy" rating, three report an "Outperform" rating, and three issued a "Hold" rating.
In my analysis, I believe that the basic idea of buying cheap while the stock value rises is a concept that applies to Teck's stock. The critical aspect in this regard is timing the buy just before the stock begins its upturn. The discounted earnings plus equity model, developed by EFS Investment partners and applied to Teck, suggests that the company is currently trading at a considerable discount. EFS's fair stock price valuation indicates that the TCK's stock currently has at least 40% upside potential to reach its fair value. Even though Teck's revenue and profits have been less than impressive, their net profit, EPS and dividend numbers have shown solid growth in the past three years. Its stock price has lowered because of weak international commodity prices. However, this is a deceptive measure with which to evaluate the company's performance. At this time, there is an opportunity to buy a considerably undervalued stock at a cheap price.
I currently expect Teck's stock price to begin an upward trend by the end of 2012, and consider Teck Resources a "Buy" option at its relatively low price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.