GLENN ROGERS LIKES TECK
Contributing editor Glenn Rogers is with us this week, back home in southern California after visiting family and friends in the Toronto area with his son earlier this month. In between his 250-yard drives on the golf course, I mentioned to him that he might want to look to his roots and recommend a Canadian stock in his column. He digested the idea, hit another booming drive, and came up with a resource play he likes. Here is his report.
Glenn Rogers writes:
After Gordon asked me to write about a Canadian company for a change, I realized it has been several years since I've done so. Given the fact that Canada is looking pretty stable and smart these days, that was an oversight that I'll correct right now.
Canada has long been known as a hewer of wood and extractor of minerals and energy. For the most part, that has not changed despite on-going efforts by the Canadian government to diversify the economy into higher tech endeavors. However, this is a pretty good time to be in the natural resources business particularly if you are seen as a reliable and politically neutral trading partner. Canadians have long been regarded by most of the world as peacekeepers and all-around good guys and gals. Given the political vitriol around the world, the fact that no other country really hates Canada is highly positive for the Canadian resource companies. Additionally, the banking system is a model of conservative stewardship which served the nation well during the recent global meltdown.
As regular readers of my comments know, I am more in the long-term inflationary camp then in deflationary camp. This lines me up against the bond vultures and a significant number of financial commentators who believe in the double-dip recession or some other doomsday outcome. Yes, that's possible but in my view it is unlikely.
That said, we are likely to have some tough months ahead but, in my view, the long-term trend for the market is up. I think we will begin to see inflation start creeping into the system late this year or early next. If you agree with that premise and if you believe that the long-term growth prospects for China, India, and other developing nations continue to be bright, than the outlook for commodities and resource companies in general must be good.
As you can see, my views are similar to those expressed last week by contributing editor Tom Slee. In that issue, he wrote that copper demand has grown 4% per annum on average for the last 100 years but that supply going forward will be constrained with a number of the world's largest copper mines being exhausted by 2015 so this sector should provide stable growth going forward.
All of this brings me to my own mining stock pick: Teck Resources (TSX: TCK.B, NYSE: TCK). Teck is a highly diversified resource business based in Vancouver. The company is active in a broad range of mining activities including copper in British Columbia, Peru, Chile, and Newfoundland. They produced over 300,000 tons of copper last year which represented 37% of their operating profits and 28% of their revenue.
There are lots of pure copper plays like Southern Peru Copper (NYSE: SCCO) and previously-recommended Freeport McMoRan (NYSE: RCX). I like both those companies but with Teck you get good copper exposure plus much more.
The company bought Fording Coal two years ago and recently paid off the $9.8 billion in bank debt used to finance the acquisition, two years ahead of schedule. As a result, Teck has become the second-largest exporter of the high-grade coal used in steel production and happily all of their coal mines are based in Canada: five in British Columbia and one in Alberta. Coal represents 46% of the company's revenue and 47% of their operating profit.
One of the company's original businesses was the production of zinc which it has been extracting and smelting since the early 1900s. Teck has a large smelting refinery installation in Trail, B.C. with producing mines in northwest Alaska and Washington state. Teck produced 711,000 tons of zinc last year and 240,000 tons of refined zinc. This business contributed 26% of the company's revenue in 2009 and 16% of operating profit.
There's more. Teck also has positions in the oil sands development in Alberta: a 20% interest in the Fort Hills project and a 50% interest in other oil sands leases. This has not yet had a significant impact on the company's revenue or earnings but does provide another area of diversification for the future.
Finally, the company is actively engaged in the exploration of gold properties and it is likely Teck will add gold to its minerals portfolio in the near future. This would be in keeping with the company's history since it started out as a gold miner back in 1900.
The company recently reported strong second-quarter results with earnings of $260 million (44¢ per share) and EBITDA of $844 million. As a result of the debt pay-down, Teck's senior debt was upgraded and is now rated as investment quality.
The company suspended its semi-annual dividend in 2008 but recently reinstated it with a payment of 20c per share on June 15.
To sum up, I consider Teck to be an undervalued company. It is currently trading at in Toronto C$34.35 and in New York at US$32.75. The stock has a forward p/e ratio of 7.97 and is more than $12 below its 52-week high of C$46.92. This is a business that operates in a stable economic and political environment, with considerable long-term growth potential.
Action now: Buy with a target of $45.
Disclosure: LONG TCK