Mining company Teck Resources (TECK) is positioned to take advantage of the commodity price surge, which has occurred since the Russian invasion of Ukraine.
TECK’s operations were negatively impacted by COVID-19 and the BC floods. TECK’s production is expanding substantially over the next few years. The culmination of these factors is why I believe TECK is a Buy.
The Russia Ukraine War Impact
Russia is a major exporter of both copper and metallurgical coal, as well as being a moderate exporter of zinc. Due to the significant sanctions now in place against Russia, exports from the country have fallen to a crawl.
Europe, Japan, and South Korea, all of whom are part of sanctioning countries, imported 25 Mt of metallurgical coal from Russia in 2021. Due to the lowered supply available metallurgical coal has risen significantly this year. Solely due to the price increase, total revenue and profits should get a nice bump higher. The same logic applies to the copper, zinc, and bitumen business groups.
China, and India, both major importers of metallurgical coal, have not enacted sanctions against Russia at this time and are unlikely to implement them. In the unlikely event that either restricts importing from Russia, you can expect a significant spike in price, which is ultimately good for TECK.
Moving away from the direct impact of price changes, more investors are worried about the social impact of companies. Many companies have been pressured to stop or reduce operations within Russia due to consumer demands. The resulting departure has material effects on some companies, so some investors are looking for more ESG compliant companies.
TECK takes pride in its ESG reporting. TECK is appealing due to the social aspect of the ESG criteria. TECK carries a naturally lower risk profile because it operates within Canada and Chile.
Production Uptick
During 2020-2021, TECK production was hit by the BC fires, as well as COVID-19 slowing production. COVID-19 restrictions within Canada have been almost completely removed. The coal and copper segments should have higher volume, assuming no severe weather.
The massive Quebrada Blanca phase-2 (QB2) copper operation is expected to start producing in H2 2022. Located in Chile, once completed, QB2 should produce 240k-300k tonnes per year for 2023-2025, as well as 4-13 million pounds of molybdenum per year.
Zinc production volume will see a 5%-10% uptick in 2022. 2021 saw lower production due to unplanned maintenance in Q4, so the increase is from being able to operate continuously throughout the year.
Potential Market Changes
The Chinese informal restriction on Australian coal is ongoing, despite China allowing some importation. If this ban were to be lifted, the price of coal would drop, ultimately being negative for TECK.
China’s real estate is in a precarious position. In 2021, multiple large developers had financial distress, which is continuing in 2022. China imports metallurgical coal to feed the significant need for steel to build the swaths of mega-cities. If new construction continues to diminish, steel demand will fall, and so will metallurgical coal demand.
Also, the FED is less hawkish than before the Russian invasion, but the market is still expecting multiple rate hikes. The hikes will add additional downward pressure to equity markets.
Strong Balance Sheet
2021 was a strong year for TECK’s finances and is expected to continue. TECK boasts a 1.1 price-to-book ratio, which shows the market is not overestimating the price of the underlying assets.
TECK took on significant debt to fund QB2 and is carrying the notable debt of C$7.2 billion, but still has strong interest coverage and a debt-to-asset ratio of 0.15, showing no solvency concerns.
Current assets and current liabilities saw an increase of 52% and 16% year-over-year, respectively, leading to a current ratio of 1.6x. The current ratio shows TECK will be able to meet short-term commitments.
The strong balance sheet is allowing management to increase returns to investors. The base dividend is increasing to $0.50 from $0.20, as well as at least 30% of available cash flow and at least 100 million in share buybacks. The increase shows the management is confident in the future of the business.
Wall Street’s Take
Turning to Wall Street, TECK stock earns a Strong Buy rating based on 14 Buys and two Hold ratings assigned in the past three months.
The average Teck Resources price target of $42.83 implies an 11% upside potential.
Conclusion
TECK has a strong operational outlook, as well as having a strong market outlook. I agree with the analyst consensus; I believe TECK is a Strong Buy.
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