Teck Profitable, Liquid, And Maybe Too Cheap

By Stephen D. Simpson, CFA | June 25, 2013 AAA

These are ugly days in the natural resources sector as the bottomless pit that was China's appetite for mined commodities apparently had a bottom after all. Most of the well-known miners have racked up double-digit losses over the past year, and companies with outsized exposure to iron ore (like Vale (Nasdaq:VALE) metallurgical coal like Teck Resources (NYSE:TCK) have suffered even worse. It may not be the worst time to think about Tech Resources, though. The combination of mines that are still profitable at spot prices, extensive production expansion potential, good liquidity, and global prices that are having miners contemplating production curtailment could make this an appealing time to consider this beaten-down miner, but investors need to prepared for conditions to get uglier before they turn around. Met Coal In The DumpsFor a company that recently got more than half of its revenue from met coal (and now gets about 40% of revenue from it because of falling prices), the terrible pricing for met coal is a big problem. Met coal prices have fallen from over $300/ton two years ago to around $200 to $220 a year ago to around $140 recently. Making matters worse, Japanese and European steel mills are pushing back hard on benchmark pricing, not wanting to get locked into a price while spot prices are still falling. SEE: A Primer On CoalWhile Teck Resources did go deeply into debt a while ago to acquire Fording and its met coal assets, the upshot is that those assets are productive and relatively low-cost. Recent cash costs have been in the vicinity of $100/ton, with an estimated life of mine cost of about $115/ton. At the same time, Teck has about 10% share of the seaborne market and higher-cost Australian producers are considering cutting/shuttering production.  Copper And Zinc In Tolerable Shape As WellWhat's true for Teck's met coal operations is broadly true for its other mining operations in copper and zinc/lead – prices have been weak, but Teck's production costs are still fairly attractive. Freeport-McMoRan (NYSE:FCX) and Teck have gotten occasional bumps on reports of lower copper inventories, but prices are nevertheless coming close to that important $3/lb level. The good news for Teck is that its recent copper cash production costs have been running around $1.64/lb (and zinc production costs of $0.18/lb are likewise below spot prices). Even though copper prices are well off of their highs, this can still be a long-term growth opportunity for Teck. The company has high-quality assets in stable regions like Canada and Chile, and Teck could double its output by 2022 at attractive costs. Well-Positioned In What The BRICs NeedThe big question for Teck is the extent to which emerging market (particularly China) demand for raw materials reaccelerates. While countries like India will likely go through a modernization phase similar to what fueled China's recent demand, it's not a near-term driver. The good news for Teck is that the BRIC countries, again especially China, are least self-sufficient in met coal and copper. Ostensibly, that should be good news for major suppliers like BHP Billiton (NYSE: BHP) (the largest exporter of met coal), Freeport, and Teck. The Bottom LineTeck looks undervalued by multiple metrics. For a stock that has historically traded at a range of about 3x to 6x forward EBITDA, today's multiple is not at all demanding and a 5x target suggests a fair value in the mid-$20s. Likewise, many investors choose to evaluate these companies by long term NAVs, and most analysts estimate Teck's NAV to be in the high $20s to low $30s. Last and not least, the stock trades at about three-quarters of its tangible book value, though skeptics can argue that the value of the company's resources is likely overstated right now given falling commodity prices. SEE: A Clear Look At EBITDAI do believe that Teck's stock will see better days, but I also see a risk that worries about economic growth in the second half of 2013 could take commodity prices even lower. But that's always the challenge with investing in commodity companies – if you want to earn significant returns, you have to buy in when it looks ugly, and things can always get uglier. 

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