Near Tangible Book, Teck Is Worth A Look

By Stephen D. Simpson, CFA | May 24, 2012 AAA

Commodity companies can do nothing to change the sometimes-devastating cyclicality of their markets, but that same cyclicality gives investors multiple chances to play the same stocks. Right now there's a great deal of worry about global growth, and particularly growth in markets like China, Brazil and Europe. Although no investor should fool themselves about the risks involved, the fact that Teck Resources (NYSE:TCK) trades near tangible book value ought to be of interest to investors looking for potentially over-punished commodity stocks.

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Serving Under-Served Markets
While it's not accurate to say that commodity demand has gone away in developed economies like the U.S. or Western Europe, the fact remains that demand from growing economies like China, India and Brazil has a great deal of influence on commodity prices today.

With its large exposure to metallurgical coal and copper, Teck is uncommonly well-positioned to take advantage of emerging market commodity demand. Many emerging market countries do produce commodities like coal and copper, but as a group they are much less self-sufficient in commodities like met coal and copper concentrate than others like aluminum.

SEE: Investing In Emerging Market Debt

As these markets continue to grow, Teck is looking to grow its production at a fairly rapid clip. The company's six Western Canadian mines already make it the world's second-largest seaborne met coal exporter. While the company's diversified copper asset base (Peru, Canada and Chile) can't match a company like Freeport McMoRan (NYSE:FCX) in terms of efficiency and production costs, it's still competitive on a global basis.

Will the Company Look To M&A Again to Boost Its Profile?
Teck's acquisition of Fording back in 2008 was transformative in many ways, and not all of them good. While the acquisition did make the company a sizable player in met coal, it saddled the Teck with a large amount of debt at almost precisely the wrong time in the cycle. That, in turn, led to some tough quarters and hasty asset sales to shore up the balance sheet.

SEE: 5 Tips For Reading A Balance Sheet Slideshow

Now it's worth wondering if the company is about to go at it again. The markets buzzed a few months ago with the rumor that Teck was considering having a go at Australia's Fortescue Metals (OTCBB:FSUGY). While this would very nearly be a merger of equals, the addition of a growing Australian iron ore producer would certainly fit Teck's pattern of playing into emerging market demand. Moreover, with its relatively geographically-advantaged position in Australia, Teck would have some advantage on large Brazilian miner Vale (NYSE:VALE).

Energy an Unknown
Teck also has substantial potential exposure to the energy market. The company has a 20% interest in the Fort Hill oil sands project (Suncor (NYSE:SU) and Total (NYSE:TOT) each hold about 40% stakes), as well as 50% interest in the Frontier and Equinox projects. The Fort Hill project isn't expected to be on-line for a few years yet, and the Frontier is about another five years behind that (and Teck may well choose to operate the project itself).

Oil sand interest has run hot and cold over the past decade. Although many oil sands projects are economically viable at crude oil prices above $40-$60/barrel, they've become increasingly controversial from the perspective of environmental impact. That said, the world is not going to wean itself from oil in the next decade or two, so these projects could well be significant contributors around the turn of the decade.

SEE: Commodities: Introduction

The Bottom Line
Teck is not an easy stock to buy today. Met coal has underperformed this year (as have major producers like Walter Energy (NYSE:WLT)) as the anticipated steel recovery has largely failed to materialize. At the same time, investors have gotten very skittish about the copper market.

That said, there may be a relative value trade here. Walter Energy, Freeport and Rio Tinto (NYSE:RIO) all trade at substantial premiums to tangible book value, while Teck is basically trading at tangible book. Even if the outlook for industrial metals over the next 12 months isn't great, I don't see why Teck deserves such a substantial discount.

While weak commodity markets would likely delay any sort of catch-up trade in Teck shares, buying quality mining/commodity companies around tangible book works out more often than not.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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