TECK RESOURCES LTD. $25(Toronto symbol TCK.B; Conservative Growth Portfolio, Resources sector; Shares outstanding: 576.2 million; Market cap: $14.4 billion; Price-to-sales ratio: 1.6; Dividend yield: 3.6%; TSINetwork Rating: Average; www.teck.com) is a leading producer of metallurgical coal, a key ingredient in steelmaking. Its six coal mines (five in B.C. and one in Alberta) have lifespans from six to 70 years.
The company sells most of its coal to customers in Asia. In 2013, coal accounted for 43% of Teck’s revenue and 41% of its earnings.
Teck also produces copper (30%, 41%), which manufacturers use to make electrical wire, auto parts and components for electronic devices. As well, Teck is a major supplier of zinc (27%, 18%), which prevents rusting when added to steel.
Results reflect erratic resource prices
Prices for these cyclical commodities rise and fall with the overall economy. Thanks to a rebound in manufacturing after the recession, Teck’s revenue jumped 50.0%, from $7.7 billion in 2009 to $11.5 billion in 2011. However, lower coal and copper prices cut revenue to $9.4 billion in 2013.
Earnings fell slightly, from $1.83 billion in 2009 to $1.82 billion in 2010. Per-share earnings declined 9.9%, from $3.42 to $3.09, on more shares outstanding. Earnings then shot up to $4.50 a share (or a total of $2.7 billion) in 2011 but fell to $1.66 a share (or $961 million) in 2013. Without unusual items, earnings per share fell 42.6%, from $3.03 in 2012 to $1.74 in 2013.
Cash flow per share jumped 59.6%, from $4.50 in 2009 to $7.18 in 2011 but fell to $3.96 in 2013.
Timely cost cuts bring big savings
In response to weaker copper and coal prices, Teck has put off its plan to reopen its Quinette coal mine in northern B.C. Layoffs and other cost cuts also lowered the company’s annual expenses by $360 million in 2013. It should achieve additional savings of $180 million a year by the end of 2014. Meanwhile, Teck has cut this year’s spending on new projects and upgrades by $150 million.
Even with the current downturn, Teck’s balance sheet remains sound. As of June 30, 2014, its long-term debt was $7.7 billion, or a high 53% of its market cap. However, it has structured its loans so that the repayments, from 2015 to 2043, are manageable. Teck also held cash of $2.1 billion, or $3.70 a share.
This should help Teck develop its new oil sands properties. It will spend $2.9 billion in the next four years on its 20.0%-owned Fort Hills project; Teck’s other partners are Suncor (40.8%) and Total S.A. (39.2%). Fort Hills should start up in late 2017, and its reserves should last over 50 years.
Look beyond high p/e
The stock trades at 29.1 times Teck’s likely 2014 earnings of $0.86 a share. However, it trades at a more reasonable 7.8 times this year’s projected cash flow of $3.21 a share. The $0.90 dividend yields 3.6%.
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