Key Takeaways for Teck Resources Stock:
- Teck Resources' planned sale of its metallurgical coal business should occur as demand for the commodity declines with weaker Chinese steel demand.
- Teck is now more focused on copper and the stock has benefited greatly from rising copper prices.
- We currently see Teck stock as overvalued; however, the balance sheet has improved, and the company will be less exposed to volatility in metallurgical coal prices after the planned sale of the business later this year.
Andrew Willis: The last time we featured Teck Resources as a Stock of the Week, the mining company had just rejected an offer from Glencore for its steelmaking coal business. Fast forward to around seven months later and a full sale of the coal business has been agreed to.
And the timing may not have been better. Since then, we’ve seen weaker Chinese steel demand, which means we expect China’s steelmaking coal demand to decline. We think India will be the main source of incremental demand, but we forecast it won’t be enough to offset the potential drop. Teck’s coal business should still be profitable, but management may be looking forward to closing the sale, likely in the third quarter of this year.
Now that Teck Resources is more focused on its copper portfolio, we think that its stock has benefited from a rise in copper sales and optimism around copper demand from new technologies related to decarbonization and electrification. But we believe the stock has benefited too much.
First, the company’s not a pure copper play. Teck has a zinc and lead business that isn’t influenced by the copper hype. Second, within the company's copper portfolio, there are considerable differences in costs to consider, as equity analyst Jon Mills points out. The company’s mines in Peru are viable under nearly any reasonable copper price or sit comfortably within the bottom half of the cost curve. However, its other mines in Canada and Chile have higher costs.
To help manage risks associated with copper prices, the company's balance sheet has improved significantly, which, as Mills points out, means less potential negative impact from financial leverage. And the commodity price Teck is most sensitive to, metallurgical coal, may be less of an issue later this year.
For Morningstar, I’m Andrew Willis.
Teck Resources Bulls Say
- Emerging-market demand for steel, producer consolidation and supply discipline, and the relative paucity of high-grade metallurgical coal deposits could backstop pricing.
- Teck is materially increasing its copper production to take advantage of increased demand due to trends including decarbonization and electrification.
- Teck's extensive copper growth pipeline makes it attractive to potential acquirers.
Teck Resources Bears Say
- A slower-growing Chinese steel industry, if investment growth in infrastructure and real estate slows and ultimately reverses, would likely exert significant downward pressure on metallurgical coal prices.
- In aggregate, Teck's copper business isn't particularly cost-advantaged, and in periods of weak copper prices, certain operations might struggle to generate positive margins.
- Teck lacks the scale of larger peers, such as BHP and Rio Tinto. With an increasing focus on leveraging technology to lower unit costs, Teck may be disadvantaged given a lack of relative scale.
The author or authors do not own shares in any securities mentioned in this article.
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