Larry MacDonald
RTGAM
Teck Resources Ltd. , the only major diversified-mining company still in Canadian hands, is followed by about 20 analysts. They're a bullish lot: more than three-quarters have issued "buy" recommendations. If their median 12-month price target of $70 on the Class B shares pans out, shareholders are in for gains of nearly 30 per cent from current prices.
Some analysts have done well enough with their past recommendations on Teck Resources to earn top rankings (5-stars) in StarMine Corp.'s survey. The all-stars include Oscar Cabrera of Merrill Lynch ($86 target), Greg Barnes of TD Newcrest ($68 target), and John Hughes of Desjardins Securities ($76 target).
Mr. Cabrera sums up the main investment thesis: "We reiterate our buy rating on Teck Resources due to the company's leverage to commodities that the [emerging] economies need for their urbanization and industrialization, but have in short supply."
Some analysts now also see a boost coming from reconstruction efforts in Japan.
Vancouver-based Teck Resources owns and has interests in 13 mines spread over four politically stable countries: Canada, U.S., Chile and Peru. In 2010, they produced a 21.7-per-cent jump in revenues to $9.3-billion, derived from shipments of metallurgical coal (47 per cent), zinc (29 per cent) and copper (24 per cent).
Net income in 2010 soared 35.5 per cent to $1.5-billion. According to StarMine, the company's "quality of earnings" is high, meaning there's minimal use of aggressive accounting methods.
Teck Resources is one of Mr. Barnes' top recommendations (an "action buy"). He too sees persistent upward pressures on coal and copper prices because of growing secular demand, delays in new mining projects due to the global financial crisis, and mounting sovereign risks that could restrict supply from some countries.
Near term, financial results should get a lift from higher prices. With monsoon rains and floods dampening Australian coal supplies earlier this year, Teck Resources and other coal producers were able to negotiate second-quarter increases to $330 (U.S.) per tonne in the price of metallurgical coal, up from $225 (U.S.) per tonne in the previous quarter.
Although labour and energy costs are edging up, the plans to expand output keep analysts enthusiastic. "Our estimates have Teck coal mine capacity increasing to 28 million tonnes from 23 million tonnes … [and] we expect copper production to increase around 30 per cent," notes Mr. Cabrera.
Present conditions contrast sharply to those in 2008. Teck Resources then teetered on the edge of insolvency after it took on $9.8-billion (U.S.) in debt to acquire Fording Canadian Coal Trust, just as commodity prices went into a downward spiral because of the global recession and financial crisis.
But the emerging economies proved resilient and commodity prices rebounded after April of 2009. Teck Resources' balance sheet was also nursed back to health through asset divestitures, suspension of the dividend, selling a $1.7-billion equity stake to China Investment Corp., and extending debt terms through a secured bond offering.
The run-up in Teck Resources' stock was swift, sprinting from $5 in early 2009 to $36 at year's end. By the end of 2010, it reached a new all-time high of $60, thanks, in large part, to reinstatement of the dividend (now yielding over 1 per cent), a sharp recovery in commodity prices, and paying down $3.1-billion (U.S.) in debt.
The takeover of Fording Coal may have been questioned at the time but it now appears to have been an astute move. And the steps taken to clean up the balance sheet are now virtually complete.
Management is a major reason why Desjardins Securities' Mr. Hughes likes the company. "They're good operators with a mixture of skills, including engineering backgrounds," he explains.
In particular, chief executive Don Lindsay, former head of CIBC World Markets, played a key role in restructuring debt and carrying out other financial moves. Also, chairman Norman B. Keevil is a seasoned veteran with several decades of experience in the industry.
Mr. Keevil retains control of the company through multiple-voting Class A shares. Some observers think the dual-class share structure means no takeover offer for Teck Resources. But Mr. Hughes wouldn't rule it out "if the right offer was presented to Mr. Keevil."
The shares have corrected in 2011, falling to a low of $50 in mid-March. Interruptions to operations resulted in disappointing fourth-quarter earnings, followed by downward adjustments to the company's guidance on future sales. Blame heavy rains in Chile, avalanches in B.C., downtime at shipping terminals, and labour strikes at some mines.
Most analysts largely see the disruptions as short-term phenomena. "Recent share price weakness has priced in … downside risks and created compelling upside reward," noted Alec Kodatsky, an analyst with CIBC World Markets Inc.
