Teck Resources Limited (TSX: TECK.B) trades at higher EV/EBITDA multiples compared to its peers, which should make investors cautious
SmallCapPower | August 11, 2017: Teck Resources Limited (TSX: TECK.B) (NYSE:TECK), Canada’s largest diversified mining company and the world’s second largest seaborne exporter of steelmaking coal, has seen its stock price surge nearly 39% over the past year on strong financial performance driven primarily by increased prices of commodities, particularly steelmaking coal. While the outlook for copper remains fairly optimistic, a muted outlook for the Company’s major revenue and profitability contributor (steelmaking coal) could negatively impact its financial results over the coming quarters. Teck Resources also trades at higher EV/EBITDA multiples compared to its peers, which should make investors cautious.
Investment Thesis
- Canada’s largest diversified resource company with significant presence in steelmaking coal, copper, and zinc
- Strong results over the past few quarters on rising commodity prices
- Steelmaking coal prices have stabilized in recent months with muted outlook on slowing China demand and ironing of supply concerns
- Trades at a higher EV/EBITA multiples compared to peers
Canada’s largest diversified resource company
Teck Resources is the largest diversified resource company, with a significant presence in steelmaking coal, copper, and zinc businesses across North America and South America. The Company has expertise in exploration, development, mining and minerals processing, including smelting and refining, safety, environmental protection, materials stewardship, recycling and research.
Teck Resources is the second largest seaborne exporter of steelmaking coal, a major producer of copper in the Americas, and the world’s third-largest producer of mined zinc. Teck Resources is also building its energy business with the development of Canadian oil sands mining projects.
Production of Company’s Principal Products
First oil at Fort Hills by end 2017
The Fort Hills oil sands project is 92% complete and is on track to produce its first oil in late 2017. The commencement of oil operations further diversifies its business, thereby limiting risks associated with focused operations.
Steel making coal stabilizes after sharp run
After more than doubling over the past year on higher demand from China and supply disruptions in Australia, prices of steelmaking coal, the Company’s key revenue contributor (57% of revenues in 2Q16), have stabilized in recent months. As China slows down and supply issues are sorted out, the outlook for steelmaking coal remains cautious. Production ramp up by major players, such as BHP Billiton Ltd., in recent months could also put pressure on coking coal prices in the near future. From US$300 per tonne in mid-April after Cyclone Debbie disrupted key Australian supplies, prices of coking coal are now trading at ~US$170 per tonne. Any further fall in prices could negatively impact the financial results of Teck Resources for 2017 and beyond.
Strong financial performance on rising commodity prices
Riding on the strong recovery in coal and metal prices, Teck Resources continues to report a stellar financial performance. For 2Q17, Teck Resources reported a 62% jump in revenues over the prior year quarter on increased production across most of its products, especially steelmaking coal supported by strong increases in prices. While steelmaking coal production rose to a second-quarter record of 6.8 million tonnes (up from 6.1 mt in 1Q17 and 6.7 mt in 2Q16), realized prices doubled YoY to US$169 per tonne. Realized prices for copper, zinc and lead also rose between 20%-30% during the quarter. Owing to the above mentioned factors, profit attributable to shareholders shot up to reach $577 million, or $1.00 per share, from just $15 million, or $0.03 per share, in the prior-year quarter.
Cash flow from operations increased significantly to $1.4 billion from $339 million a year ago, which enabled Teck Resources to declare a dividend of $0.10 per share, compared to $0.03 in the prior-year quarter.
Continued debt reduction
Teck Resources has reduced its debt by over US$2.4 billion over the past five years and as of June 30, 2017, the Company’s debt stands at a manageable US$4.8 billion, within its target of <US$5.0 billion. Teck Resources has an undrawn credit facility of US$3.0 billion, which is sufficient to fund its capex programs at the Fort Hills oil sands project and for other working capital purposes.
Valuation and Outlook
Although Teck Resources has reported strong results over the past few quarters on a recovery in commodity prices, especially steelmaking coal, its share price seems to have run ahead of fundamentals in the short term. A subdued outlook for steelmaking coal and other metals, after a sharp recovery, could result in a muted financial performance for the Company in the coming quarters.
High valuation is also evident in the high EV/EBITDA multiple of 16.6x for Teck Resources compared to large diversified miners, such as BHP Billiton Limited, Anglo American Plc, and Rio Tinto Plc, which are trading between 10.0x-14.0x.
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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