This Miner Has Major Potential

Coal prices are on fire.

Zinc costs a fortune.

10 tons of copper could buy you a sweet RV.

So you know who’s making bank on all these commodities at once? Teck Resources Limited (TECK).

And look, we were shocked too.

When we started to scour our proprietary search data, we expected well known names like Vale (VALE) and Rio Tinto (RIO) to show up at the top of our search results.

But coming in at number three was Teck Resources Ltd.

And as we explored this company, we found what we found a mining trifecta.

Most of you are already aware that commodities are going through a supercycle of sorts, with prices higher than they’ve been in history.

What’s neat about Teck is their diversified revenue streams across both metal and energy as well as the global reach.

Now we’ll make the case for Teck. But be warned, you might find some other mining companies to wet your whistle.

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Teck Resources Ltd. Business

Teck Resources Limited explores, acquires, develops, and produces steelmaking coal, copper, zinc, and energy in Asia, Europe, and North America. 

The company’s principal products include steelmaking coal, copper, gold, blended bitumen, lead, silver, molybdenum, zinc, and zinc concentrates as well as chemicals, fertilizers, and other metals. It also produces indium and germanium. 

As of December 31, 2021, Teck Resources owned or had interests in 13 operating mines, a large metallurgical complex, and several major development projects in Australia, Chile, Ireland, Mexico, Peru, Turkey, and the United States.

Operations are divided into three segments: 

• Steelmaking Coal (39% of 2021 revenues): The company is the world’s second-largest seaborne exporter of steelmaking coal, with six operations in Western Canada that have significant high-quality steelmaking coal reserves. The operations are Cardinal River, Fording River, Greenhills, Line Creek, Elkview, and Coal Mountains.
• Copper (26%): Teck Resources produces copper in the Americas, with four mines in Canada, Chile, and Peru, as well as development projects in North and South America. Its main projects are Highland Valley Copper in Canada and Antamina, Quebrada Blanca, and Carmen de Andacollo in South America.
• Zinc (31%): The company is one of the world’s largest producers of mined zinc, with three operating mines in the United States and Peru, and it owns one of the world’s largest fully integrated zinc and lead smelting and refining facilities located in Canada. The main projects are Red Dog, Trail Operations, and Pend Oreille.
• Energy (4%): Outside of its mining operations, Teck Resources owns an interest in a large producing oil sands mine in Alberta, and oil sands development assets. The main projects are Fort Hills and Frontier.

In 2021, Teck Resources dealt with a handful of issues outside its control including wildfires in Canada, a shutdown at its Highland Valley copper mine with a restart ramp in production.

In the most recent quarter, Teck’s British Columbia operations had to deal with flooding issues.

Financials

As the price of commodities rose, gross margins increased substantially. In the last quarter alone, Teck hit 47.12%.

That pushed through to a 49.3% operating margin and a 34.57% net income margin, which is just astronomical.

Operating cash flow hit its highest levels since 2017. The high capital spending is driven primarily by the opening of the Quebrada Blanca Phase 2 facility (Chile), which will commence production in the second half. 

The new facility is expected to transform the company into a major global copper producer. Its last phase will be the Quebrada Blanca Mill Expansion, which will increase the concentrator input by 50% in Q4 of 2022.

As a shareholder, this is great news as it frees up cash for dividends and share buybacks including 30% of available cash flow as dividend on top of a base dividend of $0.50 per share and a $100 million buyback.

Interestingly, the company doesn’t carry much long-term debt with only $6 billion on the balance sheet and $15 billion in total non-current liabilities.

Plus, most of that debt isn’t due until after 2040.

Valuation

Vale, Teck, and Rio Tinto (RIO) are really the three here that fight for the prize.

All have P/E ratios rolling and forward looking of less than 10x, with Vale’s at a miniscule 4.75x.

Each also has a fantastic price to cash flow ratio and a decent price to sales ratio.

So what about profitability?

Vale’s margins are better across the board with Rio in a close second.

However, Teck doesn’t look too bad and remember, its recent year was plagued by several events outside of its control.

But the real selling point for Teck is the growth.

While all the other miners expect single digit, lackluster growth, Teck’s expanding operations are set to produce a massive increase in revenue of 23.21%.

That trickles down to all the other forward looking growth metrics as well from EBITDA to EPS.

Our Opinion – 9/10

We really like the position of Teck Resources both in terms of the commodities cycle and within its industry.

Given its growth and operational expansions in the next two years, we see a lot more value than is being priced into shares.