Teck Resources is down 35% year-to-date and 49% over the last year. The decline in commodity prices has driven the stock lower. Teck Resources produces steelmaking coal, copper, and zinc. It also has interests in energy and holds a stake in Fort Hills oil sands project with Suncor Energy.
Teck’s bet on the energy industry has gone awry with the sharp decline in crude oil prices. Earlier this year, it abandoned a $20.6 billion Frontier oil sands project in Canada. It attributed the decision to non-supportive government policies. Earlier this year, hedge fund Tribeca pushed for Teck Resources’ CEO Don Lindsay’s ouster. It also wanted Teck Resources to exit its energy business.
Teck Resources is working towards increasing its copper mining capacity. Its QB2 project would catapult it into the league of major global copper miners and would increase its attributable copper production by 60%. Copper is among the key metals whose demand would get a boost from sustainable energy. Copper is expected to be in a supply deficit soon as demand growth outstrips supply.
Teck Resources might see a valuation rerating as the concentration of copper in its portfolio increases. Copper is among the most sought after metals in mining space in an otherwise oversupplied market. Copper grades at existing mines have been falling while the ramp-up of new mines has been slow.
Currently, Teck Resources trades at a 2021 EV-EBITDA of 4.0x. Southern Copper, a pure-play copper miner which is also investing in new mines trades at an EV-EBITDA of 9.6x. In 2016, Freeport-McMoRan sold its copper mines at an attractive valuation even as copper prices were trading near multi-year lows. The transaction highlighted the attractiveness of copper assets.
Teck Resources would benefit from the expected increase in its copper production in the long term. In the near-term, it could benefit from a possible rebound in commodity prices. Copper and zinc prices have been playing catch up with equity markets. As more economies reopen across the globe, metal demand and hence prices would improve.
Teck Resources’ steelmaking coal operations would also benefit as steel production increases globally. Chinese steel production is almost back to the pre-pandemic levels. The country is the largest steel producer. The fall in global steel production drove steelmaking coal prices lower. As steel production run rates improve, so should steelmaking coal prices.
Last but not least. Crude oil prices might also recover once the pandemic is controlled. Teck Resources would get positive contributions from its Fort Hills investment if energy prices strengthen.
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