Teck Resources Goes From Dud to Darling as Coal Makes a Comeback

  • Miner's shares have almost tripled as met coal and metals rise
  • Reversal of fortune has led to surge in analyst EPS estimates

Shares of Teck Resources Ltd. have almost tripled this year, making the Canadian company the best-performing global miner amid the rebound in commodity prices and a projected fivefold improvement in earnings.

The price of Teck’s three main products have surged, with metallurgical coal leading and zinc a close second. Until recently, copper had lagged the pack but gains last week have narrowed the gap. Last year, 37 percent of the Vancouver-based miner’s revenue came from met coal, which is used to make steel, 34 percent from zinc and 29 percent from copper.

The renewed vigor of the three commodities has led to a surge in positive sentiment toward the company from analysts and investors. Analysts covering Teck boosted their estimates for the company’s second-quarter results by more than fivefold on average this year, data compiled by Bloomberg show, the biggest increase in the 98-company Bloomberg World Mining Index. 

Analysts were encouraged further last week by the release of Teck’s first-quarter earnings. The company reported adjusted profit of 3 cents a share, beating the average of 19 estimates for a loss of 3 cents.

Zinc was a key driver, contributing 58 percent to Teck’s gross profit, Joseph Gallucci, an analyst at Dundee Capital Markets, said in a research note. “The reality is that there is no large cap pure zinc play in the market, but Teck is as close as you can get.”

Analysts also pointed to a strong operational quarter in which the company cut steelmaking-coal unit costs by 9.4 percent.

Best Start

“Notwithstanding that the commodity cycle continues to be challenging, we are encouraged by the change in direction in steelmaking coal and zinc prices,” Chief Executive Officer Don Lindsay said in the earnings statement.

Teck’s operations are performing well, reducing costs and meeting production guidance, according to an e-mailed statement from the company Monday. “We are continuing to focus on cost reduction, strong operational performance and maintaining our solid financial position.”

The rebound has propelled the stock to the best start to year in the company’s history, according to data compiled by Bloomberg. That’s made Teck the best performer on the Bloomberg World Mining Index and the S&P/TSX Composite Index. The shares closed Monday at C$15.23 for a market value of C$8.79 billion ($7.02 billion). While that’s up 185 percent since the beginning of the year, the stock is still about 76 percent below its peak of C$64.24 in January 2011.

After its dramatic rally, analysts are more inclined to say hold the stock than buy it. The shares have five buys, 10 holds and eight sells, according to analyst ratings compiled by Bloomberg, compared with five, 19 and four at the beginning of the year.

How much room it still has to run depends on your outlook for commodities, according to Jeremy Sussman, an analyst at Clarksons Platou Securities Inc. in New York. Gains in Teck’s largest source of revenue, met coal, accelerated in the second quarter, with the price trading around $100 a ton for the first time in a year.

“Teck will probably benefit disproportionately in an up met cycle and be hit disproportionately in a down met cycle,” Sussman said by phone.

Coal bulls have few investment options available on the New York Stock Exchange given the number of coal companies that have gone bankrupt in recent years, Mark Levin, an analyst at BB&T Capital Markets, said last week in a note.

“What remains? The short answer is very little except Teck Resources,” Levin said.

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