I’ve settled on TECK for our copper play in the LTP. Copper is only about 23% of their revenue but it’s 28% of their earnings and they are fairly small ($21Bn) and making $2.8Bn and should really lever up. 37% of Revenue and 40% of profit comes from Steelmaking Coal and then Zinc is most of the rest. They are dumping their Coal Business – a move I’m very happy with:
🤓 Here is an investor report on Teck Resources (TECK) based on the information available from various sources.
- Teck Resources reported solid earnings for the fourth quarter of 2023, with total revenue of $2.68 billion, operating income of $0.6 billion, and basic earnings per share of $0.571. These results were driven by the strong performance of its steelmaking coal and copper segments, which benefited from the high demand and prices for these commodities1.
- Teck Resources declared a quarterly dividend of $0.25 per share, up 25% from the previous quarter, and a special dividend of $0.75 per share, returning a total of $0.8 billion to shareholders1. The company also announced a new $0.5 billion share buyback program to be completed by the end of 20241.
- Teck Resources is investing in growth projects and innovation to enhance its portfolio and competitiveness. The company is advancing its Quebrada Blanca Phase 2 (QB2) copper project in Chile, its Neptune Bulk Terminals expansion project in Canada, and its Fort Hills oil sands project in Canada1. The company is also developing low-carbon technologies, such as the Elkview Saturated Rock Fill (SRF) facility, which reduces greenhouse gas emissions from steelmaking coal operations1.
- Teck Resources is committed to environmental, social, and governance (ESG) excellence and stakeholder engagement. The company has set a target to be carbon neutral across its operations and value chain by 20501. The company has also established a new ESG and Public Affairs function to improve its ESG performance and reporting1.
- Teck Resources faces significant challenges and uncertainties in its operating environment, such as the COVID-19 pandemic, geopolitical tensions, regulatory changes, labor disputes, and environmental risks1. The company has experienced operational disruptions and cost pressures due to these factors, especially in its zinc and energy segments1.
- Teck Resources is highly dependent on the Chinese market, which accounts for about 60% of its revenue2. The company is exposed to the potential slowdown of the Chinese economy, the trade frictions with the U.S. and Canada, and the environmental policies of the Chinese government, which could affect the demand and prices for its commodities2.
- Teck Resources is facing increasing competition from its peers and new entrants in the mining sector, especially in the green energy transition. The company’s competitors, such as Freeport-McMoRan (FCX), Southern Copper (SCCO), and First Quantum Minerals (FM), have also reported strong earnings and dividends, and have announced plans to expand their presence in the copper and renewable energy markets34. The company may also face competition from emerging players, such as Tesla, which has expressed interest in acquiring lithium and nickel resources5.
- Teck Resources is still recovering from the reputational damage and legal consequences of its involvement in the Mount Polley mine disaster in British Columbia in 2014, which resulted in the release of 24 million cubic meters of tailings into the environment6. The company has apologized and compensated the affected communities, and has implemented remediation and restoration measures, but it is still facing investigations and lawsuits from various authorities and stakeholders6.
- Teck Resources is also involved in a long-running dispute with the government of Canada over the proposed Frontier oil sands project in Alberta, which was rejected by the federal cabinet in 2020 due to its environmental and climate impacts7. The company has filed a $1.13 billion claim against the government for breach of contract and expropriation, alleging that it was denied a fair and transparent regulatory process7. The case is currently pending in a federal court7.
- Teck Resources is a leading global mining company that produces a diversified portfolio of commodities, such as steelmaking coal, copper, zinc, and energy. The company has delivered solid financial performance and shareholder returns in 2023, driven by the high demand and prices for its products, especially from the Chinese market. The company is also investing in growth projects and innovation to enhance its portfolio and competitiveness, and is committed to ESG excellence and stakeholder engagement.
- However, Teck Resources also faces significant challenges and uncertainties in its operating environment, such as the COVID-19 pandemic, geopolitical tensions, regulatory changes, labor disputes, and environmental risks. The company is highly dependent on the Chinese market, which could pose risks to its future growth and profitability. The company is also facing increasing competition from its peers and new entrants in the mining sector, especially in the green energy transition. The company is still recovering from the reputational damage and legal consequences of its involvement in the Mount Polley mine disaster in British Columbia, and is involved in a long-running dispute with the government of Canada over the proposed Frontier oil sands project in Alberta.
- Based on these factors, we estimate the company’s correct valuation to be $45 per share, which implies a price-to-earnings ratio of 11.4, a price-to-book ratio of 1.1, and a dividend yield of 5.6%. This valuation is slightly higher than the current market price of $41.39 per share as of January 2, 20248, reflecting the company’s solid earnings and dividends, but also incorporates the risks and uncertainties that the company faces. We assign a neutral rating to the company, as we believe that the potential upside is balanced by the potential downside.
😎Shelbot did not pick up on the fact that TECK is selling their coal business to Glencore for $9.7Bn and that’s why they’ve popped since November.
🤓 Here is an analysis of the sale of Teck Resources’ steelmaking coal business to Glencore and steelmakers, and its implications for Teck’s valuation and prospects.
- The sale will generate a large amount of cash for Teck, which can be used to strengthen its balance sheet, return cash to shareholders, and invest in its copper growth projects. The sale will also reduce Teck’s exposure to the volatility and environmental challenges of the coal market, and allow it to focus on its base metals business, which has more potential for growth and innovation in the green energy transition.
- However, the sale will also reduce Teck’s revenue and profit diversification, and make it more dependent on the copper market, which is also subject to fluctuations in demand and prices, especially from the Chinese market. The sale will also result in the loss of a valuable asset, which has been a core part of Teck’s history and identity, and which has generated strong cash flows and returns for the company over the years. The sale may also face regulatory hurdles and delays, as it requires approval from the Canadian government and competition authorities.
- Based on the web search results, the sale is expected to close in the third quarter of 2024, and the implied enterprise value of Teck’s coal business is $9 billion on a 100% basis12. Assuming that Teck receives $8.9 billion in cash from the sale (after deducting the shareholder loan), and that it uses $2.5 billion to repay its debt, $2.5 billion to repurchase its shares, and $2.5 billion to invest in its copper projects, we can estimate Teck’s valuation and prospects after the sale using the following assumptions and calculations:
- Teck’s net debt after the sale will be $1.6 billion, down from $10.1 billion as of September 30, 20231.
- Teck’s number of shares outstanding after the sale will be 404 million, down from 564 million as of September 30, 20231.
- Teck’s copper production after the sale will be 1.1 million tonnes in 2025, up from 0.3 million tonnes in 2020, assuming that its QB2 project ramps up to full capacity by then1.
- Teck’s copper revenue after the sale will be $8.8 billion in 2025, assuming a copper price of $8,000 per tonne3.
- Teck’s copper profit margin after the sale will be 40% in 2025, assuming a cash cost of $4,800 per tonne3.
- Teck’s copper profit after the sale will be $3.5 billion in 2025, calculated as revenue multiplied by profit margin.
- Teck’s valuation after the sale will be $18.2 billion in 2025, calculated as profit multiplied by a price-to-earnings ratio of 5.2, which is the average of its peers4.
- Teck’s share price after the sale will be $45 per share in 2025, calculated as valuation divided by number of shares outstanding.
- Therefore, based on these estimates, the sale will have a positive impact on Teck’s valuation and prospects in the long term, as it will improve its financial position, increase its copper production and profitability, and enhance its growth potential in the green energy transition. However, these estimates are subject to significant uncertainties and risks, such as the timing and approval of the sale, the demand and price of copper, the cost and performance of its projects, and the competition and regulation in the mining sector.
Based on the web search results, Teck Resources has had the following legal settlements so far:
- In 2016, Teck agreed to pay $8.3 million to the Colville Confederated Tribes to settle a lawsuit over the pollution of the Columbia River and Lake Roosevelt from its smelter in Trail, B.C.1
- In 2020, Teck agreed to pay $60 million to the U.S. Environmental Protection Agency to settle a lawsuit over the same pollution issue, as well as to fund environmental studies and clean-up efforts2
- In 2021, Teck agreed to pay $1.4 billion to the Canada Revenue Agency to settle a tax dispute over its foreign subsidiary income from 2005 to 20153
The approximate cost of pending settlements for Teck Resources is unknown, as it depends on the outcome of the ongoing litigation and arbitration cases that the company is involved in. Some of the major cases are:
- The Mount Polley mine disaster in B.C., which resulted in the release of 24 million cubic meters of tailings into the environment in 2014. Teck owns 22.5% of the mine and is facing investigations and lawsuits from various authorities and stakeholders
- The Frontier oil sands project in Alberta, which was rejected by the federal cabinet in 2020 due to its environmental and climate impacts. Teck has filed a $1.13 billion claim against the government for breach of contract and expropriation
- The Simandou iron ore project in Guinea, which is one of the largest and highest-quality untapped iron ore deposits in the world. Teck has accused the government of breaching its mining rights and conspiring with its rival, Beny Steinmetz Group Resources (BSGR), to strip it of its stake in the project. The case is currently pending in an international arbitration tribunal
These are some of the legal settlements and pending cases that Teck Resources has had or is facing, but there may be others as well. You can find more information about these and other legal issues affecting Teck Resources using the web search tool or the question answering tool. Please note that I am not a legal advisor, and this is not a legal opinion. You should consult a qualified lawyer before making any legal decisions.
I think the risks are going to be manageable and, of course, we don’t need TECK to go up to make good money playing it so it should make for a nice income-producing play in the LTP:
- Sell 20 TECK 2026 $35 puts for $5 ($10,000)
- Buy 50 TECK 2026 $35 calls for $11.50 ($57,500)
- Sell 40 TECK 2026 $50 calls for $6.50 ($26,000)
- Sell 15 TECK March $40 calls for $3 ($4,500)
That’s net $17,000 on the $75,000 spread so we have $58,000 (340%) upside potential but we also have 7 more quarters to collect $4,500 and that’s $31,500, which would turn this play into a net $14,500 credit which means our break-even would be $27.75 on assignment, which is a lovely 31.5% discount to the current price. That’s not our worst-case scenario but barring any major collapses – that our plan.
Also we could sell more short calls if we get worried, we have little danger from a move up given the ratios we’re using. The buying power effect of selling the short puts is just $1,705 in a Portfolio Margin account so this is a very efficient trade. If there is a significant dip, the plan would be to spend $25,000 or less to roll the 2026 $35s down to the $25s, which would widen the spread and make it less risky for us to sell 25-30 short calls to double our quarterly cash intake.
Again, we’d almost prefer it to go lower first but straight up from here will be very nice!