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Wednesday, February 21, 2024

Top Trade Alert – Jan 3rd 2024 – Teck Resources

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Top Trade Alert – Jan 3rd 2024 – Teck Resources

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.

The Good

The Bad

The Ugly

Summary

  • 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.

https://finviz.com/publish/010324/TECKd153909089i.png

😎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.

Based on the web search results, Teck Resources has had the following legal settlements so far:

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
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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.

Finviz Chart

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!