Why would anyone ever buy Teck Resources? It’s dirt cheap is why!

If Warren Buffet were at all interested in this sector, he’d find the deep value he’s always talking about.  Why is the stock so cheap? What could go more wrong?  Teck recently posted a non-cash after-tax charge against the value of its energy assets to the tune of $999 million.  Due to political issues rampant in Canada nowadays it cancelled its participation in the mega Frontier Oil Sands Project.  It seems there’s no shortage of loony protesters out there – did I really type this?  I find it bewildering that the same people who drive cars and live in homes are so dead against the coal, copper mines and oil that make their homes, automobiles and all manner of consumer goods possible.

Teck MineAdmittedly, mines are only beautiful to geologists, mining engineers and some investors.  However, Canadian mining companies are probably the most environmentally and socially responsible in the world.

The industry has had a rough go of it.  Consider these headwinds thanks to the coronavirus:

1. Dampened demand
Chinese steel orders  for March have already dropped  month on month from February,

2. Rising steel inventories
Chinese finished steel inventories at mills and on the spot market both increased after the holiday due to lower demand and transportation restrictions.


And Teck’s problems are indeed the “perfect storm.” The following is from the company’s 4th Quarter Report.

“Ongoing global economic uncertainty negatively impacted commodity prices in the fourth quarter and that has continued into 2020, exacerbated by the effect on markets from the Coronavirus and the impact of severe weather conditions in British Columbia, followed by blockades on rail lines,” said Don Lindsay, President and CEO.”

Other than the write-down of assets (a one-time thing) the biggest problem is the softness in their biggest business segment; steel-making coal. Coal has got to be the most hated commodity despite the fact that it’s absolutely necessary for making steel.  Coking coal is black and dirty just like the stuff used for electricity – and gets tarnished with the same brush.

TeckContributionsGrossProfitSo what else could go wrong?  I’d suggest not much at all.  Not surprisingly, the stock suffered when the Frontier project was dismissed by the company.  But in this case I’d suggest that it’s a good thing.  The economics of the project were tenuous, and without doubt would have drained capital (i.e. cash) for years to come.

So what could go right?  Once the fallout from coronavirus settles and the global economy gets back on track, stronger fundamentals will rule the day.  The Debt/Equity Ratio is a modest 16% and the company is sitting on $1 billion of cash and equivalents at the end of the year.  2019 was a pretty crappy year, and the company was able to generate nearly $3.5 billion in cash flow.  The CAPEX guidance for 2020 is for a little over $1.7 billion.  In other words, if things don’t improve relative to the crappy year expect more than $3.00 in free cash flow per share.  At a P/FCF of about 4X, the company is a bargain (takeover candidate?).

Sure, we’ll have to battle the short-sellers for a time, but as Warren Buffet might say volatility only matters if you have to sell the stock at the wrong time.  Don’t get me wrong, this isn’t a buy and hold for 30 years proposition.  I’ve owned this stock at current price levels, and at three times these price levels…many times over many years.  You buy when things couldn’t be worse, and sell when the company is making lots of money in better commodity markets.


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About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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