Teck Resources Ltd.’s (TSX: TCK.B)(NYSE: TCK) stock has suffered over the past 12-months, and is down about 45%. The stock rebounded a bit on October 29, following its Q3 earnings release, which slowed another huge slump in profits, but were better than analyst estimates.
The latest earnings have raised the question: If the company is now performing better than analysts expect, is a turnaround in the cards and should you buy the stock?
The major factor contributing to Teck Resources’ recent profit slump is its exposure to coal. Coal prices have suffered, and with Teck Resources commodity base being about 44% coal this has had detrimental effects. In the recent quarter, the company’s average realized price for coal was $110 a tonne, down $29 year over year.
The simplest way to solve Teck Resources’ struggles is through an improvement in coal prices, but, unfortunately, the outlook for coal is murky. Steelmaking coal has a somewhat brighter outlook thanks to the recent renewed demand by the steel market. But if you believe the sentiment that the global economy is headed for a slowdown, then steel demand, and therefore steelmaking coal, has tough times ahead. Thermal coal has a fairly negative outlook. Many countries are trying to get away from using thermal coal for electricity generation due to its negative environmental implications.
Another challenge for the coal market popped up just last week and sent Teck Resources’ stock to a five-year low. China, the world’s top coal importer, said it will levy tariffs of 3%-6% on imports of coal. While it is not clear how much of Teck Resources coal is purchased by China, in 2013 that country accounted for 26% of Teck Resources’ revenue.
Teck Resources’ other major resources are copper and zinc. Recently, one bright spot for the company has been an improving zinc market. In order to capitalize on this the company is increasing zinc production. Copper has not performed as well, and Teck has had recent challenges in that resource thanks to production problems. Copper prices tumbled at the beginning of the year and have been unable to return to their 2013 value. Both zinc and copper are industrial metals, which mean they are sensitive to the health of the global economy. Like coal, if you believe an economic slowdown is in store then the future for these two commodities is not very positive.
Are cost cuts enough?
Weak commodities prices have made it necessary for Teck Resources to embark upon a cost-cutting program, and the company is being quite successful at this endeavour. In its latest quarterly earnings, it reported that it has realized $150 million of annualized cost reductions year to date, and is targeting another $50 million in cuts. It is also on track to reduce capital spending by $150 million. The past cuts contributed to better-than-expected results, and future cuts should improve its bottom line even more.
Has the stock bottomed?
Teck Resources’ could very well be trading near its bottom, as the company’s cost savings could contribute to an improving financial position for the company, and in turn the company’s stock could see more upside in the future. I don’t expect the stock to experience massive gains in the near term, with its large exposure to coal keeping downward pressure on the stock while uncertain economic times will limit the price of its other major commodities, copper and zinc.
For investors with a higher risk tolerance and patience, this could be a good opportunity to purchase a major miner at a bargain basement price. But for those with lower risk tolerance, the company’s coal exposure is reason to limit yours.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Leia Klingel has no position in any stocks mentioned.