Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK) is being hammered by low commodity prices, and investors are wondering if the company can hold on until the market finally recovers.
Teck’s stock chart is a disaster. The company has lost more than 85% of its value in the past five years, and the markets for its products remain weak.
The company has been here before and managed to mount a fantastic rally when commodity prices finally recovered, but analysts aren’t so sure things will work out that way again, or at least anytime soon.
China remains the key driver of demand for Teck’s core products, and the Asian giant is working its way through a period of much slower growth.
That doesn’t sound very encouraging, but there are some positive points in the Teck story that might justify a small contrarian investment in the stock.
With that thought in mind let’s look at Teck’s ability to ride out the rout.
Teck is a low-cost producer in the steel-making coal, copper, and zinc markets. This has allowed the company to generate operating profits despite the brutal conditions in the market.
In fact, the company squeezed out a Q3 2015 profit of $29 million, or $0.05 per share.
The coal operation saw its average realized price drop by 20% to US$88 per tonne compared with the third quarter last year, but lower production costs and a weaker Canadian dollar helped boost gross profit in the segment from $10 million in Q3 2014 to $27 million in the latest report.
The copper division really took a hit as prices for the base metal have completely fallen out of bed. Teck’s average realized copper price in Q3 2015 was US$2.39 per pound, down from US$3.17 per pound a year earlier. Gross profit dropped by more than 50% to $82 million.
Zinc delivered gross profit of $231 million, about in line with the results of the third quarter of 2014.
Teck holds a 20% stake in the massive Fort Hills oil sands development. That situation has put severe pressure on the balance sheet in recent years because Teck is obligated to cough up its share of the construction costs.
When oil prices were trading at $100 per barrel, everyone thought Fort Hills was a great idea. Now, some analysts question the wisdom of completing the project.
For the moment, Teck is determined to see the project through and says it can pay the $1.5 billion it needs to contribute over the next two years to get Fort Hills completed.
Production is expected to begin by 2018 and Teck’s share at full capacity will be about 36,000 barrels per day.
Teck finished Q3 2015 with $1.8 billion in cash, so it looks like the company has the funds needed to meet its Fort Hills obligations. The company has $8.2 billion in long-term debt, but none is due before 2017 and the weighted average maturity is 14.5 years.
The company can meet its payments and has $5.8 billion in available credit lines to help it navigate the slowdown and get Fort Hills completed.
Should you buy?
Teck is a risky bet. If commodity prices have bottomed, the stock is probably a good buy at the current price, but that is a gutsy call to make right now given the outlook for the Chinese economy and oil prices.
If you have a contrarian investing style, it might be worth taking a small position. Otherwise, you should look for other places to put your money.