The world has been brutal to these miners, and the slowing growth of China is hurting them more. Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK) now sits at $4.50 per share, and First Quantum Minerals Limited (TSX:FM) now sits at $3.80 per share. They have fallen 92% and 84%, respectively, in the last five years. Which is a better turnaround investment today?
Usually, turnaround investments aren’t very safe. In fact, they could even fail and go bankrupt. However, if they survive, they could return substantial capital gains.
Teck Resources’s main products are coal, copper, zinc, and lead. Since commodity prices have been falling, the miner’s earnings per share have been falling at a double-digit rate since 2012. As a result, its share price has been falling for multiple years.
The story is similar for First Quantum. It produces copper, gold, nickel, and zinc.
Which is cheaper?
With an initial look, one might think that Teck Resources is a better turnaround because it has gone down more than First Quantum in that last five years. However, price movement is not the only metric to analyze when buying a stock. Which is truly the better turnaround opportunity?
First Quantum looks cheaper based on price alone. But by digging deeper and looking at the price-to-book ratio (P/B), Teck Resources is actually priced at a lower valuation with a P/B of 0.15, while First Quantum has a P/B of 0.2. So, the P/B implies that Teck Resources is cheaper.
Still, the valuation only tells one part of the story. Let’s compare the two miners in multiple facets.
Comparing the two miners
Yield: The dividends for commodity stocks aren’t reliable. In fact, both companies have cut their dividends in the last year. Still, the higher the yield, the more income shareholders receive today. Teck Resources yields 2.2%, while First Quantum yields 2.1%. Personally though, investors shouldn’t invest in these miners for the income.
Earnings: Both miners are experiencing negative earnings, but Teck Resources’s earnings per share are more negative at -$3.3, while First Quantum’s is only -$0.3.
So, relatively speaking, First Quantum looks to be a better bet based on earnings. Either way, their dividends aren’t sustainable by earnings.
Quality: Teck Resources has an S&P credit rating of BB, while First Quantum has a rating of B. Both look pretty shaky since a minimum rating of BBB- is considered investment grade.
Debt: The more debt a company has, the more likely it is to default. Teck Resources’s debt-to-cap ratio is 34% while First Quantum’s is 33%. So, they don’t have excessive debt levels.
Valuation: As mentioned before, Teck Resources is cheaper than First Quantum based on the P/B.
Both potential turnaround investments look shaky. However, if they survive, and if the demand for their underlying commodities grows, they could provide potential returns of five to 10 times.
Foolish investors need to decide whether or not these turnaround investments are necessary for their portfolios. If you’re going for it, you should wait till there’s an evident rebound in commodity stocks before buying, and only buy turnaround opportunities in a non-registered account in case a write off is needed.