Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK) is moving higher again, and investors who missed the big rally over the past few months are wondering if this is the right time to buy the stock.
Let’s take a look at the current situation to see if Canada’s largest diversified miner deserves to be in your portfolio.
The rally continues
Teck surged from below $4 per share in January to above $15 at the end of April. The stock then took a breather through May, falling back to the $12 mark, but the pullback is starting to look like a pause rather than the massive reversal some pundits predicted. At the time of writing, Teck is back above $14.50 per share.
The continued strength isn’t a surprise.
Teck reported Q1 2016 earnings of $18 million with all but one of its facilities, generating positive cash flow in the quarter. That’s an impressive feat given the slump in the commodities market and is an indication of how well management is controlling costs amid the downturn.
Market outlook
Teck produces metallurgical coal, copper, and zinc. All three have been in a nasty downtrend for the better part of the past five years but 2016 could be the year the cycle finds a bottom.
Coal is in its worst slump since 1950. Teck and other North American producers have trimmed output, but weak demand in China has continued to put pressure on prices. While the market remains oversupplied, there could be some light at the end of the tunnel. In the Q1 report Teck said spot prices had moved above the Q2 contract settlement price.
Copper traded higher in the first part of 2016 as stockpiles fell, and investors started to move back into the metal. The rally lost some steam through May, but prices are moving higher again and copper now trades just above Teck’s Q1 average selling price.
Zinc has been the best performer of the three this year with prices now 30% above the January low. Analysts say the rally could continue as production cuts continue to work their way through the market.
Oil is the wildcard
Teck is not an oil producer, but the company has a 20% stake in the Fort Hills oil sands development, which is scheduled to begin production at the end of next year.
Fort Hills has been a massive cash drain on Teck and is a big reason why the stock fell so far. When WTI oil dropped below US$30 per barrel in January, it looked like the billions pumped into Fort Hills would be a total write-off.
Oil now trades just shy of US$50 per barrel, and Fort Hills suddenly looks viable again.
Risk vs. reward
Teck isn’t without risk. The company is burdened with nearly $9 billion in debt, and a reversal in commodity prices would send the stock crashing again.
However, the company remains profitable in the current market, and a turnaround in coal and copper would boost margins significantly. If oil continues to recover through next year, Fort Hills could prove to be a significant generator of cash flow. Remember, the last time Teck rallied off $4 per share, it hit $60 in less than two years.
I wouldn’t back up the truck, but contrarian types should keep Teck on the radar.
