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Teck Resources Ltd.: Look Out Below?

Teck Resources Ltd. (TSX:TECK.B)(NYSE:TECK) is down 20% in the past month, and investors are wondering if more pain is on the way.

Let’s take a look at the current situation to see if Teck deserves to be in your portfolio right now.

Commodity prices

Teck produces metallurgical coal, copper, and zinc. The company is also a 20% partner of the Fort Hills oil sands development.

The stock rallied from $4 per share early last year to above $35 in November on the back of surging prices for coal and the base metals.

The surge caught many pundits by surprise, as the multi-year downtrend in coal wasn’t expected to reverse course in 2016.

What happened?

China made a policy change in March 2016 that restricted the number of days in a year a mine can operate. This shifted the market from a position of oversupply to one that was relatively tight and triggered a significant rally in the metallurgical coal market.

In fact, metallurgical coal prices jumped from US$90 per tonne last summer to more than US$300 per tonne in November.

Copper and zinc also enjoyed strong rallies in 2016.

Why is the stock falling?

In an effort to cool the rally, China reversed its restrictions, and coal subsequently pulled back below US$200 per tonne though the first part of this year.

Coal has since recovered some of its losses due to concerns of oversupply disruptions in Australia, but contract prices for Q2 still haven’t been released.

Copper and zinc are also giving back some of their gains amid reports of sluggish growth in China, so investors who’d bought at the beginning of the rally last year are locking in profits.

At the same time, oil prices are starting to play a factor in Teck’s stock. Fort Hills is scheduled to begin production in late 2017, which should be good news, as the project has been a cash drain for several years.

However, analysts are concerned oil prices might not be high enough to make Fort Hills profitable, and the recent slide in WTI oil back below US$50 per barrel could put additional pressure on the stock.

Should you buy?

Over the long haul, Teck is an attractive pick. The debt situation is under control, and the company is a low-cost producer in its core markets. When commodity prices are rising, this stock has the ability to be a free cash flow machine, as we have seen in the past year.

At this point, however, it might be a good idea to sit on the sidelines and wait for the pullbacks in copper, zinc, and oil to run their course. Given the huge rally off the 2016 lows, there could be more pain on the way in the near term.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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