With the fate of China, so goes the fate of Teck Resources Ltd. (TSX: TECK.B)(NYSE: TECK), or so it would seem. But that may be good news for investors, as there are encouraging signs that the Chinese economy is starting to turn the corner.
The reason Teck Resources and China are so inextricably linked is because Chinese demand drives much of the market for everything that Teck digs out of the ground, from metallurgical coal to copper, zinc, and lead.
Metallurgical coal is particularly important as it forms the major driver of Teck’s profitability and is also used in the production of steel, which has been such an integral part of China’s investment in infrastructure spanning the past decade.
Back in 2011, all was well with Teck’s share price on the Canadian exchange, sitting as high as $55, and the Chinese economy humming along with GDP growth above 8% per year.
And then began the fears of a “Chinese slowdown,” or even what some thought may be the bursting of a credit bubble. While it was true that Chinese GDP decelerated from double digits to a low of 6.7% in 2016, at least to date there has been no major collapse in the Chinese economy, or even signs of one.
In fact, recent data shows that Chinese GDP is expected to accelerate this year for the first time since 2010.
First-quarter GDP clocked in at 6.9% with the second quarter equaling that mark and topping the Chinese government’s own internal forecasts on the back of strength in the country’s property market.
A stronger Chinese economy combined with lower interest rates in the U.S. since the start of the year and a weaker U.S. dollar all bode well for the future of Teck.
That’s because lower interest rates in the U.S. tend to benefit emerging market economies like China, and a weaker U.S. dollar has historically acted as a tailwind for commodity prices.
The effect can already be seen in Teck’s recent performance.
In the second quarter, Teck set a new record for coal production at 6.8 million tonnes, and, what’s perhaps more encouraging, the company realized prices for metallurgical coal that were more than double the levels from a year ago.
Management used the opportunity to retire some of its more expensive debt maturities, bringing its net-debt-to-total-capital ratio below 25%, and established a new dividend policy, doubling the annual rate to $0.20 per share with the expectation that the company will additionally be issuing a supplemental dividend towards the end of the year.
Time to buy?
A look at the charts suggests Teck shares have already started to break out.
Teck shares on the NYSE have demonstrated solid support this month, bouncing off the 200-day moving average before popping 6.3% in the first two days of trading last week.
These are all encouraging signs for investors who may want to Foolishly put down a little capital on Teck Resources and see if shares are ready to soar to new heights.
