The Main Reason Investors Need to Short Teck Resources Ltd. (TSX:TECK.B)

With shares of Teck Reources Ltd. (TSX:TECK.B)(NYSE:TECK) trading at a premium to tangible book value, investors may want to take a major short position.

| More on:
think, plan, and act to work towards your financial goals

The past several months have been very good for companies in the resource sector and, more specifically, those in the oil segment. As the price per barrel of oil continues to increase higher (as it should), it is easy to understand why many shares are also trading at higher prices.

As the future profits of oil companies are dependent on the price of oil, the correlation between the going price per barrel of oil and corporate profits are directly in line with one another. To boot, there are still a number of projects that can be restarted at a reasonable cost for those willing to take the risk.

For investors who are prepared to look past oil, the picture is not as clear. At a current price of almost $36 per share, Teck Resources Ltd. (TSX:TECK.B)(NYSE:TECK) may be the best short of the year.

In addition to trading at a more than a 10% premium to tangible book value, the company now faces higher borrowing costs (as interest rates have increased) and, of course, a higher opportunity cost.

Opportunity cost is a very important concept to understand in order to enter this short position.

In many cases, buyers of resources are required to pay an upfront cost and tie in their money for a period of time prior to the product being delivered. When this happens and future prices are higher than the current price, it is called contango. In the resource space, it takes time for large buyers to plan in advance what their future needs will be and to commit to a contract. As cash is required up front, the cost to enter a contract increases.

With interest rates increasing from their traditional lows, the biggest headwinds are currently being felt by the buyers that are entering these contracts. Instead of tying up money for 1%, the government has increased the risk-free rate of return, making the opportunity cost much higher. They are giving up a higher risk-free rate of return. This will lead to less demand from investors and a share price that will hopefully correct to an appropriate level.

Along with shares of Teck Resources, investors may want to think very hard before entering shares of Goldcorp Inc. (TSX:G)(NYSE:GG), as the miner may experience the very same fate. In spite of a rising share price since the beginning of the year, investors should not be tricked.

The main factor that has driven this stock higher is the abandonment of Bitcoin, as the alternative currency or ultimate “safety.” In spite of many readers who do not believe this, it must be noted that there is a correlation between the two assets that is impossible to ignore. When we consider that shares of Goldcorp have increased since the beginning of the year in tandem with the decline of almost all cryptocurrencies, the equation seems to make more sense.

Bottom line: short the resource sector.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Goldsman has no position in any of the stocks mentioned.

More on Metals and Mining Stocks

Gold bars
Metals and Mining Stocks

Why Alamos Gold Jumped 7% on Wednesday

Alamos (TSX:AGI) stock and Argonaut Gold (TSX:AR) surged after the companies announced a friendly acquisition for $325 million.

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Stocks for Beginners

Cameco Stock and More: 3 TSX Commodity Titans to Watch in 2024

Cameco stock and these others will provide you with growth that goes beyond just a year or two, with all…

Read more »

Handwriting text writing Are You Ready For Tomorrow question. Concept meaning Preparation to the future Motivation Stand blackboard with white words behind blurry blue paper lobs woody floor.
Stocks for Beginners

3 Reasons to Buy Lundin Stock Like There’s No Tomorrow

Lundin stock (TSX:LUN) has been killing its production of copper and plans on blowing its records out of the water…

Read more »

Gold bars
Stocks for Beginners

TSX Materials in March 2024: The Best Stock to Buy Right Now

Materials have been quite volatile, though the price of gold has surged to all-time highs. That makes this stock a…

Read more »

Gold bars
Metals and Mining Stocks

Will Gold Stocks Rally in 2024?

Down almost 30% from all-time highs, Franco-Nevada is a gold mining stock trading at a discount to consensus price target…

Read more »

A miner down a mine shaft
Stocks for Beginners

Canadian Mining Stocks: Buy, Sell or Hold?

Canadian mining stocks have seemed like such a strong investment, but with shares down significantly this year, what should we…

Read more »

Gold king in chess game face with the another silver team on black background (Concept for company strategy, business victory or decision)
Stocks for Beginners

Great News for Gold Stock Investors!

Gold has hit an all-time high! Which is good news for some gold stocks, and really good news for others.

Read more »