It is an important exercise to periodically review our stock holdings as well as those stocks that are on our watch lists. This review should happen at least once a year and when big stock price movements are observed.
Teck Resources Ltd. (TSX:TECK.B)(NYSE:TECK) is a stock that has seen big price movements in the last few years, and the volatility has been both an opportunity and a curse.
December was no exception. But why did Teck rally so much in December? And with Teck Resources stock price rising 8.3% in December, what, if anything, should investors do?
Business as usual
While there were no big happenings or events for Teck in December, there was a sense that “business as usual” for Teck is pretty appealing. It’s just a matter of time before the market realizes the value in this cheap stock that’s trading at cyclical lows.
As a $16.5 billion diversified mining, smelting and refining giant with operations in Canada, the U.S., Chile and Peru, Teck is a force to be reckoned with.
Its major positions in various base metals’ markets and its 21% interest in Canada’s Fort Hills oil sands project are huge assets, and the firm is cranking out tons of cash flow today and will likely crank out tons more.
There is of course, the elephant in the room, which is Teck’s coal operations that currently account for 57% of the company’s EBITDA. But over time, the company’s coal business will make up less and less of its total EBITDA (45% of EBITDA by 2020, and 35% in 2023), as efforts to increase its copper business are in full swing.
Long-term agreement with CN Rail
In December, Teck announced a new long-term agreement with CN Rail — one that provides for investments of more than $125 million by CN to support increased shipments volumes to Teck’s Neptune coal terminal.
The agreement runs from April 2021 to December 2026, and will lower transportation costs and improve rail and terminal performance. It illustrates the fact that in these difficult times, the company is focused on driving home cost savings and efficiencies.
Teck Resource stock valuation is unsustainably low as dividend increases are coming
If we consider the fact that Teck Resources stock is trading at half of its book value and that at seven times earnings, we can see the upside of Teck Resources stock price, as the company increases its copper revenue and earnings and as the company increases its dividend, which the company has indicated that it will certainly do.
Teck continues to generate impressive amounts of free cash flow. In its latest quarter, Teck generated $1.6 billion in operating cash flow and $560 in free cash flow, adding to its already dramatically improving balance sheet and financial standing. I
Teck is clearly in an attractive position, and management has laid out its plans to focus on returning cash to shareholders.
The company’s new policy is to return at least 30% of available cash flow to shareholders, over and above current dividend levels. This paves the way for healthy dividend increases, pushing up the company’s dividend yield significantly higher from 1% currently.
Foolish bottom line
Teck Resources stock price rose in December in what I believed was the beginning of a significant rally. It has, however, dipped again in January.
With the company’s cash flow expected to ramp up significantly in the next few years, I see this as a buying opportunity ahead of significant upside for the stock.
