Why the Teck Resources (TECK.B) Stock Price Rose 8.3% in December

Teck Resources Ltd. (TSX:TECK.B) (NYSE:TECK) rallies in December then gives up its gains in January, as the stock tries to move out of undervalued territory.

| More on:
Modern buildings in business district

Image source: Getty Images

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.

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 Karen Thomas has no position in any of the stocks mentioned.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »