Morningstar | Coal Price Strength and Teck’s Improved Guidance Offset Lower Zinc Price; FVE Maintained
We retain our USD 17 per share fair value estimate for no-moat-rated Teck Resources. The headwind from our approximately 16% lower spot zinc and lead price assumptions of USD 1.25 and USD 1.06 per pound, respectively, is offset by higher assumed metallurgical coal prices in the near and medium term and a better outlook for production in 2018. In nominal terms, we have raised our 2018 forecast by 3% to USD 200 per tonne, 2019 by 17% to USD 140 per tonne, and 2020 by 10% to USD 110 per tonne. Our long-term forecast remains USD 90 per tonne from 2022. The ramp-up of oil sands production at Fort Hills is advancing better than we had expected. This is to the benefit of both volumes and unit costs, and fortuitously coincides with the higher oil price. Teck’s volume guidance for mined copper and zinc in 2018 has also increased.With market concerns around slowing economic growth in China and lower zinc and coking coal prices, the shares have sold off about 15% from multiyear highs of around USD 30 in early 2018. However, we think Teck remains overvalued. This call reflects our expectation for coking coal and copper prices to decline as economic growth in China slows.
Second-quarter 2018 attributable net income of CAD 634 million was up 9% on a year ago. The better result was driven by higher prices for the firm’s key commodities, particularly copper, where the average realised price increased 22% to USD 3.14 per pound. A 7% increase in sales volumes to 74,000 tonnes also helped. Operating profit in the copper division more than doubled to CAD 275 million. Operating profit from coal fell 4% to CAD 771 million, with 12% higher unit costs of USD 73 per tonne and 7% lower sales volumes outweighing a 10% rise in the realised price to USD 183 per tonne. The balance sheet is sound with CAD 5.0 billion of net debt. On a trailing 12-month basis, net debt/EBITDA of 0.8 is relatively comfortable.
Teck Resources is engaged in mining and related activities including exploration, development, processing, smelting and refining. Co.'s major products are steelmaking coal, copper and zinc. Co. also produces precious metals, lead, molybdenum, electrical power, fertilizers and other metals. Co. also owns an interest in certain oil sands leases and have partnership interests in an oil sands development project and wind power project.
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