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Morningstar | Guidance Unchanged After Teck Resources' 1Q; $22 FVE Maintained

No-moat-rated Teck Resources confirmed its 2019 cost and production guidance for all key commodities despite cold weather affecting first-quarter coking coal and zinc production. Adjusted net profit of CAD 568 million, or CAD 1.00 per share, was down 25% in the first quarter compared with the same period in 2018. Revenue of CAD 3.1 billion was in line with the first quarter of 2018, but this included CAD 212 million of revenue from the low-margin oil sands business. The rest of Teck was affected by lower commodity prices compared with a year ago. Zinc declined 21%, copper 11%, and metallurgical coal 5%. Slightly higher costs also detracted from profit.

While guidance at the Fort Hills oil sands operation was maintained at 12-14 million barrels of oil for 2019, Teck now expects production in the middle to low end of the range. Output was reduced by Alberta government-enforced production cuts. Overall, the impact to group profit is minor as Fort Hills is relatively low margin and only makes up about 6% of forecast 2019 group operating profits. The enforced cuts have ultimately helped to normalize the excessive product discounts for Western Canadian Select crude, which detracted in late 2018.

We make no material changes to our 2019 forecasts and maintain our $22 fair value estimate. Teck appears close to fairly valued, trading within 5% of our estimate. The company is in strong financial shape, and management expects to decide on potential shareholder returns in May. Net debt stood at CAD 3.3 billion at the end of March. We forecast net debt/EBITDA to average 0.5 to 2023, down from 0.7 in 2018. Teck could return around CAD 2 billion, either in special dividends or share buybacks, and net debt/EBITDA would still average just 1.0 for the five-year forecast period. We estimate about CAD 1 billion of further value in earlier-stage growth projects, dubbed Project Satellite by Teck. If sold, this could add to shareholder cash returns.

The substantial investment by Sumitomo in Teck’s main growth project, Quebrada Blanca 2, means group capital expenditure should remain around 2018 levels for the five-year forecast period. Sumitomo’s investment is key to capital investment remaining in check and the potential for additional shareholder returns.

All up, if Teck returned CAD 3 billion to shareholders, this would equate to almost $4 per share, or 18% of our fair value estimate. That said, we would expect those returns, if they do eventuate, to be spread over several years. It’s likely the company will want to retain some financial flexibility for any potential cost overruns at QB2. First production at QB2 is slated for the second half of 2021. There’s also a chance that Teck could retain and develop the Project Satellite options. If so, the lack of sale proceeds, and the need for capital to develop those projects, would probably further curtail potential cash returns to shareholders.