EUR 850.00 For Business Accounts Only

Morningstar | Weak Underlying 2018 Result for Teck but USD 18.40 per Share FVE Maintained

Teck’s 2018 net profit after tax rose 24% to CAD 3.1 billion. The result included several once-off items, notably CAD 809 million of profits from asset sales. On an adjusted basis, net profit fell 8% to CAD 2.4 billion, short of our CAD 2.8 billion forecast. The shortfall reflected weaker than expected coal and copper earnings. Full-year coal sales of 26.0 million tonnes were less than our 26.5 million tonne forecast and realized coal prices were also slightly weaker. The shortfall in copper primarily reflected lower realized prices.

Versus 2017, coal EBIT was flat at CAD 3.0 billion, copper rose 42% to CAD 877 million, zinc fell 10% to CAD 869 million, and energy recorded a CAD 165 loss. The zinc division was hit by lower second-half 2018 prices and low global smelter charges. The firm’s Trail smelter contributed EBIT of just CAD 16 million versus CAD 131 million in 2017. The energy division loss reflected the first year of production and low oil prices in 2018. The Western Canadian Select oil price collapsed in the fourth quarter with Teck realizing just CAD 9 per barrel, or CAD 33 per barrel for 2018. Teck had already flagged this issue. Energy should improve in 2019 with the operations fully ramped up and unit costs to fall. Cost guidance is CAD 26 to 29 per barrel in 2019 versus CAD 33 per barrel in 2018. Despite this, we expect energy production to remain relatively high cost, particularly once product discounts are considered.

We maintain our USD 18.40 per share fair value estimate. The market reacted negatively to the result, we think primarily due to higher cost guidance for 2019. Cost guidance overall was higher than we expected but not sufficiently high to reduce our fair value estimate. Teck expects cash costs of CAD 62 to 65 per tonne for coal, CAD 1.70 to 1.80 per pound for copper and CAD 0.50 to 0.55 per pound for zinc. This compares with CAD 62 per tonne, CAD 1.74 per pound, and CAD 0.49 per pound respectively in 2018.

The balance sheet continues to improve, and the company is in solid financial shape. Net debt declined 17% to CAD 3.8 billion in the year ended 2018. This is modest relative to the CAD 2.8 billion of free cash flow for the year, up 10% year on year with a CAD 1 billion contribution from net asset and investment sales. Debt metrics are comfortable with net debt/EBITDA at 0.7 and EBIT/net interest at 14.

While we expect Teck’s future earnings to decline, based on our lower forecast metallurgical coal price, we expect the financial position to remain strong. Net debt/EBITDA is forecast to average less than 1.0 for the five years ended 2023. Teck has significant liquidity with CAD 1.7 billion cash and a further nearly CAD 5 billion of undrawn debt. The first major maturity of USD 600 million is in 2024.

Free cash flow is likely to reduce with lower earnings and the ramp up of capital expenditure for Quebrada Blanca 2, or QB2. We forecast free cash flow to average CAD 500 million per year to end 2023. Net of contributions from Teck’s joint venture partner, QB2 capital expenditure should be around CAD 4 billion to end 2023. We think the halving of total dividends in 2018 to CAD 0.30 per share acknowledges the upcoming expenditure for QB2. Total dividends in 2018 reflected a payout ratio of just 7.3% of diluted underlying earnings.