Company Reports

Teck Resources' first quarter broadly met our forecasts, and full-year guidance is maintained. The shares screen about 50% overvalued, which we think primarily reflects Teck’s rising copper sales and investor optimism for copper demand to significantly increase with decarbonization and electrification. No-moat BHP’s proposal for no-moat Anglo American also suggests that copper miners with growth, like Teck, are attractive to potential suitors bullish on long-term copper demand. We maintain our fair value estimate for no-moat Teck at USD 34/CAD 46 per share.

China plays a defining role for Teck Resources as the biggest buyer of everything the company digs out of the ground: metallurgical coal, copper, zinc, and lead. With the exception of lead, demand for these commodities is tied to fixed-asset investment. We expect a rebalancing of China's economy from investment to household consumption will mean weaker demand growth for investment-oriented commodities and lower prices than the favorable 2023 levels.

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

No-moat Teck’s metallurgical coal business, EVR, accounted for roughly 75% of 2023 fourth-quarter EBITDA and 70% of 2023 adjusted EBITDA of CAD 6.4 billion. The latter was down one-third on last year, driven by lower metallurgical coal and zinc prices and higher unit cash costs, partially offset by increased metallurgical coal sales volumes. However, after selling a minority stake in EVR in January 2024, the sale of its remaining 77% stake to no-moat Glencore means Teck will mainly be a copper business along with some zinc. The sale is likely to close in the third quarter of 2024. We forecast the copper division to account for roughly 85% of EBITDA in 2025. Once its new 60%-owned Quebrada Blanca 2 mine in Chile ramps up to full production of around 180,000 metric tons (Teck’s share), likely in 2025, QB2 will drive an increase in Teck’s attributable copper production by approximately 75% to about 470,000 metric tons.

China plays a defining role for Teck Resources as the biggest buyer of everything the company digs out of the ground: metallurgical coal, copper, zinc, and lead. With the exception of lead, demand for these commodities is tied to fixed-asset investment. We expect a rebalancing of China's economy from investment to household consumption will mean weaker demand growth for investment-oriented commodities and lower prices than the favorable 2023 levels.

Near-term iron ore prices are higher on strong China steel production. Gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 54. It is the cheapest we cover, trading 30% below fair value.

China plays a defining role for Teck Resources as the biggest buyer of everything the company digs out of the ground: metallurgical coal, copper, zinc, and lead. With the exception of lead, demand for these commodities is tied to fixed-asset investment. We expect a rebalancing of China's economy from investment to household consumption will mean weaker demand growth for investment-oriented commodities and lower prices than the favorable 2023 levels.

Commodity prices diverged in the quarter with strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices dropped on worries of a Western recession. Even so, prices are elevated versus history and cost-curve support.

China plays a defining role for Teck Resources as the biggest buyer of everything the company digs out of the ground: metallurgical coal, copper, zinc, and lead. With the exception of lead, demand for these commodities is tied to fixed-asset investment. We expect a rebalancing of China's economy from investment to household consumption will mean weaker demand growth for investment-oriented commodities and lower prices than the favorable 2023 levels.

No-moat-rated Teck Resources has agreed to sell 77% of Elk Valley Resources, or EVR, its metallurgical coal business in British Columbia, to no-moat Glencore. Japanese steelmaker Nippon Steel and Korean steelmaker Posco are to own the rest of EVR. The implied value for EVR (100% basis) of roughly USD 9 billion is modestly higher than Glencore offered earlier this year as an alternative to its initial proposal to purchase all of Teck. We think the sale price is reasonable for shareholders of both companies, with the deal expected to close in the third quarter of 2024. Teck intends to return some of the EVR proceeds to shareholders and maintain a strong balance sheet and its capacity to grow copper output, which seems sensible. Glencore will combine EVR with its existing coal business and, after paying down debt, intends to spin off the enlarged coal business to its shareholders.

China plays a defining role for Teck Resources as the biggest buyer of everything the company digs out of the ground: metallurgical coal, copper, zinc, and lead. With the exception of lead, demand for these commodities is tied to fixed-asset investment. We expect a rebalancing of China's economy from investment to household consumption will mean weaker demand growth for investment-oriented commodities and lower prices than the favorable 2023 levels.

No-moat Teck Resources’ third-quarter 2023 result was lower than our expectations. Adjusted EBITDA of CAD 1.2 billion fell 36% on third-quarter 2022. Teck’s metallurgical coal business accounted for about two-thirds of EBITDA, with copper and zinc roughly splitting the remainder. Adjusted net profit after tax of CAD 400 million, or CAD 0.76/USD 0.55 per share, declined 57% on last year, driven by lower metallurgical coal prices and sales volumes along with higher unit cash costs. Lower earnings and temporary increases in working capital drove negative free cash flow of about CAD 650 million, but net debt remains reasonable at about 1.1 times trailing 12 months EBITDA.

Strong China steel production is supporting prices for steel inputs despite recession concerns. Otherwise, changes to our commodity price assumptions are mixed, led by higher near-term iron ore prices and lower near-term thermal coal prices. We think thermal coal miner Whitehaven Coal and minerals sands miner Iluka are the cheapest we cover. Both trade at 29% discounts to our AUD 9.50 and AUD 10.50 per share fair value estimates, respectively, with Whitehaven’s down 3% on lower near-term thermal coal prices, partially offset by a weaker Australian dollar. Peer New Hope is also down 3% to AUD 6.10 per share. Iluka’s estimate is unchanged, with a weaker Australian dollar offsetting lower synthetic rutile prices.

China plays a defining role for Teck Resources as the biggest buyer of everything the company digs out of the ground: metallurgical coal, copper, zinc, and lead. With the exception of lead, demand for these commodities is tied to fixed-asset investment. We expect a rebalancing of China's economy from investment to household consumption will mean weaker demand growth for investment-oriented commodities and lower prices than the favorable 2023 levels.

Commodity prices have generally stabilized after falling on concerns that China’s reopening would underwhelm, along with worries over a recession in the West. Even so, they remain elevated versus history and cost-curve support. The Russian invasion of Ukraine and subsequent sanctions on Russia support energy prices and reinforce the importance of energy security.

China plays a defining role for Teck Resources as the biggest buyer of everything the company digs out of the ground: metallurgical coal, copper, zinc, and lead. With the exception of lead, demand for these commodities is tied to fixed-asset investment. We expect a rebalancing of China's economy from investment to household consumption will mean weaker demand growth for investment-oriented commodities and lower prices than the favourable 2023 levels.

China plays a defining role for Teck Resources as the biggest buyer of everything the company digs out of the ground: metallurgical coal, copper, zinc, and lead. With the exception of lead, demand for these commodities is tied to fixed-asset investment. We expect a rebalancing of China's economy from investment to household consumption will mean weaker demand growth for investment-oriented commodities and lower prices than the favourable 2023 levels.

While no-moat Teck’s first-quarter 2023 earnings fell compared with the same quarter of 2022, they were still strong. Adjusted net profit after tax declined 43% to CAD 930 million, or CAD 1.78 per share. Adjusted EBITDA fell by about one third to CAD 2 billion, down from roughly CAD 3 billion. The CAD 1 billion decrease in EBITDA was driven by lower prices, lower sales volumes, and higher unit costs, partially offset by foreign exchange. Teck shareholders approved its proposal to remove its dual share class structure at its special meeting on April 26, 2023. However, after shareholder feedback, Teck won’t proceed with the proposed demerger and spinoff of its metallurgical coal operations into a new company called Elk Valley Resources, or EVR. We agree with the decision as we think the proposal was complex and didn’t offer a clean break from metallurgical coal, unlike Glencore’s latest proposal. Glencore’s proposal also includes a meaningful premium for Teck shareholders. While Teck will pursue a simpler spinoff of its metallurgical coal operations (that is, without the substantial financial liabilities that EVR would have had after separation), we think it is likely that Glencore returns with an improved proposal. It is also possible that other bidders emerge. If so, we think it is likely they will also propose a separation of metallurgical coal to satisfy those investors who prefer not to invest in fossil fuels.