Teck Resources Ltd is a Canada-based company, which engaged in the business of exploring for, acquiring, developing and producing natural resources. The company’s segments include steelmaking coal, copper, zinc and energy.

Key Highlights

• Production Update: On September 08, 2020, the company reported that Fort Hills Ltd decided to ramp up production to approximately 120,000 bbl/day by the end of FY20. Teck Resource has a 21.3% share in the project. Further, the group also lowered the unit operating costs guidance by CAD 2/bbl to in between CAD 35 to CAD 38 per barrel. The company previously announced a reduction in 2020 capital spending in Energy business unit to CAD 85 million from CAD 175 million and this remains unchanged.

• Dividend Announcement: The company announced that it would pay a dividend of CAD 0.05 per share on its outstanding Class A common shares and Class B subordinate voting shares on September 30, 2020.

• Strengthen Financial Position (2QFY20): In the second quarter of FY20, the company updated that it has reduced near-term debt maturities and further strengthened liquidity by adding a US$1 billion revolving credit facility. Further, the company has completed Elkview Operations plant expansion, reducing steelmaking coal operating costs and improving margins while maintaining total production capacity.

• QB2 construction activities are ramping up: The company updated that QB2 production activities are gradually ramping up with over 3,000 people currently on-site, 4,000 expected by the end of July and increasing to pre-suspension levels with a workforce of 8,000 by the end of October, as conditions allow.

• Lower Debt implies low balance sheet risk: The company’s Debt/Equity ratio stood at 0.34x, with a significantly higher interest coverage ratio of 19.64x, which implies lower balance sheet risk.

Risk: The company’s financial performance is exposed to a variety of risks including commodity price risk, currency exchange risk. Also, the second wave of COVID-19 outbreak could further dent its performance.

Bullish Price Trend

• Moving Averages: Tech Resource shares traded above the crucial long-term, short-term and immediate support levels of 5-day, 10-day, 20-day, 30-day, 50-day and 200-day SMAs, which reflect a bullish price trend in the stock

• RSI: 14-day RSI hovering in a neutral zone and tilted towards the overbought zone, reflect a positive price momentum in the stock. 

• MACD: The Moving Average Convergence Divergence (MACD) is rising and hovering above 9-day signal line. Further, the difference between short length 12-day and long-length 26-day EMA is positive, which is another bullish indicator.  

Valuation Methodology (Illustrative): EV to EBITDA

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

The group’s performance in the second quarter of FY20 was moderate, and the management remained focused and took steps during the quarter to further strengthen its financial position, reduce costs and position Teck to significantly improve margins towards the end of 2020 and early 2021 as it completes major capital projects.

We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like We have valued the stock using Price to Book based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like First Quantum Minerals Ltd, Agnico Eagle Mines Ltd and Kinross Gold Corp etc., Therefore, based on the above rationale, we have given a Buy recommendation at the closing price of CAD 17.92 (as on September 14, 2020), with lower double digit upside potential.

1-Year Daily Price Chart (as on September 14, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Disclaimer

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