Teck Resources Ltd (NYSE: TECK) has seen its outlook change dramatically over the last few years. When commodity prices started to tumble in 2011 investors worried the forecast was bleak at best. As commodities started to come back in 2016 that worry subsided and the stock price rocketed higher by more than 450% in a single year. Here are five things you should know about Teck if you are looking at it today.
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1. Big in Canada?
Teck lays claim to being the largest diversified resource company in Canada. That needs a bit of relativity thrown in, though. For example, Teck's market cap is around $9 billion. That's a large company, but it pales in comparison to a Rio Tinto or BHP Billiton on the world stage, which clock in at $71 billion and $85 billion, respectively. And Teck is nowhere near the largest resource company in Canada, with oil-focused Suncor Energy (NYSE: SU) weighing a hefty $47 billion. It's also pretty small when you look at the entire Canadian market, with the largest rungs of the country normally made up of Canadian banks that tip the scales up around the $100 billion mark. The key to the claim is the word "diversified."
2. Three main businesses
What diversification means today is that the company's business has exposure to steelmaking coal, copper, and zinc. The size of each business waxes and wanes over time based on commodity prices, but lately the mix has been roughly evenly distributed across each of these commodities. For example, coal accounted for 35% of the miner's cash operating profit in 2015, copper 35%, and zinc 30%. But don't get too comfortable with that diversification.
3. Coal is bigger than it looks
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The wild card for Teck is steelmaking coal. A quick look at the price chart for this commodity will help explain why. It's not that the price charts for copper and zinc don't gyrate, they just don't gyrate like steelmaking coal has of late. In fact, if you go back to 2011 coal accounted for 49% of Teck's revenue and 57% of its gross operating profit. Copper and zinc roughly split the rest of the revenue pie that year, with copper accounting for nearly 30% of gross operating profits and zinc around 15%.
The real takeaway here is that coal has historically been the driving force at Teck. And while that hasn't been the case lately, with the breakdown more evenly split, a pickup in the steelmaking coal market would quickly return things back to the way they were.
4. Fort Hills
The next thing you may not have known is that Teck has an energy business. It just hasn't been a notable contributor over time. That, however, is close to changing because of the Fort Hills oil sands project. This project is a partnership with Suncor Energy owning about 50%, Total just under 30%, and Teck exactly 20%.
First oil is expected in late 2017 with 90% of capacity reached over the following 12 months. At this point the project is more than 80% complete. The company expects it to produce around 185,000 barrels of oil per day. The interesting thing about this project, though, is that it's expected to produce oil for 45 years. That's a really long time in the oil business and will make this an important contributor for Teck adding additional diversification to the business for years to come.
5. Debt isn't the problem it once was
One of the big issues for Teck over the last few years has been leverage. Debt wasn't too much of a problem when commodities were in a roaring bull market, but it turned into a major issue when prices started to tumble in 2011. That said, Teck has been working hard to do something about this. Today the miner's debt load sits at around $5 billion, down about $2 billion from the over $7 billion of debt weighing Teck down in September of 2015. I'm rounding so the numbers aren't exact, but Teck reduced debt by about 30% in a year and half or so.
That's an impressive change. At one point investors were worried that Teck couldn't handle the commodity downturn, its financial obligations at Fort Hills, and its debt load. It proved the naysayers wrong.
A lot has changed
When you step back, a lot has changed at Teck. It remains a relatively small diversified miner (despite its Canadian size claim), but it's in much better financial shape today than just a few years ago. And with Fort Hills ready to start producing oil soon, the mix of commodities it produces is going to be reshaped. However, don't let that fool you, steelmaking coal will still be the commodity to watch in the near term as coal prices swing wildly up and down. If they return to a relatively high plateau, coal will again be the largest piece of the miner's business.
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