Teck Resources (NYSE: TECK) lays claim to being Canada's largest diversified miner. That's a true statement, but with a roughly $12 billion market cap, it's still a small fry on the global stage when you compare it to peers BHP (NYSE: BHP) and Rio Tinto (NYSE: RIO), which weigh in at $200 billion and $64 billion, respectively. Teck's relatively small size added to the concern a few years ago when the mining sector was mired in a commodity downturn. Lacking the scale of larger peers and its financial results faltering, there was a very real worry that Teck wouldn't be able to keep paying its bills. That fear, however, is now officially in the past. Here's what you need to know about Teck now.
It was really bad
There's never a good time for a commodity downturn if you're a miner. With the top and bottom lines so reliant on volatile commodity prices, a deep decline can leave a company gasping for air. That's exactly what happened to the broader commodity space when prices started a multiyear downward trend in 2011. Companies across the industry were forced to sell assets and ink other deals (like gold streaming agreements) to raise cash so they could shore up their balance sheets.
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Teck was no different. The company's earnings declined each year between 2011 and 2015, when a massive write-off left the bottom line deep in the red. The miner also reduced its dividend that year because of its financial troubles. The bottom line started to bounce back in 2016, along with commodity prices, but not before Teck's trailing debt to EBITDA ratio spiked to over six times.
Part of the problem was that long-term debt rose each year between 2010 and 2015. Over that span, the miner's long-term debt load nearly doubled. Since this was taking place right when commodity prices were falling (and the bottom line along with them), it's little wonder that investors were concerned. A big part of the problem was a long-term investment Teck had agreed to make in a Canadian Oil Sands mine. A multibillion-dollar investment, it would add a fourth major commodity to Teck's current trio of metallurgical coal, copper, and zinc. Management didn't want to give up on this strategically important asset, so it muddled through as best it could.
Fast-forward a few years
A dividend cut, asset write-downs, some asset sales, and more than $4 (Canadian) per share of red ink in 2015 are all proof that it wasn't a pretty time for Teck. However, it did manage to get through the period while still funding its big oil investment. And it's been working hard to get its balance sheet back in order since commodity prices turned higher. After hitting a peak in 2015, Teck has been trimming debt since, with long-term debt down by roughly 45% by the end of 2018.
That oil investment, meanwhile, started producing revenue in 2018. In the first quarter of 2019, Teck's energy business accounted for 7% of the top line, with copper at 21%, zinc 23%, and coal the remainder. Coal is clearly still the biggest contributor, but with oil now flowing, Teck's business has another offset to the ups and downs in that market. This increased diversification was the main reason for sticking with the expensive project despite the near-term headwinds in the commodity business during the construction phase.
Improving commodity markets, a falling debt load, and increased business diversification haven't gone unnoticed. Teck's stock is up around 480% since the start of 2016. But there's another important aspect to look at here, too -- credit ratings. In the first quarter, the credit rating agencies increased Teck to investment grade.
Although that may seem like a small deal after a massive stock rally, it's a big long-term benefit. Regaining investment grade will allow Teck to eliminate $1.1 billion in letters of credit related to its oil business. It also means that Teck should be able to tap debt markets at lower interest rates when it goes to refinance maturing debt. It will be facing a series of modest debt maturities starting in 2021, with a huge maturity in 2024. That said, it can call the 2024 debt in 2019 if it wants to -- and with the improved credit rating it might just want to, since that tranche of debt comes with a hefty 8.5% interest rate.
Increased financial flexibility, in turn, will make it easier for Teck to complete a new copper mine in Chile while at the same time returning value to shareholders. On that score, the company bought back $180 million worth of stock in the first quarter on top of the $189 million worth it repurchased in 2018. To be sure, Teck is a long way from competing directly with the likes of Rio Tinto or BHP, but things are clearly heading in a good direction.
What's interesting from an investment standpoint here is that Teck's price to tangible book value of 0.7 or so is well below that of either of its larger peers. Rio's price to tangible book value ratio is 2.4 times, and BHP's is even higher, at 2.6 times. While a discount isn't uncommon, the spread between Teck and its larger peers appears wide today when you consider the fundamental improvement taking shape at Teck.
Time for a deeper dive
So, despite a huge stock price advance, Teck could still be an interesting investment option for those seeking to take a position in a diversified miner, with the backstory of improving fundamentals (highlighted by a return to investment grade status) adding to the luster. If you are looking at Rio Tinto or BHP today, you should also take the time to get to know Canadian mining "giant" Teck.
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