Teck Resources Plunges 52% in a Year: What's Pulling it Down?
Shares of Teck Resources Limited TECK have not been performing well for the past year. The company’s stock has plunged 51.7% over the past year compared with the stocks in the industry that posted a cumulative decline of 13.5%. This downside resulted from weak commodity markets and global economy slowdown. Moreover, the company’s major plant outages are likely to impact current-year coal production, while muted production guidance for Steelmaking Coal, zinc and Energy segment are concerns.
Factors Plaguing Teck Resources
Teck Resources delivered adjusted net earnings of 31 cents per share in the fourth quarter of 2019, reflecting a year-over-year slump of 52%. Also, the bottom-line figure lagged the Zacks Consensus Estimate of 35 cents. Quarterly results reflected the impact of weak commodity markets for the company’s principal products and unfavorable weather conditions in British Columbia. Net sales slid 18.2% year over year to $2,011 million, missing the consensus mark of $2,075 million.
For the current quarter, sales volumes for the Steelmaking Coal segment is projected at 4.8-5.2 million ton, down from the previous estimate of 5.1-5.4 million ton due to weather-related issues in British Colombia and rail blockades. Given the potential weak demand due to the coronavirus outbreak, and the high inventory levels owing to rail and port constraints, the company plans to shut down Neptune Bulk Terminals, in order to progress the facility upgrade, which might mar quarterly coal production.
Further, pricing softened in 2019, reflecting the pressure on steelmakers’ margins factoring lower steel pricing and persistent high iron-ore prices. Steelmakers curbed production amid uncertainties created by trade disputes and the global economy slowdown. Copper and zinc metal markets remained under pressure during December-end quarter, affected by the macroeconomic slowdown and global trade disputes. Also, copper and zinc prices have since plummeted following the outbreak of the Coronavirus.
In late August, an electrical equipment failure at the company’s Trail Operations reduced refined zinc production by 10%. Hence, Zinc production in the ongoing year is expected to decline. Furthermore, in light of production curtailments taken by the Government of Alberta, bitumen production will continue being below the design capacity this year.
Will the Stock Rebound?
Despite the aforementioned headwinds, Teck Resources will gain from the Neptune Bulk Terminals facility upgrades, construction of Quebrada Blanca Phase 2 copper project and the company’s cost-reduction initiatives.
Notably, Neptune Bulk Terminals project will significantly boost the terminal-loading capacity and improve its capability to meet delivery commitments to customers, while the Quebrada Blanca Phase 2 copper project will transform the company’s copper business, making it a major global copper producer.
The company implemented a company-wide cost-reduction program to lower operating costs and deferred some of planned capital projects in bid to counter uncertain economic conditions. It is targeting reductions of $400 million in planned capital spending and other costs. Also, the company’s initiative to achieve annualized EBITDA of $350 million by the end of the current year will bolster its margin.
The company intends to complete major plant outages in 2020. Though these outages are likely to lower steelmaking coal production in first-half of the current year, it will eventually pick up in the second half. Cost of sales is expected to be significantly higher in the current quarter than fourth-quarter 2019. However, it will decrease significantly in the second half of the year, when the plants resume full production levels. Overall, cost of sales will be lower in the ongoing year than in 2019, which will benefit margins for the year.
We believe these factors will benefit Teck Resources’ results and help drive a recovery in its share price.
Zacks Rank & Key Picks
Teck Resources currently carries a Zacks Rank #5 (Strong Sell).
Few better-ranked stocks in the basic materials space include Daqo New Energy Corp DQ, Sibanye Gold Limited SBSW and Impala Platinum Holdings Limited IMPUY, each currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Daqo New Energy has an expected long-term earnings growth rate of 29%. The company’s shares have surged 73.2% in the past year.
Sibanye has an expected long-term earnings growth rate of 20.4%. Its shares have soared 109.5% in a year’s time.
Impala Platinum has a projected long-term earnings growth rate of 26.5%. The company’s shares have appreciated 125.3% over the past year.
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