Teck Resources Limited (TSX—TCK.B) is a diversified resource company with business units focused on copper, steelmaking, coal, zinc and energy. The company owns or has an interest in 13 mines in Canada, the U.S., Chile and Peru, as well as one large metallurgical complex and a wind power facility in Canada.
Teck’s financial results depend on prices for the commodities it produces, sells and uses in its production processes. That means the company’s financial results can be quite volatile. So you should have a higher risk tolerance to invest in these shares.
Results for the 2009 to 2013 period, for example, are quite mixed. Revenues rose from $7.7 billion in 2009 to $11.5 billion in 2011, only to reverse course and decline to $9.4 billion in 2013.
Earnings per share, or EPS, have generally tracked the course of revenues. Starting at $3.21 in 2009, EPS rose to $4.52 in 2011, and then fell to $1.66 in 2013.
Profits have continued to decline this year due to significantly lower coal prices, which are currently at their lowest level since 2007. Consequently, adjusted profit for the six months ended June 30, 2014, was $177 million, or $0.31 a share, compared with $525 million, or $0.90 a share, in the same period of 2013.
But a substantial recovery looks possible next year. Assuming the global economy gains strength in coming quarters, commodities prices will likely improve. Certainly, zinc market fundamentals are already improving. Also, the company’s copper production, which is expected to decline this year largely because of lower grades at its Antamina mine in Peru, should rebound in 2015 as grades improve. These factors, combined with cost cutting and share buybacks, bode well for the bottom line.
At about $25, Teck’s share price is undervalued based on its tangible book value of $29.65. This metric gives the net asset value of the company, and is calculated by subtracting the value of a company’s intangible assets, such as patents and goodwill, and liabilities from its total assets. Benjamin Graham, the grandfather of value investing, used to consider a stock that traded at less than 1.5 times tangible book value as undervalued.
Another measure that suggests Teck is attractively valued is its dividend yield. At 3.5 per cent, its dividend yield is well above the S&P/TSX Composite Index’s yield of 2.3 per cent.
Teck should earn $3.18 a share in cash flow in 2014. The stock trades at about 8 times this estimate. It yields 3.5 per cent. Buy.
Money Reporter, MPL Communications Inc.
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