PKX - Teck Resources: $10 Billion Windfall My Bullish Outlook

2023-11-14 10:53:13 ET

Summary

• I'm enthusiastic about Teck Resources Limited's $10 billion windfall from selling its coal assets, signaling a positive shift in the company's trajectory.
• My conservative estimates anticipate Teck returning at least 10% of its market cap to shareholders over the next year, aligning with the long-awaited bullish scenario.
• The acquisition of a majority stake in Teck's coal business by Glencore plc opens the door for a strategic pivot towards copper mining, marking a significant step in reshaping the company's prospects.

Investment Thesis

Teck Resources Limited ( TECK ) is about to receive roughly US$10 billion from its coal assets due to a sale to Glencore plc (GLCNF) (GLNCY). Using my most conservative estimates, I believe the result will be that Teck will return to shareholders at least 10% of its market cap over the next 12 months.

This bull case has taken a very long time to play out. But finally, it has arrived. Here I describe this transaction, my estimates for the ongoing value of the business, plus why investors should continue to buy into this copper business.

Rapid Recap,

In my previous bullish analysis , I said,

I recommended Teck Resources Limited because of two catalysts that are in play.

• The company may still perhaps be acquired in whole or in part by Glencore.
• Demand for copper will increase with time, and there's not enough supply coming online to support copper demand in the next two years.

This thesis has taken a long time to start to play out. But finally, the moment we've been waiting for has arrived.

Glencore's Offer Discussed

The value of Teck's coal business, which Glencore Plc has agreed to acquire a majority stake in for $6.93 billion, is estimated at about $9 billion.

With Glencore taking ownership of 77% and steelmakers Nippon Steel Corp (NISTF) and POSCO Holdings (PKX) holding the remaining stake, the deal implies an enterprise value of $9 billion for Teck's coal business. Then, there's a further $1 billion coming from the coal business receivables over the next twelve months. This means the total value of the deal is about $10 billion.

For Teck Resources, this acquisition allows it to divest its metcoal business, which is highly profitable but environmentally challenging, and refocus on mining metals like copper.

The deal provides Teck with the means to pay off debts, invest in new metal mines, and return value to shareholders.

For a business with a market cap of $18 billion, this puts approximately $9 billion to the value of Teck's metals business.

The Metals Business Discussed - at least a 10% Return

The transaction implies a fair multiple for the coal business, based on peer comparables. After all, note that the metcoal market has been noticeably strong in 2023, after a lackluster 2022.

This will allow Teck to de-lever its balance sheet , build cash to support copper development projects, and return cash to shareholders, see below.

Teck ended Q3 2023 with approximately CAD$6 billion of net debt. This transaction will include about CAD$750 million of related taxes.

Furthermore, I don't believe that Teck has the intention of operating debt-free, therefore, I suspect there's room for at least CAD$2 or CAD$3 billion to be returned to shareholders. There's obviously a lot of uncertainty on the exact amount and timing, but I suspect that this implies at least 10% of capital to be returned to shareholders.

Teck does have a dividend, but I believe that Teck will most likely return cash to shareholders via share repurchase rather than as a one-off dividend. That being said, perhaps a combination of both could ultimately be offered.

Why Invest in Copper?

The rapid rise of electric vehicles, or EVs, is driving a substantial increase in copper investment, particularly in the context of strengthening grid infrastructure.

As the automotive industry undergoes a shift toward electrification, together with the Electrification of Everything movement, the demand for copper-intensive components such as charging infrastructure has surged.

Additionally, the integration of renewable energy sources, essential for sustainable EV charging, relies heavily on copper for efficient transmission and distribution of power.

Grid enhancements, including energy storage systems, are essential to accommodate the growing demands of EV charging networks.

TECK Valuation -- This Stock Will Re-Rate

The graphic above is not a clear like-for-like indication of the amount that Teck should re-rate. It's important to realize that Teck will be selling a significant proportion of its earnings, so its future EPS will be compressed relative to the expectations baked into this graph.

But perhaps this next graphic could be used as an illustrative example that Teck will have the ability to re-rate as a cleaner ''green business,'' rather than a metals and coal business.

The Bottom Line

In conclusion, I'm excited about Teck Resources and the imminent transformation it's set to undergo with a substantial $10 billion windfall from selling its coal assets.

My conservative estimates suggest that within the next 12 months, Teck could return at least 10% of its market capitalization to shareholders.

The awaited bull case has finally materialized, with Glencore acquiring a majority stake in Teck's coal business for $6.93 billion, paving the way for a strategic shift towards copper mining.

This transaction not only allows Teck to divest from its profitable but highly stigmatized metcoal business, but also provides the financial means to pay off debts, invest in new copper mines, and return significant value to shareholders.

As Teck capitalizes on this opportunity, the broader bullish narrative extends to the copper industry, driven by the increasing demand for electric vehicles and the necessity to fortify grid infrastructure.

In the midst of these promising dynamics, Teck's valuation is poised for a potential re-rating, positioning the company as a cleaner, green business in line with evolving market preferences.

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