2023-05-26 14:08:19 ET
Summary
- Two catalysts for Teck Resources Limited: underlying business growth in servicing the energy transition and potential acquisition of Teck Metals (copper business).
- Management's focus on unlocking shareholder value for Teck's copper business.
- Compelling opportunity with potential upside within 12 months.
- Possibility of multiple suitors for Teck Metals, indicating recognized value.
Investment Thesis
There are two possible catalysts for Teck Resources.
There's the underlying business. And there's the potential bid coming for the copper side of the business.
First thing first. Teck Resources Limited ( TECK ) is positioning itself as a growth business seeking to service the energy transition, by producing copper and other base metals.
As I look to embrace the electrification trend as part of my portfolio, I have for a long while been following Teck. But what led me now to pull the trigger is that there's the possibility that Teck Metals (the core copper business), may end up being acquired. This is one potential catalyst that we'll soon discuss in more detail.
The other catalyst considers the management is acutely aware that Teck's copper business is trading at a discount to value and is working hard to unlock shareholder value.
In essence, I argue that there's a compelling opportunity here, that I believe could provide some upside potential within 12 months.
Context to the Botched Teck Resources Spinoff
Recall, Teck's proposed spinoff of its coal business has been retracted . For now. I use this background information for us to base our investment decision.
Nonetheless, I use the graphic that follows as a helpful indication of the thinking behind the thesis and simplifies the proposed splitting of Teck Resources into its copper business (Teck Metals) and its coal business.
TECK Q4 2022
Essentially, having the steelmaking coal business together with the copper business has not allowed Teck to get rewarded with a multiple to EBITDA commensurate with its copper peers.
As you know, steelmaking coal is extremely cash flow generative but carries a significant stigma against it for two reasons: its environmental impact; and the erroneous misconception that it's not got a growth aspect to it.
Nevertheless, the deal was struck so that over several years, there would be at least CAD$7 billion of cash returning to Teck Metals (the name of the ongoing Teck Resources business).
For now, the takeaway is this, Teck's coal business was being valued at about CAD$11.5 billion. So, that means that what's left of Teck Metals (predominantly the copper business) is what's left. Meaning that the coal business is being valued at approximately CAD$15 billion
Teck's Balance Sheet is on Strong Footing
Moving on, Teck Resources stock made meaningful progress on its balance sheet in the trailing twelve months and ended Q1 2023 in very good shape. With a net debt to adjusted EBITDA ratio of 0.6x, Teck is now better-positioned to double down on its copper business.
As you can see above, Teck's balance sheet's debt is well-laddered, with no meaningful maturity until the end of this decade.
This provides the background to the value that Teck Metals (the copper business) has within Teck Resources.
There's More Than One Party Seeking Teck Metals
Next, this is important to keep in mind. There may be more than one suitor seeking Teck Metals. While the likelihood that any of the ultimately acquires Teck Metals is not something I'm basing my investment thesis upon, however, it does reinforce the overall concept that a knowledgeable partner sees value in Teck Metals.
Because let me be honest with you. I have absolutely no idea of what a copper mine could be worth. But those copper giants know. And that's what is important.
Now, the Second Catalyst
As touched on already, asides from the potential ongoing Teck Metals potential bid or not, there's the underlying energy transition aspect that's likely to drive copper prices higher.
As you can see here, copper prices have clearly bottomed and haven't broken through the lows made last year.
Even though, there's an ever-present and consistent fear of the upcoming global recession.
Also, the fact that China's ''great reopening'' didn't take place.
Basically, everything that could really go wrong to suppress copper prices is already well known and appreciated. And yet, copper prices remain very stubborn in a very tight range.
The Bottom Line
Over the past several quarters, Teck Resources Limited has shed its energy business, and now has something in the works to unlock shareholder value.
The business wants to become a pure-play copper business, with a multiple commensurate with those of its peers.
As I've frequently argued, there's a very strong demand for copper as part of the energy transition. And in this manner, Teck Metals will be well set up to participate in this growth opportunity. If it doesn't first get acquired.
For further details see:
Teck Resources: 2 Catalysts Happening (Rating Upgrade)