Teck Resources (Teck) has revised rating of Outperfomer, but increase our 12 to 18-month price target to C$46 from C$45, after updating our model for a lower-than-expected negative impact from the pressure incident at the company’s Elkview dryer on January 19, 2018 (Exhibit 1), and an upgrade from CIBC oil and gas team to our 2018 and 2019 WTI price forecast
Teck became our top pick despite the Elkview dryer incident (“Top Pick Despite Elkview Incident; Commodities Forecast Upgrade Raises Price Target”). After revising our model, we estimate Teck will generate free cash flow (FCF) yields in the mid-teens during 2018- 2019, the highest among our base metal coverage universe, despite a recent strong share performance
Our fire-side chat with Teck at our 21st Whistler conference highlighted management’s commitment to a disciplined capital allocation, prioritizing shareholders’ returns and organic growth, especially on Teck’s copper division. We provide highlights of our conversation at the end of this report.
What’s The Event?
We have revised our model to account for: 1) updated oil price (WTI) forecasts from our oil and gas colleagues (“Stronger For Longer On The Horizon?”); and 2) an update of our assumptions for the Elkview incident: 2018 met coal production estimate increased to 26.7Mt (up from 23.7Mt) and lower mining (C$52.5/tonne from C$52.8/tonne previously) and logistics (C$36.4/tonne from C$37/tonne previously) costs, as well as lower capex at C$10M (from C$100M previously).
Valuation: Trading At A Discount To Diversified Peers We estimate that Teck shares trade at a 37% and 18% discount to the large diversified mining peer averages of 5.7x 2018E EV/EBITDA and 1.0x P/NAV, respectively. Our analysis suggests the discount is unwarranted given Teck’s strong financial position and increasing exposure to our preferred base metals, zinc and copper.
In addition, we see potential upside to our 2018 Teck EPS and EBITDA estimates from supply disruptions in the copper (i.e. Chile labor negotiations) and met coal (Australia weather) markets (See “Improved Demand Lifts Metals’ Forecast”). This should allow Teck to continue returning cash to shareholders via special dividends or share buy-backs (e.g., November 2017).
Elkview’s pressure incident better than expected
Teck Resources (Teck) announced that the pressure incident at Elkview, (January 19, 2018) is expected to reduce clean coal production by 200kt during Q1/18, with expected repairs costing $5M-10M, taking 4 to 6 weeks to complete. The incident’s negative impact is much smaller than our original estimates (i.e., production loss at ~3.5Mt, capex of $100M). Teck did not provide an estimated impact to logistics and mining/milling costs. We assumed these to be similar to those during the Greenhills dryer repairs in H2/10 ($2/t in mining and $1/t in logistics). Exhibit 1 provides a comparison with the Greenhills pressure incident of June 2010 and the recent Elkview incident.
Teck stated that Elkview is producing higher moisture steelmaking coals at approximately 80% of planned production levels. In order to manage the overall moisture level, Teck is blending higher moisture coal with dry coal from inventories and from other operations.