Why I'll Hold Teck Resources Until the Year 2032

I don't doubt that the astounding volatility in commodity markets over the past several years could be connected to an additional grey hair or two, but all the same I intend to hold my core position in one major miner until my entire head turns a silvery monotone.

The stock in question is diversified miner Teck Resources (NYSE: TCK  ) , whose third-quarter earnings released Wednesday provide a welcome snapshot through which to consider the stock's persistently bullish long-term outlook. Teck weathered a meaningful dip in global commodity demand during the period, primarily on the strength of a 29% increase in production of one of the more price-resilient products around: copper.

Copper holds down the fort
Gross profit from Teck's copper unit declined by 27% to $263 million, reflecting a modest 14% retreat by copper prices, but also exacerbated by lower by-product revenue from secondary products like molybdenum and lead. With the enhanced production scale offered by the recent investments like the expansion of Teck's Antamina joint venture with BHP Billiton (NYSE: BHP  ) , Teck achieved a 5% improvement to its net cash cost to reach $1.69 per pound. For the time being -- though likely not for long -- that cost structure is on par with that of much larger producer Freeport-McMoRan Copper & Gold (NYSE: FCX  ) .

During the recent period of more substantial near-term weakness in the markets for coal and zinc -- Teck's other two primary products -- the copper unit played a valuable role in sustaining Teck's enviable position of financial strength. When it comes to forging my own 20-year investment thesis for Teck Resources, however, the coal assets take center stage. Even in the context of a 33% decline in the average realized price for coal, the coal unit maintained a 31% gross margin on revenues that accounted for 43% of the company's consolidated sales.

The unbroken long-term outlook
While a near-sighted equity market adapts its valuation of Teck's shares to the current market environment, this Fool's gaze remains fixed upon the company's longer-term outlook. Teck believes that "the medium to longer term fundamentals for steelmaking coal are quite favorable, however, the recent weakness in the seaborne steelmaking coal market may well persist into the first half of 2013." Peabody Energy (NYSE: BTU  ) shares a similar view, and joined Teck in focusing upon disciplined cost-reduction initiatives and slightly curtailed production growth while awaiting a partial recovery in prevailing prices for seaborne coal.

Ultimately, my uber-confident 20-year outlook for the shares of Teck Resources comes down to a valuation call. Given the multi-generational productive potential of Teck's coal portfolio, I consider 20 years a reasonable time frame over which to anticipate the steady unlocking of substantial shareholder value. We could strip away all of Teck's phenomenal copper mines, it's strategic zinc assets, its multiple copper development opportunities, and its delayed oil sands joint venture with partners Suncor (NYSE: SU  ) and Total SA (NYSE: TOT  ) . Take all of that unmistakable treasure away, and I would still find the shares an attractive valuation for the coal assets alone! Teck's current enterprise value amounts to a mere $21.25 for each ton of coal in attributable reserves (or just 11% of the latest average realized price of $193 per ton under severely impaired market conditions)! 

A bargain for just the coal alone
Those with a truly long-term view may also enjoy a long-term memory, and I recall quite well the $23.5 billion asset valuation implied by Teck's $14.1 billion deal in 2008 to acquire Fording Canadian Coal Trust for that company's 60% stake in the Elk Valley coal project. True, the deal triggered a rather epic fight for the company's very survival after the financial crisis and resulting commodity-market implosion made the worst of an admittedly aggressive debt exposure. But today, with Teck's debt load down to a reasonable level, and a huge offsetting cash position of $4.2 billion (as of Oct. 23), I find it Foolishly fascinating that the company's enterprise value still hovers beneath that deal's original implied asset valuation.

Over the next 20 years, I expect that Teck's world-class coal assets will generate the kind of cash flow and sustained profitability that will illuminate the remarkable bargain of the stock's current price, and I celebrate the bonus of a 2.5% dividend yield to enjoy while I wait. The stock will remain a long-term coal holding in my own stock portfolio, and I have selected Teck as a "top pick" within my Motley Fool CAPS portfolio. I invite readers to follow along by bookmarking my article list or following me on Twitter. And in case my value-based assessment of the company's coal assets prove a touch optimistic, well, let's just call the miner's copper, zinc, and energy units one of the investment world's richest safety nets.

As reflected by this 20-year investment thesis, the best investing approach is to choose great companies and stick with them for the long term. In our free report, "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Fool contributor Christopher Barker owns shares of Peabody Energy and Teck Resources Limited. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Motley Fool newsletter services recommend Total. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 25, 2012, at 8:01 AM, gamblingkev wrote:

    With coal so depressed of late, is now the time to get into TCK or do I wait for a dip down to the 27-28 range? I recently jumped into CDY as the price seems to definitely be right there. Do you think TCK will take a portion of their 4.2 billion to buy up some more coal assets?

  • Report this Comment On October 25, 2012, at 8:47 AM, XMFSinchiruna wrote:

    Well, that happens to be the range where I added shares a short time ago, but I have no crystal ball to signal whether that entry price will re-avail itself. I routinely build my long-term positions in stages, taking advantage of selloffs that may present themselves, but without relying on such an outcome to gain exposure. Good luck!

  • Report this Comment On October 26, 2012, at 3:21 PM, garifolle wrote:

    My way is different.

    Unless I am absolutely sure (as sure as one can be) that the dip is only that, a short time dip, I prefer to buy somewhat higher, when a clear uptrend has established.

    Back to 27-28 $, you could think it could go much lower.

    So (in USD), I would wait for a $34-$35.00.

    Because in the moment it looks more like a sell.

    This, if I entended to hold till 2032!

    LOL, the author knows that the article won't be here anymore so that we can check if he still holds in 20 years ffrom now, and mostly why would he sell then.

  • Report this Comment On November 03, 2012, at 9:53 AM, XMFSinchiruna wrote:

    Garifolle,

    To the contrary, I expect that this article, like all Motley Fool articles, will remain in place over the long haul as a lasting archival record.

    I did not intend to suggest that I've pre-determined a date to sell my shares, but rather that I intend to hold for at least that long.

    In terms of investment strategy, I would welcome the lower prices that you seem to fear. I always try to keep some cash on the sidelines for just such an occasion.

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