Teck Resources' Cash Flows Could Be in Danger This Year

The lack of production growth in combination with the rise in capital spending could lead to a negative free cash flow for Teck Resources.

Feb 19, 2014 at 10:59AM

Sometimes even diversification doesn't help to avoid difficulties. This has been the case for Teck Resources (NYSE:TCK), which produces coal, copper, and zinc. Teck Resources achieved record coal sales and second highest yearly copper production in 2013, but it didn't help the bottom line as prices for these materials declined. It looks like the difficult price environment will continue to pressure the company this year.

Production will be stagnant in 2014
Teck Resources' revenue stream is fairly evenly distributed between three main sources. Coal accounted for 43.8% of revenue in 2013, while copper brought 30.4% of revenue and zinc brought 25.7% of revenue.

The company expects 2014 coal production of 26 million – 27 million tons, a modest increase from the previous year's level of 25.6 million tons. Teck Resources has the capacity to produce up to 28 million tons of coal, and could do so in the case of a favorable market environment.

Copper production is expected to decline. The company expects to produce 320,000 – 340,000 tons of copper, down from 364,000 tons in 2013. Zinc production is projected to stay at the previous year's levels. The absence of meaningful production growth will result in stagnant revenue levels.

Oil sands project leads to increase in capital spending
At the same time, Teck Resources lifted its 2014 capital expenditures by 40%. The main part of the increase came from the company's investment in the Fort Hills oil sands project, which it is developing together with partners Suncor Energy (NYSE:SU) and Total.

Suncor expects that its 2014 production levels will be lower than in 2013 as the company lost almost all oil production from Libya as a result of ongoing labor strikes. A solid production stream from an asset in a safe jurisdiction would have been a perfect substitute for the lost barrels. However, Suncor will have to wait until 2017 when the first oil from Fort Hills is expected.

Fort Hills will require $2.94 billion of capital investment from Teck Resources over the four years from 2014 to 2017. In the current year, the project will require $850 million. When Fort Hills starts producing, Teck Resources' share of production is expected to be 36,000 barrels of bitumen per day. Lately, bitumen prices have been under pressure. Suncor received $59.45 per barrel of bitumen in the fourth quarter. At such prices, Teck Resources' share of Fort Hills production will contribute less than $800 million per year in the future.

Teck Resources is not the first mining company to go into the oil business. Copper producer Freeport-McMoRan (NYSE:FCX) acquired Plains Exploration & Production and McMoRan Exploration back in 2013. As a result of this move, Freeport-McMoRan achieved production of 16.6 million barrels of oil equivalent in the fourth quarter with healthy margins.

Cash flows will come under pressure
The lack of production growth will negatively affect Teck Resources' revenue growth. Prices for coal, copper, and zinc remain at depressed levels, and this means that operational cash flow is unlikely to demonstrate significant growth.

At the same time, capital expenditures will be significantly higher than in 2013. Also, Teck Resources maintained its dividend. The company spent as much as $521 million on the dividend in 2013. It is possible that Teck Resources will have negative free cash flow in 2014, as expenditures continue to rise while revenue remains stagnant.

Teck Resources' long-term growth is dependent on the success of the Fort Hills project. However, this project will not be finished until 2017. In the near term, the company remains dependent on materials prices, and this means that its shares could see some weakness.

The Motley Fool's top stock for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information