Consider This Important Fact Before Investing in Teck Resources

Teck Resources obtained the right to purchase up to 20 million shares, but how likely is the buyback?

Jul 7, 2014 at 9:47AM

Teck Resources (NYSE:TCK) shares got a boost when the company received regulatory approval to buy back up to 20 million shares, representing approximately 3.5% of total outstanding shares. Teck Resources produces met coal, copper, and zinc. The situation on these markets differs: Copper made a big rebound from its March lows, zinc prices experienced some upside, while met coal stayed under pressure. Thus, the company feels that its copper and zinc segments will make it secure enough to spend around $500 million at Teck's current share price.

Copper prices pave way for cautious optimism
Copper quickly recovered on news of Chinese probes surrounding the use of copper in shadow financing schemes. Recently, prices were boosted by Newmont Mining's (NYSE:NEM) move to seek international arbitrage in resolving the copper concentrate export issue with Indonesia. Together with Freeport-McMoRan Copper & Gold (NYSE:FCX), Newmont Mining produces virtually all copper in the country. There have been no exports from Indonesia since January because of the unexpected tax hike, and Newmont Mining's move could signal that the issue will take longer to resolve.

As copper is one of the main pillars for Teck Resources, bringing 38% of gross profit last year, the rise of its price is positive for the company. This ensures that operating cash flow will increase, reversing the current trend. However, downside risks are still there. For example, when Freeport-McMoRan and Newmont Mining solve their Indonesian problems -- and they ultimately will -- copper prices will experience some pressure.

Cash cushion is enough to back the buyback, but there is one important thing to consider
Teck Resources finished the first quarter with $2.4 billion of cash on the balance sheet. In my view, this cash is enough to back not only the current 3.5% dividend but the buyback as well. Despite soft pricing, Teck Resources continues to generate meaningful operating cash flow. Given the company's solid cost position on the met-coal side, this is likely to continue in the future.

What's more, the company could hope for some relief in met-coal pricing in 2015, as multiple producers have already started to idle their mines. The latest move on this front was made by Cliffs Natural Resources (NYSE:CLF), which decided to idle its met-coal mine in West Virginia because of tough market conditions.

Teck Resources' balance sheet and performance could be solid, but there is one important thing to think about. Last year, the company also announced that it could purchase up to 20 million shares. How many shares were purchased? Just 200,000 at a weighted average price of $24.16 per share.

Bottom line
Buybacks are a good way to return money to shareholders. Purchases on the open market lift the share price, and the dividend increases as the purchased shares are cancelled. However, Teck Resources did not announce its firm intention to repurchase its shares. By receiving regulatory approval, the company just obtained this option.

Copper prices are the key thing to consider regarding Teck Resources' buyback program. Despite recent upside, this year's average copper price is below last year's levels. Last year, Teck Resources purchased an insignificant amount of its shares. This year, the story could repeat itself.

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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.

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