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3 Reasons Teck Resources Ltd. Stock Could Fall

By Reuben Gregg Brewer – Sep 15, 2016 at 10:31AM

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Teck Resources has some pretty obvious issues to deal with, but also a big one that you might miss if you don't know what's going on.

Image source: Teck Resources.

Teck Resources Ltd (TECK -7.20%) has been working hard to get to the other side of the commodity downturn that started in 2011. So far it's been doing a decent job, but there are still risks. Here are three reasons Teck Resources Ltd stock could fall.   

The obvious

The most obvious reason Teck's shares could trade lower is the very basis of its business: commodities. Teck sells metallurgical coal (roughly 35% of cash operating profit), copper (35%), and zinc (30%). The price of all three can be volatile at times. So the first big reason that Teck's shares could fall is if the prices for what it sells decline anew.   

There's more that goes into that, though, because steel making coal is seeing competition from natural gas. Companies like U.S. steel giant Nucor (NUE -2.74%) are building Direct Reduction Iron (DRI) plants that create iron ore pellets without the need for coking coal. Although DRI plants won't completely eliminate demand for coal anytime soon, Teck is facing a changing landscape for one its biggest businesses. If it can't navigate this industry shift, which could lead to reduced demand and coal prices, investors would likely become increasingly concerned about Teck's future.   

Fort Hills oil sands construction. Image source: Teck Resources.

The oil expansion

A bigger-picture issue is the company's Fort Hills Oil Sands project, which it jointly owns with Suncor (SU -9.87%) and Total (TTE -6.32%). Suncor owns roughly 51% and is the operating partner, Total owns 29%, and Teck has a 20% stake. The price of oil will play a big role here, of course. Oil sands tend to be on the higher cost side of the oil business, which is why Total sold part of its stake to Suncor recently to reduce its exposure to the region.   

But right now the bigger issue to watch is execution, because the project isn't scheduled to come on line until late 2017 at the earliest. It won't reach full production until at least a year after first oil. If something goes wrong at Fort Hills, investors are likely to react negatively.     

For the most part, things have been going well, with the project about 60% complete. However, the massive fires that stopped production in the oil sands region are just one example of what could go wrong. Fort Hills wasn't directly affected by the fires, but Suncor isn't expected to provide a full update on the project until later in the year.   

Clearly, delays would be unfortunate and could lead to a short-term decline in Teck's shares, but the real concern would be something more catastrophic. And that leads into the third issue: debt.   

All clear... until 2021. Image source: Teck Resources.

Balancing act

To fund the Fort Hills investment at a time when commodity prices were falling, Teck increased its debt load. At the end of 2013, debt made up around 29% of the company's capital structure, totaling around $5 billion. Fort Hills got the green light at the end of that year. Today, debt stands at around 35% of the capital structure and totals roughly $7.7 billion.   

Teck has been able to push its debt maturities out and won't face any big bills until roughly 2021. So there's no immediate reason to worry about debt. But the company does need higher commodity prices and a successful Fort Hills project if it hopes to trim debt back down to previous levels. If debt goes up from here, though, investors are likely to be concerned. And if Fort Hills runs into problems, market concerns could quickly go beyond execution risk to balance-sheet risk if the issues aren't fixed relatively quickly. In other words, you'll want to keep an eye on the balance sheet, too.   

Moving parts

As with any company, there are a lot of moving parts at Teck. Some of them are within the company's control, and others are not. And right now there's no reason to believe that there's an imminent downturn in the shares ahead. However, commodity prices and the miner's costs, Fort Hills, and debt are three reasons Teck Resources Ltd. stock could fall. You'll want to pay attention to each of them.

Reuben Brewer owns shares of Nucor. The Motley Fool recommends Nucor and 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.

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Stocks Mentioned

Teck Resources Limited Stock Quote
Teck Resources Limited
TECK
$29.15 (-7.20%) $-2.26
TotalEnergies Stock Quote
TotalEnergies
TTE
$44.94 (-6.32%) $-3.03
Nucor Corporation Stock Quote
Nucor Corporation
NUE
$105.87 (-2.74%) $-2.98
Suncor Energy Inc. Stock Quote
Suncor Energy Inc.
SU
$27.20 (-9.87%) $-2.98

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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