Teck Resources Ltd (NYSE:TECK) lays claim to being the largest diversified miner in Canada. But its roughly $12 billion market cap pales in comparison to mining industry giant BHP Billiton Limited (NYSE:BHP), one of the largest diversified miners in the world with an over $100 billion market cap. That difference, however, doesn't make BHP the better investment, here's why you might prefer the smaller of this pair.
BHP's largest businesses are petroleum, copper, iron ore, and metallurgical coal. Iron ore is the most important, accounting for roughly 45% of underlying EBITDA in fiscal year 2017. That said, the company's coal business, around 18% of EBITDA, has a notable focus on steelmaking coal, increasing the miner's overall reliance on the steel industry. Teck's business is made up of steelmaking coal, copper, and zinc. Steelmaking coal is Teck's biggest business, at roughly 70% of gross profit before depreciation and amortization. So both miners are highly dependent on the steel industry, with Teck a little more so.
Looking at the pair's financial situation, Teck and BHP have similar debt levels. Long-term debt makes up about 25% of Teck's capital structure and about a third of BHP's. Debt to EBITDA ratios are also roughly in line, with Teck at about 1.60 and BHP at 1.75. While they operate on a different scale size-wise, both have roughly similar financial foundations.
To be fair, Teck's balance sheet has improved materially of late, with debt levels falling by about a third over the last three years. BHP's debt levels are roughly flat over that span. During the commodity downturn investors were, worried that Teck wouldn't be able to pay its debts and the capital investments it had agreed to fund. That is where some big differences start between Teck and BHP.
Bigger or smaller
In late 2013, Teck teamed up with Suncor Energy and Total to build a new Canadian oil sands mine known as the Fort Hills Project. The timing for that project was pretty bad. Oil prices started to plummet in mid-2014, a drop that coincided with a deepening downturn in commodity prices across the board. Meanwhile, the cost of the project increased from around $11 billion to nearly $13.5 billion as it progressed. All told, this investment left Teck with higher costs (driven by the obligation to fund its 20% share of the Fort Hills project) right at the point when its revenues were being hit. You can see why investors were concerned about its finances.
However, it managed to get through that difficult span in one piece and without materially altering its business -- helped along by recently recovering commodity markets. Fort Hills should start producing oil at the end of 2017, with a 12-month ramp up to full production thereafter. This will add a fourth major commodity to Teck's operations, materially increasing its diversification. It will also turn oil from a business that was all cost to one that starts producing revenues. And, as Suncor explained earlier this year, once built, oil sands tend to be fairly cheap to operate -- something that investors often don't grasp.
BHP has traveled a vastly different path. During the downturn it made the decision to slim down by spinning off South32 in May 2015. The new company took on BHP's smaller operations, including businesses like nickel and zinc, leaving BHP to focus on oil, iron ore, coal, and copper. More recently BHP has been under pressure from activist investors to trim down its oil business, too. It looks like BHP is going to appease the dissident shareholders by selling its U.S. shale assets.
A different trajectory
There's nothing inherently wrong with BHP or its move to trim down. In fact, BHP is a financially strong, well run miner. The decision to spin off South32 and the current attempt to jettison U.S. shale assets are perfectly reasonable business decisions.
However, I prefer the direction in which Teck is moving. It survived the commodity downturn while still expanding its business into new areas. And that investment is about to pay off with oil from Fort Hills set to contribute to the top and bottom lines starting later this year -- adding a fourth major commodity to its portfolio. The overhang from the costs for the Fort Hills project, meanwhile, will start to fall away once that happens. Teck is, in essence, getting bigger to get stronger. I like that story more than BHP's efforts to shrink itself into a better industry position.