Since hitting a low in early 2016 at the nadir of the commodity downturn, Teck Resources Ltd (TECK 3.77%) stock has rocketed higher by nearly 600%. But when you compare this relatively small diversified miner to larger peers like BHP Billiton (BHP 3.24%) and Rio Tinto (RIO 2.95%), it still appears relatively cheap. And the company has a catalyst that should push its top and bottom lines higher starting this year. Here's why, even after a big run, Teck Resources stock could still be worth buying today.
Valuation first
Teck Resources is a diversified Canadian miner that's primarily focused on metallurgical coal (used to produce steel), copper, and zinc. The revenue that each of these materials adds to results varies based on commodity prices. In 2017, met coal accounted for roughly 50% of revenue, with copper contributing 20% and zinc 30%. Met coal made up 60% of EBITDA, with copper and zinc evenly splitting the remainder. The company's revenue is globally diversified, with China accounting for 18% of the top line, the rest of Asia 42%, the Americas 22%, and Europe 18%.
Image source: Getty Images.
This commodity company is a truly diversified global player despite the fact that it is relatively tiny compared to the giants that you normally think about as diversified miners. Teck's market cap is roughly $15 billion, while BHP and Rio Tinto hover around $117 billion and $90 billion, respectively.
There's one more area where Teck's numbers are more modest: its enterprise value-to-EBITDA ratio. Even after a huge price advance since the commodity market bottomed in 2016, the miner's 4.7 EV-to-EBITDA ratio is still lower than BHP's 7 or Rio's 5.7. They are both larger and have different commodity portfolios (both are heavily reliant of iron ore), but neither is particularly more diversified by product or the markets they serve. So Teck does appear to be an attractive alternative...and it has a catalyst that will be increasingly apparent in 2018.
Investing during the downturn
In 2013, Teck started building a giant new mine, called Fort Hills, in conjunction with Suncor Energy, Inc. and Total S.A. Suncor is operating the project. This mine is notably different from Teck's other assets, however, because it is a Canadian oil sands mine. Essentially, Teck was looking to add a fourth major commodity to its portfolio. The list of commodities by revenue and earnings above didn't include oil because it didn't contribute to the top line or earnings in 2017 -- it was still in the construction phase. But oil has started to flow, with production expected to ramp up to 90% of nameplate capacity (194,000 barrels of oil a day) by the end of 2018.
A quick update on Fort Hills progress from early in 2018. Image source: Teck Resources
In other words, look for oil to become a profit center instead of a cost center as 2018 progresses. And, as the new mine ramps up, revenue from this business should increase through the year. There could be kinks that need to be worked out that hamper progress, of course, but it should trend higher.
The mine, meanwhile, has a 40-year reserve life, so it will be contributing to results for a very long time. Better yet, its cash operating costs are low enough that the mine will be profitable as long as oil stays above $40 a barrel. That said, the financial benefit from this oil sands mine will depend on commodity prices, but that's just par for the course at a miner like Teck. Regardless, adding a fourth major commodity to the portfolio increases diversification and should bolster the miner's top and bottom lines.
If you are looking for a diversified miner...
Teck Resources is relatively small compared to competitors like Rio Tinto and BHP Billiton. But it isn't really any less diversified when you dig into the business. With a catalyst to push the top and bottom lines higher, it should be compelling to most investors looking for a diversified miner. Add in the company's relatively low enterprise value-to-EBITDA ratio, and it looks even more compelling. This is one miner that should be on your short list today.
