I don't doubt that the astounding volatility in commodity markets over the past several years could be connected to an additional grey hair or two, but all the same I intend to hold my core position in one major miner until my entire head turns a silvery monotone.
The stock in question is diversified miner Teck Resources (TCK 3.12%), whose third-quarter earnings released Wednesday provide a welcome snapshot through which to consider the stock's persistently bullish long-term outlook. Teck weathered a meaningful dip in global commodity demand during the period, primarily on the strength of a 29% increase in production of one of the more price-resilient products around: copper.
Copper holds down the fort
Gross profit from Teck's copper unit declined by 27% to $263 million, reflecting a modest 14% retreat by copper prices, but also exacerbated by lower by-product revenue from secondary products like molybdenum and lead. With the enhanced production scale offered by the recent investments like the expansion of Teck's Antamina joint venture with BHP Billiton (BHP 1.45%), Teck achieved a 5% improvement to its net cash cost to reach $1.69 per pound. For the time being -- though likely not for long -- that cost structure is on par with that of much larger producer Freeport-McMoRan Copper & Gold (FCX 3.32%).
During the recent period of more substantial near-term weakness in the markets for coal and zinc -- Teck's other two primary products -- the copper unit played a valuable role in sustaining Teck's enviable position of financial strength. When it comes to forging my own 20-year investment thesis for Teck Resources, however, the coal assets take center stage. Even in the context of a 33% decline in the average realized price for coal, the coal unit maintained a 31% gross margin on revenues that accounted for 43% of the company's consolidated sales.
The unbroken long-term outlook
While a near-sighted equity market adapts its valuation of Teck's shares to the current market environment, this Fool's gaze remains fixed upon the company's longer-term outlook. Teck believes that "the medium to longer term fundamentals for steelmaking coal are quite favorable, however, the recent weakness in the seaborne steelmaking coal market may well persist into the first half of 2013." Peabody Energy (BTU +0.00%) shares a similar view, and joined Teck in focusing upon disciplined cost-reduction initiatives and slightly curtailed production growth while awaiting a partial recovery in prevailing prices for seaborne coal.
Ultimately, my uber-confident 20-year outlook for the shares of Teck Resources comes down to a valuation call. Given the multi-generational productive potential of Teck's coal portfolio, I consider 20 years a reasonable time frame over which to anticipate the steady unlocking of substantial shareholder value. We could strip away all of Teck's phenomenal copper mines, it's strategic zinc assets, its multiple copper development opportunities, and its delayed oil sands joint venture with partners Suncor (SU +2.18%) and Total SA (TOT +0.00%). Take all of that unmistakable treasure away, and I would still find the shares an attractive valuation for the coal assets alone! Teck's current enterprise value amounts to a mere $21.25 for each ton of coal in attributable reserves (or just 11% of the latest average realized price of $193 per ton under severely impaired market conditions)!
A bargain for just the coal alone
Those with a truly long-term view may also enjoy a long-term memory, and I recall quite well the $23.5 billion asset valuation implied by Teck's $14.1 billion deal in 2008 to acquire Fording Canadian Coal Trust for that company's 60% stake in the Elk Valley coal project. True, the deal triggered a rather epic fight for the company's very survival after the financial crisis and resulting commodity-market implosion made the worst of an admittedly aggressive debt exposure. But today, with Teck's debt load down to a reasonable level, and a huge offsetting cash position of $4.2 billion (as of Oct. 23), I find it Foolishly fascinating that the company's enterprise value still hovers beneath that deal's original implied asset valuation.
Over the next 20 years, I expect that Teck's world-class coal assets will generate the kind of cash flow and sustained profitability that will illuminate the remarkable bargain of the stock's current price, and I celebrate the bonus of a 2.5% dividend yield to enjoy while I wait. The stock will remain a long-term coal holding in my own stock portfolio, and I have selected Teck as a "top pick" within my Motley Fool CAPS portfolio. I invite readers to follow along by bookmarking my article list or following me on Twitter. And in case my value-based assessment of the company's coal assets prove a touch optimistic, well, let's just call the miner's copper, zinc, and energy units one of the investment world's richest safety nets.
- Add Teck Resources to My Watchlist
- Add Peabody Energy to My Watchlist
- Add Freeport-McMoRan Copper & Gold to My Watchlist
- Add Suncor to My Watchlist
- Add BHP Billiton to My Watchlist
