Upgrade After Citi’s global commodity team raised his met coal price forecasts through 2022, equity analyst Alexander Hacking upgraded Teck Resources Ltd. (TECK.B-T) to a “buy” recommendation from “neutral.”
On Wednesday, the firm moved its met price target to US$325 per ton for the second half of 2021 from US$145 previously. Its 2022 projection jumped to US$225 from US$150, while it maintained a US$150-per-ton projection for 2023.
“This equates to $165-million of additional revenue and EBITDA over the next 18 months for every seaborne ton sold by the met coal companies under our coverage,” said Mr. Hacking.
“We acknowledge that met is a peak price and facing structural de-carbonization headwinds - but the FCF is too good to ignore, in our view.”
With that view, Mr. Hacking raised his Teck rating and increased his target for its shares to $40 from $30, exceeding the average on the Street of $36.90.
“Teck Resources trades at 13-per-cent attributable-FCF yield in 2022 Citi met coal and 13 per cent in 2023 as QB2 copper ramps up,” he said. “Broadly speaking we see mostly positive catalysts going forward: QB2 ramp up in 2022 (risk of major capex overruns/delays receding), lower transport costs from Neptune, met coal earnings upgrades, and discussion of capital return in 2022 (a year ahead of expected). Operational updates have been mostly disappointing in recent years – but we see enough valuation upside to offset this risk. There is potential sum-of-parts value in Teck if the carbon portfolio is divested – although this is not embedded in our target price.
“Investment positives include a solid portfolio of mining assets including the world’s second biggest export met coal business; growth in copper; a strong balance sheet; increased capital returns in recent years. Negatives include risk of lower met coal demand in future; a history of questionable M&A and dual class share structure. On balance we see more upside than downside at current level”