Teck Resources Ltd.
(TECK.B-T, TECK-N) C$42.36 | US$33.23
Selling a Stake in the Coal Business Moving Up the Agenda Event
We have looked at a number of scenarios under which Teck reduces its interest in its steelmaking coal business by the end of 2022 and sells its interest in the Ft. Hills oil sands operation.
Impact: NEUTRAL
Last year, a Bloomberg article reported that Teck was exploring options for its steelmaking coal business, including a sale or spinoff, that could value the unit at ~US$8 billion. At the time, we thought it was unlikely that Teck would proceed with such a transaction until 2023/2024, once the QB2 copper project is completed.
During Q&A sessions at recent conferences, Don Lindsay, Teck's CEO, suggested that a transaction to lower the company's stake in the coal business could proceed within the next 12-18 months. From our perspective, the timing for a transaction may be accelerated by: (1) Teck's confidence in completing and ramping-up the QB2 project and (2) tightly supplied steelmaking coal markets and record-high coal prices. Our current base-case NPV-8% for the coal business is $10.6 billion ($19.73/share), assuming a long-term US$150/t coal price. Increasing the long-term coal price to US$175/t would generate an NPV-8% of $15.82 billion ($29.29/share).
Mr. Lindsay has also made it clear, in our view, that Teck will exit its interest in the Ft. Hills oil sands operation. How this will be achieved is not clear at this point, with possibilities including a sale or spinoff of the company's 21.3% interest in the operation. We currently value Teck's interest at ~$2 billion.
Over the past five years. Teck has generally traded at the low end of the valuation range relative to its larger-cap, global mining peers (based on Capital IQ consensus EV/NTM EBITDA) at an average of ~4.4x; the average EV/NTM EBITDA over the past five years for BHP, Rio Tinto, Anglo American, Antofagasta, and Freeport is ~5.6x (range of 5.2x-6.8x). We believe that selling the interest in Ft. Hills and reducing its interest in the coal business could materially improve Teck's valuation multiple, resulting in a higher share price despite lower absolute EBITDA and FCF.
TD Investment Conclusion
We are maintaining our ACTION LIST BUY recommendation and $55.00 target price.