Upgrade Stifel analyst Alex Terentiew sees a “catalyst rich year ahead” for Teck Resources Ltd. , believing a valuation upwards of $64 per share “could be warranted.”
“Strong commodity prices are aligning with ideally timed project development to create an outlook for Teck we think couldn’t get much better,” he said. “Met coal prices remain well above expectations, Fort Hills is expected to finally show its potential, QB2 is in the final stage of completion, San Nicolas may soon get a partner and move forward, and the energy and met coal divisions we believe could be restructured later in 2022, attracting new shareholders. Altogether, the alignment of these events we expect could generate higher cash flows and returns to shareholders, in addition to a higher market valuation as a more base metals focused company takes shape.”
Mr. Terentiew thinks Teck’s base metals business alone could be worth almost as much as the company is valued today.
“Breaking down Teck into base metals, met coal and energy divisions, we estimate that applying peer a valuation to the base metals business alone could warrant a $39 per share valuation, leaving copper growth projects ($4), met coal ($12-17) and energy ($4 per share) as incremental upside, potentially to $64 per share plus share,” he said.
“Coal and oil sands are weighing down Teck’s base metals valuation, in our view. With 50 per cent of its business currently driven by metallurgical coal, it’s understandable why Teck trades more like a premium coal company and at a discount to the copper miners. Once QB2 ramps-up and if Fort Hills is sold or coal is restructured, a shift towards a copper premium is warranted. Even without asset sales, we see copper surpassing met coal as the dominant source of revenue in 2024. Although we expect met coal prices to moderate from today’s lofty levels, should a weakening coal price pull Teck’s share price lower, we would view a pullback as a buying opportunity.”
Ahead of the Feb. 24 release of its fourth-quarter results and 2022 guidance, Mr. Terentiew reiterated Teck as “a top pick for 2022,” raising his target to a Street-high of $57 from $53 with a “buy” rating. The average is $47.71.
“The long-term bullish outlook for copper, combined with Teck’s copper-focused growth profile and the current exceptional price strength in coking coal, has created an ideal scenario for Teck, and one that we believe the investing market has not yet adequately appreciated,” he said. “Today’s coal driven cash windfall is ideally timed to redeploy funds into the company’s cornerstone copper growth project, QB2, and ultimately support enhanced returns to shareholders and redeployment of additional funds to more copper growth. We expect a start-up of QB2 in 2H 2022 will establish Teck as a significant global copper producer, which in combination with its other growth opportunities, should provide several catalysts to generate incremental value over the coming years. With approximately 70 per cent of NAV derived from Canadian and U.S. assets, Teck also carries a relatively low jurisdictional risk.”