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Teck Resources a Top Pick for 2013!

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Not All Mining Stocks Are High Risk

Canadian miner Teck Resources (NYSE: TCK) has three main business segments, all of which are attractive over the long-term. Currently the company's largest segment, premium hard coking coal, is under pressure. However, Teck has a significant copper business and an emerging Canadian Oil Sands business that's likely worth $4-$5 per share on a $33 stock price. Importantly though, Teck's stock price gives little credit for its formidable Oil Sands assets. With a dividend yield of almost 3%, a $20 billion market cap and a forward P/E of just 12, Teck could be a great stock to own into next year.

Production of Top Shelf Coal Positions It Well Over the Long-Term

Roughly half of Teck's earnings typically come from its premium hard coking coal segment. Next year earnings in coking coal will likely be flat to down next year due to weak global pricing. Unlike coal producing peers, Teck has a dominant position in coking coal. In fact, it's the second largest producer in the world. If Teck were selling a mix of top quality coking coal and lesser quality coking coal like Peabody Energy,\ (NYSE: BTU) I would not recommend it. Peabody paid way too much for Macarthur Coal in 2011. It bought 2nd tier coal assets that are worth far less today.

Not only does Teck fail to get proper credit for its Oil Sands assets, investors are missing a key benefit of that segment. Oil production will be a natural hedge of Teck's coal and copper activities. Globally, mining cost inflation has been a big problem and a lot of the cost inflation is petroleum based. Next year will be especially unpleasant for many miners as production cuts will exasperate per ton costs. Teck will largely side-step the cost inflation problem in the near-term due to its organic growth and from its Oil Sands operations longer-term.  

Canada Is a Good Place to Be, Queensland Australia Unreliable

Teck's location in Canada is a strategic advantage as well. As much as two thirds of the world's top quality coking coals come from Queensland, Australia. These coals are exported to Japan, Korea, Taiwan and China, among other countries. However, twice in the past four years Queensland experienced devastating flooding that severely impacted supply. Japan and Korea in particular rely heavily on Australian coal, so they had great difficulty and cost in securing supplies in 2008 and 2011. Learning form these lessons, Asian consumers are actively diversifying sourcing strategies. Canada is high on the list of alternative supply.

Top quality coking coal prices should bounce back next year. The magnitude and timing of the bounce may not enable the company to have banner earnings, but as investors look forward to 2014 Teck could be firing on all cylinders. In the meantime, Teck has a profitable and growing copper business in relatively low risk countries in North and South America. Copper prices have held up considerably better than coking coal prices over the past six quarters.

Organic Growth Has Been the Best Strategy Lately

A key attribute of Teck is its organic growth profile. The company very wisely chose not to make acquisitions last year when the market for mining stocks got hot. Instead, Teck is prudently and methodically growing in both coking coal and copper. Brown field growth in these segments is both low risk and cost effective. Since Teck is growing production, unit costs are not rising nearly as fast as many peers that are forced to curtail production.

A problem with Teck has been that it trades at a meaningful discount to the value of its assets. The same problem is shared by U.S. coal and natural gas producer Consol Energy (NYSE: CNX). Consol has a valuable conventional gas business as well as strong positions in the Marcellus and Utica Shale gas plays. The company also has perhaps the best coal business in the U.S. Yet because its not a pure play gas or coal company investors under-value its assets and earnings power. 

Walter Energy (NYSE: WLT) is a pure-play premium hard coking coal producer in North America. In the long run I believe that Walter is a winner due to the quality of its coal. However, in the short-term the stock is far risker than that of Teck. I believe that Teck offers significant upside with limited downside due to the value of its assets. Teck has a very strong balance sheet with a net debt to Earnings Before Interest, Taxes,  Depreciation and Amortixation, "EBITDA" ratio of just 1.1x. This compares to net debt to EBITDA ratios of 2x-6x among peer coal producers and the major global diversified miners such as BHP (NYSE: BHP) and Rio Tinto (NYSE: RIO).

The Bottom Line

Teck is a fairly low risk company, growing organically in a prudent and cost efficient manner. It has a strong balance sheet yet it trades at an unwarranted discount to the value of its assets. Growing cash flow will add to the company's $4 billion of cash, enabling it to buy back shares or raise its dividend. Acquisitions of cheap assets is not a stated goal of the company, but if peer valuations continue to trade at distressed levels, Teck will be one of the few with the wherewithal to make opportunistic acquisitions. 

MockingJay2011 owns shares of Walter Industries and CONSOL Energy and may buy Teck Resources at a price of $30 per share or lower. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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