This Blockbuster Mining Company is Hard to Miss

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The health of the economy is an interesting topic for debate. The unemployment rate in the US dipped to 7.8%, housing sales and construction are witnessing an uptick, and the industrial output beat market expectations. To strengthen the financial system of the country, the Fed will be buying $40 billion worth of toxic mortgage backed securities and all these numbers suggest that economic recovery is in the cards. It’s a well-known fact that in a recovering economy, major commodities recover along, which brings Teck Resources into the picture. In my opinion, investors envisioning economic recovery should consider investing in the company, here are a few reasons why Teck Resources (NYSE: TCK) is a good investment.

Teck Resources is a diversified mining company that is involved in the production of metallurgical (met) coal, copper, lead, germanium, and zinc. The company is the second largest exporter of met coal in the world. In 2012, the company was able to increase its coal reserves by 55%, thanks to its development of mines and coal drilling.

Arguably, natural gas is posing as a cheap and eco-friendly alternative for coal, and the transition to natural gas would only be gradual, and not rapid. Also, coal and copper prices depend on the infrastructural activities in the developing nations like India and China. According to the recent economic data, industrial production of China rose by 8.9% in August and 9.2% in September. Indian industrial output also rose 2.7%, which came in better than expected.

In the recent earnings release, the company reported a slump in earnings due to falling commodity prices. The adjusted EPS stood at $0.60, which met the street’s estimates. Revenues also declined, but met analyst’s estimates. Since falling commodity prices is an industry wide issue, and not a company specific issue, the results were positively received by the market. The company ended the quarter with C$4.2 billion in cash and management announced that it would be initiating programs with a goal to save C$200 million in operating costs annually.

The company also announced that the copper production eclipsed record levels by 10% and stood at 99,000 tons. Overall, production rose by 29% compared to the last year’s quarter. Zinc concentrates shipments stood at 950,000 tons and lead concentrates stood at 175,000 tons. Coal production stood 6.3 million tons and the company aims to produce 28 million tons of coal in 2013.

The company shares its market space with Rio Tinto (NYSE: RIO), BHP Billiton (NYSE: BHP) and Vale (NYSE: VALE).

Company

P/E

P/B

Debt/Equity

Dividend Yield

Gross Profit Margin

Teck Resources

9.47x

1.00x

39%

2.5%

38.71%

Rio Tinto

22.30x

1.66x

38%

3.31%

-NA-

BHP Billiton

12.22x

1.72x

43%

3.18%

31.63%

Vale S.A

5.95x

1.17x

34%

1.93%

55.37%

All the mentioned companies enjoy similar debt/equity levels. Teck Resources enjoys a healthy gross profit margin of nearly 39% and a net profit margin of 17.64%. The stock yields 2.5% and the company retains 75% of its earnings. Amongst the peers Teck Resources has the second lowest P/E multiples, and the lowest P/B ratio.

In my opinion, the stimulus packages around the globe and the increase in industrial production levels is only going to put an upward pull on major commodities. The cost cutting plan and the jump in production when complemented with rising commodity price could very well be a bonanza for Teck Resources. The company has a good mix of fundamentals, and performed in line with the Street’s estimates, and it is due to these reasons, that Teck Resources has a Foolish Buy rating in my opinion.


PiyushArora has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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