Should You Buy This Volatile Metal Stock
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A Plummeting coal price was the major reason for the poor third quarter results of Vancouver, British Columbia based Teck Resources (NYSE: TCK). It has reported lower 3Q 2012 earnings as compared to the year ago due to lower commodity prices prevailing in the market and also lower volumes of steel making coal being sold amid global economic concerns. The company’s third quarter adjusted EPS fell to $0.60 per share from $1.26 last year. Though it posted revenue as per the analysts’ estimates of $2.51 billion, it was still well below last year’s figure of $3.38 billion. The metal miner is now pushing its 2013 planned capital spending of $1.5 billion for future use. Teck Resources is also cutting its annual operating costs by at least $200 million.
As far as its peers are concerned, its two main competitors the Southern Copper Corp (NYSE: SCCO) and the Freeport-McMoRan Copper & Gold (NYSE: FCX) are boosting their production capacity through project expansions and diversifications.
Southern Copper Corporation is expanding in four major projects which will add 500 Kt to its annual production capacity bringing its total annual production to more than 1 million tons. Its Buenavista project will add 188,000 tons of copper and 2,600 tons of molybdenum to its annual production. The Tia Maria project in Peru and SXEW III at the Buenavista in Mexico add 120 kt of copper each to the annual capacity. Toquepapa, also a project in Peru will add 100Kt to the annual production. Additionally, it is spending lower capex as compared to its rivals. The Company has defined its strategies well through high value expansion projects which will drive in additional capacities. The production will be both financially incremental and a contributor to its strong balance sheet.
Freeport-McMoRan has announced its diversification plans into the energy sector through the acquisition of McMorRan Exploration Co and Plains Exploration & Production Co. While analysts have given a mixed rating for the stock after this news but I believe that this capital allocation will be a good payoff for the long term. The two deals have a combined value of $20 billion. With commodity prices under serious pressure due to the uncertain global economic environment, this deal enhances the company's exposure and resource base. The addition of such high quality resources to its portfolio combined with a strong growth exposure in the U.S. geologic basins increases the company’s potential highly.
Coming back to Teck Resources I anticipate that despite the earnings downfall Teck is going to benefit from the increased demand which it has already planned for by added more capacity. Also, the company is exposed to demand from BRIC economies with 80% of its profits coming from copper and met coal.
Acquisition of SilverBirch Energy Corp
Teck resources acquired SilverBirch Energy Corp for $435 million with diversification plans into oil sands. SilverBirch Energy is a Calgary, Canada based company majorly operational into exploration and development of oil sands. SilverBirch is Teck's 50% partner in the Frontier Oilsands project and after acquisition; it has gained full control of the project. The transaction would add fuel to the Frontier project and provide Teck the ability to leverage more partnership alternatives. At the time of rising costs due to the volatile global economy, this deal provides a new venture for the company besides its core metal mining. The Frontier project is expected to produce 74,000 barrels per day of bitumen by 2021, and subsequently rising to more than 277,000 barrels per day. by 2030. Though the operation time of the project is quite longer but this move signifies that the management has taken an efficient move to remain ahead in the energy market for the long haul.
Teck has achieved the targeted increase in its mining capacity to 28 million tons per year. In addition to this, Quintette is also expected to contribute 3-4 million tons per year. The Quintette restart is on track for regulatory approval in 2Q13, first operation to be in 2Q14. Full annual production of 3Mt from Quintette is expected by 4Q14. From the last two years the company has been planning to increase its mine capacity which it has achieved through a 9% increment with the addition of three new shovels (Fording River, Greenhills, and Elkview). Further increment is expected to be achieved through the renewal of the truck fleet and a 30% increase in the workforce. It has expanded the capacity of Greenhills to 5.0 million tons per year from 4.3 million tones earlier. Elkview capacity has been increased to 6.6 million tons per year. Both the mines Elkview and Quintette are located at the lucrative British Columbia locations with vast amounts of metal reserves. The capacity improvement and additional low cost potential serves as a major catalyst for growth in the company's coal business.
As mentioned earlier Teck has reported weak earnings in the last quarter but things should now settle down with the improvement in the commodity outlook for 2013. The company will have lower to negligible turndowns related to its production capacity at the Westshore terminal, given Teck's ability to divert coal to alternative ports. The Company has been able to meet its guidance for fourth quarter coal sales of 6.2 million tons. The company’s stock is currently trading at $35.14 up ~4% over the year. Additionally, it has plans to pay fairly to its investors with an increased dividend of 12.5% paying $0.45 per share. I believe that investors should have a look at this company’s prospects for a buy point.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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!