Questor: This miner offers a ‘cleaner, simpler story’ for investors

Questor share tip: recent sales of coal and oil projects shore up the balance sheet for Teck Resources

Mining is a dirty business. It takes sweat and toil to gouge large tracts of land and the activity can carry high risks for both workers and the environment. Some of the more contentious materials the big miners pull out of the ground – coal, in particular – have also made the sector a no-go zone for many investors in recent years.
But large parts of the industry have been cleaning themselves up, not least with the aim of cashing in on supplying metals needed to ensure the energy transition. This is good news for investors tempted to buy into a sector that is renowned for its strong cashflows, financial firepower and bumper capital returns to shareholders.
A lesser-known player here is Teck Resources, a Canadian company with a dual US listing that has positioned itself as a producer of the low-carbon metals of the future, specifically copper and zinc.
Gone is its stake in a troublesome Canadian oil sands project, sold almost two years ago for roughly C$1bn (£560m). And gone too is its steelmaking-coal division, offloaded to a consortium led by blue-chip miner Glencore. In late July, $7.3bn cash from the deal landed on Teck’s balance sheet.
This disposal was the cue for Amit Wadhwaney, portfolio manager of the Moerus Worldwide Value Fund, to start building a position. Mr Wadhwaney is one of eight of the world’s most successful fund managers to have bought into the company. Each is among the top-performing 3pc of the more than 10,000 equity fund managers whose performance is tracked by financial publisher Citywire.
This has earned Teck Resources a AAA-rating from Citywire Elite Companies, which ranks businesses according to investors’ conviction.
Mr Wadhwaney’s thinking is two-pronged. First, Teck Resources is now swimming in cash. Second, it has become a “cleaner, simpler story”.
He said: “The primary attraction, in our view, is that the sizeable sale of its coal assets was a transformational transaction that offers significant financial strength and flexibility, which has now allowed Teck to pursue a number of initiatives that we believe are accretive to shareholder value.
“This has come via a reduction in debt, the return of a substantial amount of capital to shareholders via share repurchases, and reinvestment in its formidable copper and zinc resources.”
He reckons deals to buy additional copper assets are a distinct possibility.
For its part, Teck has already used a tender offer to redeem nearly $1.4bn of its debt, which, at less than twice last year’s earnings before adjustments for items such as interest, tax and depreciation, are by no means worryingly high.
The group has also received clearance to return up to $500m to shareholders through a stock buyback programme, in addition to its regular dividends, and will consider further repurchases subject to market conditions. It has made clear its aim to create value from its “copper growth portfolio”.
Prospective buyers of the shares need to be mindful of likely currency conversion charges on their purchases and ensure they’ve filled in the necessary forms to reduce dividend withholding tax.
It is true that Teck Resources’ overall earnings will drop as a result of the sale of its coal business, which accounted for more than half of last year’s C$15bn of revenues and more than two-thirds of its C$5.1bn gross profits.
However, with the group ramping up its copper output – pursuing feasibility studies at two sites and life extensions at several others, in addition to the prospect of it buying in additional production – over time its income streams should recover.
What’s more, refocusing on copper and metals that are in demand as a result of the global energy transition positions the business for strong growth well into the future, while coal is gradually being phased out.
The shares have rallied since the Glencore transaction, but the trading multiple of just over 26 times next year’s forecast earnings is skewed by the likelihood that revenues in the short term are likely to be sharply lower. As more cash is returned and invested, the share price should benefit.
Questor says: buy
Ticker: NYSE:TECK
Share price: $43.49
This column highlighted an opportunity in Dollar General shares in February based on attempts to turnaround performance.
Unfortunately, trading has remained poor and signs of new competition emerging from general retailers means it looks like Dollar General faces a bigger uphill task than anticipated.
The shares have lost a painful 43pc since our recommendation and it is time to throw in the towel.
Questor says: sell
Ticker: NYSE:DG
Share price at close: $140.40
Miles Costello is a contributing journalist for Citywire Elite Companies
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