In a year where commodities producers have propelled Canadian stocks to the top of the developed world, Teck Resources Ltd. has been the biggest winner of them all.
The country's largest diversified miner has risen five-fold on the S&P/TSX Composite Index to a market value of $16-billion this year, the biggest year-to-date gain of any stock since 2009. The company's bonds are also the best-performing debt on the Bank of America Merrill Lynch U.S. High Yield Index, returning 104 per cent.
The shares rose 2.5 per cent to $28.15 in Toronto, the highest since January, 2014. A Teck representative didn't immediately return a request for comment, outside the Vancouver-based company's normal business hours.
"Teck is a good company that got trashed with the rest of the market and has rallied since," John Stephenson, CEO at Stephenson & Co. Capital Management, said in a phone interview from Toronto. With the stock slumping almost 95 per cent from its peak in 2011, Mr. Stephenson held short positions in Teck going into this year. He switched to a long position after the stock started to rally and cashed out of the position two or three months ago.
Teck spokesman Chris Stannell declined to comment ahead of third quarter earnings. The company reports Oct. 27
The key to Teck's success has been the rally in commodity prices, especially in metallurgical coal, used in making steel, and zinc. Met coal more than tripled to a record $245.50 per metric ton as of Monday, after a surprise output cut from China which moved to help lift prices for struggling miners and curb pollution.
Zinc meanwhile is up 44 per cent this year, on track for its biggest annual increase since 2009. The base metal used in galvanized steel has been one of the best-performing materials in the Bloomberg Commodity Index this year, amid growing supply concerns.
Teck reported $678-million in revenue from coal in its most recent quarter, accounting for 39 per cent of total sales. That's a 2-per-cent increase from the previous quarter, halting a string of four straight quarterly declines in coal sales. Analysts expect the company's recent hot streak of improving earnings to continue when it reports third-quarter results on Oct. 27.
Teck's market-beating performance isn't just restricted to its equity. The company's bonds have staged a dramatic recovery this year to become the best-performing debt on the Bank of America Merrill Lynch U.S. High Yield Index, returning six times the 17 per cent average return of the index.
"It was one of my best performers year to date," Geof Marshall, head of corporate bonds at CI Investments' Signature Global Asset Management unit, said by phone from Toronto. "I'm happy for the bounce in the commodity markets and the reopening of the credit market, but it was just time to take some profits as it was priced to perfection."
With most of the bonds trading at par, there's not much room for them to improve in price, Mr. Marshall said.
Greg Kocik, head of TD Asset Management's high yield group with $4-billion in assets, said his early bet on Teck in 2015 allowed him to ride the recovery to be the best-performing high-yield bond fund earlier this year.
"What we're focused on is the ability to generate free cash flow over the next two to three years," he said. "They reduced costs pretty much across the board so that's helping as well."
Kocik said he's optimistic met coal prices will stay at higher levels over the next few years as China's restrictions temper supply. Teck is also getting closer to finishing construction on the Fort Hills oil-sands project, slated to start production in late 2017, which will improve costs, he said.
Marshall and Kocik said they're still concerned about Teck's total debt, $7-billion at June 30, the second most-indebted Canadian mining company on the S&P/TSX Composite Materials Sector Index after Barrick Gold Corp.
"Teck clearly lives in the commodity space so there's clearly more volatility in those cash flows," Mr. Marshall said. "I need to be paid for that."
Teck said in its second-quarter earnings report that cost reduction is a priority and that it has ample liquidity due to maturity extensions on some of its debt that it completed earlier this year. Neither Mr. Kocik nor Mr. Marshall are looking to add to their Teck holdings. Marshall opted to sell his later-dated Teck bonds while holding onto guaranteed debt sold earlier this year, Mr. Kocik hasn't sold.
"We think that the company will try to manage the level of debt down and we'll probably benefit from that," Mr. Kocik said.
It isn't the first time Teck has risen Phoenix-like to reward investors. After 83 per cent of its value was wiped out in the 2008 financial crisis, Teck shares soared six-fold the following year amid a widespread resurgence among raw-materials producers in the S&P/TSX. It was overrun by OceanaGold Corp. that year which returned 1,060 per cent.