Fears of a global economic slowdown are deflating commodity prices, but they are also creating discounts on some well-run mining companies that offer a broad play on the sector.
Canada's Teck Resources Ltd. sent a message to the market last month that its long-term fundamentals remain strong, boosting its dividend by 33 per cent. At the same time, the company is getting ready to pull the trigger on several multibillion-dollar projects that will allow it to increase production.
The Vancouver-based company has just come off its best quarter ever in terms of profit and sales, but the news was tainted by a move to lower targets for coal sales and copper production for this year. Teck said copper production could see a shortfall due to weather-related problems at one of its two mines in Chile. More importantly, coal sales could land short of earlier expectations due to weakening demand from steel markets, principally in China, it said.
Don Lindsay, the president and chief executive officer, says the adjustments reflect normal bumps on the road for a global mining company and his optimism for Teck's biggest market remains unchallenged.
"Long term, the macro trend is still in place – 1.3 billion people in China want a better life. They are going to work hard to get it, and they are going to use a lot of commodities in doing so," he says. "One thing we've learned is you can bet with confidence on the [Chinese government's] five-year plan, and the five-year plan is calling for significant economic growth and industrial production growth and that will require commodities."
Teck's belief in future Chinese demand for commodities is backed by its relationship with China Investment Corp. The nation's sovereign wealth fund paid $1.7-billion for a 17-per-cent stake in Teck in 2009, rescuing the mining company from a financial crisis brought on by too much debt at the wrong time.
The coal assets that Teck purchased in 2008, which quickly overloaded the balance sheet, are now pumping out cash. High prices for coal, copper and zinc left the company with $4.5-billion in its coffers last month. Now investors are anxious to find out how Teck will allocate its new wealth.
Mr. Lindsay says the company will follow the same strategy it used in the 1980s and 1990s to expand: making sure it maintains a large cash balance and healthy balance sheet at a time when others may find it hard to raise capital.
Three major projects will be financed from Teck's cash balance and cash flow if they get final approval in the coming months:
A second development at the Quebrada Blanca mine in Chile would produce 200,000 tonnes of copper a year, more than doubling current output there. A decision should come in February, Mr. Lindsay said, and although the cost hasn't been disclosed, it would run "several billion dollars."
The Fort Hills oil sands project north of Fort McMurray, in which Teck has a 20-per-cent stake, could get the green light late next year or early 2013.
Additionally, an engineering study looking at developing a 190,000-tonnes-per-year copper mine in Relincho, Chile, is due next year.
Fraser Phillips, of RBC Dominion Securities Inc., describes Teck as one of his preferred mining stocks given the company's diversified resources. Drivers for the stock over the next year are likely to include announcements on significant expansion projects. Longer term, he thinks that Teck's zinc operations will benefit from a global shortage beginning in 2013, when mine closings will constrain supply.
However, signs of deteriorating conditions in the steel industry are "an ominous signal" notes Orest Wowkodaw, of Canaccord Genuity. Still, the analyst says that Teck is "extremely well positioned for production growth over the next 10 years," thanks to the variety of development projects it can launch. The shares trade at a discount to other mid-size mining firms, and are valued at about 4.9 times next year's estimated enterprise value divided by EBITDA (earnings before interest, taxes, depreciation and amortization), compared with 6.1 for its peers, he said.