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Shares in Teck Resources Ltd. have been beaten up so badly in recent months that they now appear to be undervalued relative to the prices of the commodities the company produces. The volatile markets this week have only intensified the divergence.

As a large diversified miner, Teck is indicative of a market sector hit hard by fears the coronavirus will take a significant bite out of Asian demand for raw materials. But it’s also an industry set to benefit most from expectations of a global economic snap-back in the latter half of 2020.

A close look at Teck finds the stock trading at a significant discount relative to prices for the commodities. Teck stock has dropped almost 60 per cent from a high set in April 17 of 2019 – and is down nearly 40 per cent this year alone. In the latter half of 2019, profit growth was limited by a sharp slide in metallurgical coal prices – coking coal was responsible for the largest share of revenue in 2019 at 46 per cent of the total.

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This year, a decline in copper prices has reduced sales forecasts for Teck and has been a significant driver of weakness in the stock price. The Chinese economy consumes 35 per cent of the world’s copper production, and as economic activity in China stalled because of the coronavirus, expectations for copper demand also fell. The end result was a commodity price down sharply – 10 per cent – between Jan. 14 and Feb. 26.

In the accompanying chart, the stock price is compared with a benchmark I built to reflect the commodity prices that determine revenues and profits.

Teck stock declines outpacing

commodity prices

 

Teck Resources (US$, left scale)

Teck commodity benchmark (46% met coal,

25% zinc, 21% copper, 8% crude)

$35

185

30

165

25

145

20

125

15

105

10

85

5

0

65

2015

2016

2018

2020

2017

2019

THE GLOBE AND MAIL, SOURCE: BLOOMBERG;

SCOTT BARLOW

Teck stock declines outpacing commodity prices

 

Teck Resources (US$, left scale)

Teck commodity benchmark (46% met coal,

25% zinc, 21% copper, 8% crude)

$35

185

30

165

25

145

20

125

15

105

10

85

5

0

65

2015

2016

2018

2020

2017

2019

THE GLOBE AND MAIL, SOURCE: BLOOMBERG;

SCOTT BARLOW

Teck stock declines outpacing commodity prices

 

Teck Resources (US$, left scale)

Teck commodity benchmark (46% met coal,

25% zinc, 21% copper, 8% crude)

$35

185

30

165

25

145

20

125

15

105

10

85

5

0

65

2015

2016

2018

2020

2017

2019

THE GLOBE AND MAIL, SOURCE: BLOOMBERG; SCOTT BARLOW

In 2019, metallurgical coal formed 46 per cent of revenue, zinc 25 per cent, copper 21 per cent and crude oil 8 per cent. The blue line on the chart reflects commodity prices in the same proportions.

The purple line on the chart depicts the U.S.-traded Teck Resources stock – commodities are priced in U.S. dollars and I wanted to be sure to compare like versus like.

The chart shows that from May, 2015, to April, 2019, the stock price tracked underlying commodity prices extremely closely. This makes perfect sense – changes in commodity prices are the main determinant of total sales revenue and profit growth.

A divergence on the chart started in the second quarter of last year. From that point, the stock price fell much harder than resource prices dictated.

Teck, of course, has been in the headlines this week for reasons not reflected in the chart, after abandoning a planned $20-billion-plus investment in the oil sands. The effects of this on the stock price are not easy to quantify, because of the broad market sell-off this week. But because the investment hadn’t started – and was looking doubtful it would any time soon given environmental protests and the recent dive in the price of crude – the company’s finances are unlikely to be affected by the change in course.

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The short-term outlook for Teck Resources’ stock is uncertain and will remain so until we get more clarity regarding containment of the coronavirus and the pace of recovery in China’s economy. Investors will have to be careful about entry points when buying the stock to avoid significant, immediate losses.

RBC Dominion Securities analyst Sam Crittenden is, however, optimistic about the medium-term outlook.

The drop in the share price appears to be “an overreaction,” Mr. Crittenden said in a Feb. 24 report. "We continue to see a scenario where Teck performs better in [the second half of 2020].” The analyst has a 12-month target price of $29 on the Canadian-listed Teck stock (TECK.B-TSX), which represents a gain of more than 100 per cent from current levels.

Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.

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