Greenlight Capital’s David Einhorn issued a strongly bullish call this week on Teck Resources Ltd., the Vancouver-based diversified mining company that the hedge-fund manager added a position in last year.
Teck Resources’ participation in copper mining is what has Mr. Einhorn excited. Copper is a key input in the production, storage and transmission of electricity, and there is a need for a lot more electricity in a world moving away from carbon emissions to a greener environment.
“In a gold rush, the surest way to make money isn’t to look for gold – it’s to sell equipment to the miners,” Mr. Einhorn said Wednesday at the 2021 Sohn Investment Conference, which was held virtually.
“Today, the gold rush is in electrical vehicles [and other innovative electrical equipment]. To power those vehicles [and other applications], we need … to grow the electrical grid, which will require lots more copper. Take, for example, electrical vehicles: They require four times as much copper as automobiles powered by internal-combustion engines.”
In April, Goldman Sachs put out a report titled Copper is the New Oil, which assessed demand and supply conditions in the copper market. They estimated that green electrification would require an extra 5 million metric tons of copper by 2029. Adding to upward pressures on price is a worsening supply gap caused by low metal prices keeping a lid for many years on investing in new mines.
The global leader in copper production is Freeport-McMoRan Inc. It is also a pure play on the metal, so it is a tempting prospect to invest in. However, the tough mining environment since 2007 has led to the company not investing enough in new mines to offset depletion of its copper deposits: Production is down about 25 per cent from 2016 – with many more years to go before new copper mines come on stream.
“What I’m recommending today is a more overlooked company, Canadian-based Teck Resources,” Mr. Einhorn declared. “Teck trades at two-thirds of Freeport’s price-earnings multiple and has much better growth prospects, particularly a 60-per-cent stake in a $5.7-billion copper mining project in Chile, scheduled to come online in the second half of 2022.”
He said there is “significant value in the cash flow to be generated” from that major Chilean project, known as Quebrada Blanca Phase 2, when using Teck’s own projections with regards to copper fundamentals.
“If the price of copper were to climb to US$6.80 per pound by 2025 as forecasted by the Goldman Sachs report, the expansion from this new mine would by itself be worth the current market capitalization of Teck, even though the new mine doesn’t yield results until 2023.”
The company’s cost structure is relatively low, being “just on the edge of the first quintile of producers.” It also has five other copper projects beyond its Chile development; they were estimated by the company in 2017 to be worth $3-billion.
Teck is a diversified miner, with its largest operations currently in metallurgical coal, where “supply and demand is roughly equal and is expected to remain in balance, although we expect it to fall into deficit near-term,” Mr. Einhorn said. Metallurgical coal is used to make steel and has no replacement. It is distinct from thermal coal, “which is used to make electricity and is under siege for its carbon emissions.”
Teck also mines zinc, which is 30 per cent of the company’s output. Zinc is used in galvanized steel. Mr. Einhorn did not have time to get into that aspect of the company.
Wrapping up, Mr. Einhorn said: “Let’s now talk about valuation. At a forward price of US$4.50 per pound for copper, I believe the company’s shares are worth $59, nearly double the current price. The Goldman Sachs’ projection for copper of US$6.80 per pound puts the share price three times higher, at nearly $90 a share.”
According to Fintel, which monitors SEC filings, Greenlight Capital had 3.1 million shares (or 3.5 per cent of the value of its portfolio) in Teck Resources as of the end of 2020. Greenlight had the 27th-largest investment stake in the company at that time.
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