Is it Too Late to Get into Teck Resources Ltd.?

Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK): the worst is over, but the valuation is too rich.

| More on:
The Motley Fool

The start of 2016 saw shares of Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK) plummet to levels not reached since the Great Recession. Fast forward seven months later, with fears of a global economic slowdown and a hard landing in China’s economy largely in the rear-view mirror, Teck shares have rallied a staggering 300% off their lows.

But as remarkable as this turnaround has been, Teck has also reached dangerously overbought levels. In other words, those on the sidelines looking to get in on the action might be better served by waiting for a more attractive price and valuation.

Teck currently trades at a premium to commodity spot prices

In the midst of their fantastic rally, Teck’s shares have largely overshot the spot commodity prices, as apparent by the decoupling shown in the figure below, from both the broader commodity (green) and copper (red) indices.

Furthermore, while Teck continues to track the zinc break out, zinc prices would have to reach $1.60/lb, a 50% premium to the spot price, to justify Teck’s current market cap (based on Bank of Nova Scotia’s 2017 estimates).

Finally, although metallurgical coal prices have also rallied significantly pass the US$130-per-tonne level, the current spot price is still below Teck’s share implied premium of US$145 per tonne. Moreover, the bulk of the move in metallurgical coal will most likely prove to be temporary, as the market adjusts to the recent structural and policy shifts from China and India. Of note, the consensus forecasts for metallurgical coal continue to be well below the current price at just US$80 per tonne for the rest of 2016.*

Source: The Australian
*Source: theaustralian.com

Teck’s valuation is also stretched

Teck is currently trading at a premium to not only commodity prices, but also to its own historical average valuation as well as its peer group. At 8.4 times blended forward EBITDA, Teck’s valuation is one full standard deviation above its historical average of 7.1 times, while its EV to sales and P/BV multiples are two or higher sigma above their historical norms.

Source: theaustralian.com
Source: theaustralian.com

On the relative valuation side, Teck’s blended forward EV/EBITDA of 8.4 times and forward P/E of 30.7 times are well above its peer average of 7.7 times and 16.6 times, respectively.

Source: theaustralian.com
Source: theaustralian.com

In other words, this rich valuation is implying strong growth going forward. However, Teck is in the midst of a turnaround as it looks to cut costs and monetize its non-essential assets to improve its balance sheet. Moreover, with Fort Hills still under construction, near-term growth catalysts for Teck are virtually non-existent. Therefore, Teck’s valuation is largely unwarranted, and a bullish case cannot be justified on a fundamental level.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Zaw Tun has no position in any stocks mentioned.

More on Metals and Mining Stocks

todder holds a gold bar
Metals and Mining Stocks

Canadian Mining Stocks: Buy, Sell or Hold?

Investing in quality gold mining stocks that trade at a reasonable valuation could help you beat the TSX index over…

Read more »

People walk into a dark underground mine.
Metals and Mining Stocks

Is First Quantum Minerals Stock a Buy?

Let's dive into whether First Quantum Minerals (TSX:FM) is worth buying at current levels, or if investors should sit this…

Read more »

nugget gold
Metals and Mining Stocks

Competitive? Beat the Market With These 2 Dividend-Paying Growth Gems

Investors looking to beat the market buying dividend stocks right now need to focus on this right sectors. Here are…

Read more »

nugget gold
Metals and Mining Stocks

A Canadian Billionaire Investor Sold Micron Stock and Bought This TSX Company Instead

Prem Watsa focuses on value over short-term growth.

Read more »

Concept of multiple streams of income
Metals and Mining Stocks

Is Franco-Nevada Stock a Buy for Its 1.2% Dividend Yield?

Gold royalty stocks represent a niche in the precious metals industry. They have different dynamics from mining stocks.

Read more »

todder holds a gold bar
Metals and Mining Stocks

The 1 Mining Stock Canadians Should Buy and Hold Forever

Newmont is a gold mining stock that trades at a cheap valuation, making it a top investment choice for those…

Read more »

Metals and Mining Stocks

Top Canadian Gold Stocks to Buy Now

Canadian gold mining stocks such as Barrick Gold and Kinross Gold are two top investments in October 2024.

Read more »

todder holds a gold bar
Stocks for Beginners

Is the Worst Over for SSR Mining Stock?

SRR Mining stock has been rising higher after recent earnings performance that made a bit of a comeback. So is…

Read more »