Time To Sell Teck, Deutsche Bank Says

• Teck Resources Ltd (USA) TCK shares have been volatile over the last three months, and are down 16 percent since July 23.
• Deutsche Bank’s Jorge Beristain downgraded the rating on the company from Hold to Sell, while maintaining the price target at $5.
• The company’s rising net debt level, deteriorating value of Energy assets, lack of catalysts for volume growth and downside to copper and zinc operations are the key concern areas, Beristain mentioned.

Teck reported its 3Q15 results ahead of expectations and raised its 2015 guidance for zinc volumes and coal realizations, while projecting lower coal costs. Deutsche Bank’s 2015-2017 EBITDA estimates have been raised by about 3 percent on average. The EPS estimates for 2015 and 2016 have been raised from CAD0.49 to CAD0.56 and from CAD (0.36) to CAD (0.31), respectively.

Despite these positives, the NAV remains unchanged due to the company’s rising net debt, analyst Jorge Beristain said. He commented, “Key concerns include the company’s rising net debt level, deteriorating value of its Energy assets, absence of key catalysts for further volume growth and downside risks to copper/zinc operations.”

Teck's overall coal production has been around the 25mt level, short of its 28mtpa capacity, on account of market weakness. Copper output is likely to decline, until the commencement of Quebrada Blanca 2, which has been delayed, and longer-term, Relincho, projects are built.

“Oil sands projects in Northern Alberta should provide oil exposure over the longer term and add meaningful growth,” Beristain wrote. He added, however, that the downgrade in rating reflected the company’s elevated net debt level, declining cash flow generation amid weakness in the commodity market.

Beristain added that Teck’s current share price represents 26 percent downside potential to the price target.