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Teck Resources Called 'A Destroyer Of Shareholder Value' Ahead Of Its Analyst Day

Teck Resources Called 'A Destroyer Of Shareholder Value' Ahead Of Its Analyst Day

Axiom in a note Monday called Teck Resources Ltd (USA) (NYSE: TECK) as a destroyer of shareholder value. The firm sees a sizeable cut to consolidated EBITDA estimates ahead.

Accordingly, the firm initiated coverage at a Sell rating with a price target of $16.

Teck Resources is an integrated natural resource producer based in Canada, which generated 69 percent of its second-quarter gross profit before depreciation and amortization from coal, 18 percent from copper and 14 percent from zinc. Beginning the first half of 2018, the firm expects the company's interest in the Fort Hills oil project to contribute to profits.

Analyst Gordon Johnson attributed to his negative stance on Chinese economic growth. The analyst expects the record credit growth preceding the 19th Party Congress in October to moderate.

Based on his assessment of the Chinese economy, Johnson expects the coking coal market to see excess supply in 2018. With Chinese refined copper output rising but consumption declining, the analyst said the global supply deficit declined 90 percent year-over-year in the first-half, with the second half expected to see a seasonal surplus and an estimated 3 percent CAGR in refined output through 2019 compared to a 2 percent increase in demand (see Johnson's track record here).

Meanwhile, Axiom sees zinc prices as a bright spot for Teck Resources. The firm expects the commodity to see support through 2018, given an 8.5-year low inventory, draw down on the heels of a 672 Kt fall in mined ore in 2015/16, leading to a record supply deficit in April 2017.

However, the firm sees zinc supply gradually moving to excess by 2019 due to new mines coming online.

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On valuation, Axiom noted that the company's trailing four-quarter residual income has been negative since the first quarter of 2012, thus giving it the dubious distinction of having the track record of destroying shareholder value. The firm noted that Teck Resources is a high-beta stock with a cost of capital that consistently exceeds return on equity.

"While the co. could see some positive RI on the surge in commodity prices since Oct ‘16, given our outlook on coal & metals prices, we believe this would likely be short-lived," the firm said.

The firm expects 2017 revenues and earnings per share of C$11.7 billion and C$4.00, respectively compared to the consensus estimates of C$11.9 billion and C$4.43. The firm is also below-consensus with respect to its 2018 and 2019 revenues and earnings per share estimates.

The firm clarified that its price target of $16 represents 26 percent downside from current levels.

Related Link: A Look Back At Delivering Alpha 2016's Top Long And Short Ideas
Image Credit: Teck's Pogo underground gold mine in central Alaska, By University of Exeter from United Kingdom [CC BY 2.0 (], via Wikimedia Commons

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