Teck to Primarily Be a Copper Miner After Selling Its Metallurgical Coal Business

Equity Analyst

Jon Mills

China plays a defining role for Teck Resources as the biggest buyer of everything the company digs out of the ground: metallurgical coal, copper, zinc, and lead. With the exception of lead, demand for these commodities is tied to fixed-asset investment. We expect a rebalancing of China's economy from investment to household consumption will mean weaker demand growth for investment-oriented commodities and lower prices than the favorable 2023 levels. 

Teck produces high-quality metallurgical coal. The price of met coal, which is used in steelmaking, benefited from China's fixed-asset investment boom. Amid weaker Chinese steel demand, we expect China's met coal import needs to decline, particularly once supply-side reforms on domestic coal mines are complete and recycled scrap rates grow. We expect global seaborne demand growth to shrink. India is expected to be the main source of incremental demand; however, we forecast that this will be insufficient to offset the falls we expect from China, with domestic supply taking share and shrinking overall demand, given forecast declines in steel consumption and greater scrap usage. With its decent cash cost position, we expect Teck to remain profitable, though much less so. Teck has agreed to sell its coal business, with the deal likely closing in the third quarter of 2024.

There are considerable differences in cash costs within the company's copper portfolio: The high-grade Antamina mine in Peru is viable under nearly any reasonable copper price, while its Quebrada Blanca 2 mine sits comfortably within the bottom half of the cost curve. However, its other mines in Canada and Chile have higher costs. 

Teck's zinc/lead business has historically generated solid profits, thanks to attractive ore grades at the massive Red Dog mine in Alaska. The asset's high grades and relative capital efficiency should see this business comfortably in the black.

Business Strategy & Outlook

We assign Teck Resources a no-moat rating. As a commodity producer, Teck is a price taker and needs low-cost mines with long lives and a low installed capital base to support the longer-term excess returns needed to justify an economic moat. With a few notable exceptions including Red Dog (zinc/lead) and Antamina (copper/zinc), most of its mines aren’t low enough on their respective cost curves to be considered moatworthy assets, with much of its operations having elevated invested capital bases. 

We note that the company generated average ROIC of around 6.5% for the five years ended 2022 and around 5.5% for the 10 years ended 2022. We estimate that Teck will generate midcycle returns well below the company’s cost of capital. 

Despite its moatworthy, low-cost, long life Antamina and Red Dog mines contributing around half of midcycle EBIT, Teck’s other lower quality, higher cost and more capital intensive copper mines and steelmaking coal businesses offset their contribution and are the reason for the very low midcycle ROIC, which is far below Teck’s weighted average cost of capital, or WACC, of 9.4%. Accordingly, we don’t assign a moat to Teck. 

In terms of commodity prices, our midcycle assumptions for metallurgical coal and copper are roughly USD 150 per metric ton and USD 3.10 per pound, respectively, from 2027 based on our estimates of the marginal costs of production. We also assume zinc prices of about USD 1.15 per pound from 2024 based on spot. 

In calculating ROIC, we have added back to invested capital CAD 9.4 billion in asset and goodwill write-downs taken over the past decade on the basis that these amounts relate to assets developed or acquired in the ordinary course of business and so should be included when calculating ROIC. Some of the more material amounts we have added back include CAD 6.2 billion in relation to its oil sand investments in Canada (since sold), CAD 2.1 billion relating to the company’s steelmaking coal mines, and CAD 500 million relating to its Carmen de Andacollo copper mine in Chile. Even if we instead chose not to add back any write-downs, Teck’s midcycle ROIC would still be materially below its WACC.

None

Economic Moat

Teck Resources

Teck Resources Limited is a resource company, which engages in mining and development of mineral properties. It organized into business units focused on steelmaking coal, copper, zinc, and energy. The firm also offers lead, silver, molybdenum and various specialty and other metals, chemicals and fertilizers. It focuses on its project operations located in Canada, Peru, Chile, and U.S. The company was founded on September 24, 1951 and is headquartered in Vancouver, Canada.

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Teck Resources Limited is a resource company, which engages in the exploration, acquisition, development, production, and sale of natural resources. Its products include steelmaking coal, copper, zinc, industrial products and fertilizers, and other metals. Its project operations are located in Canada, Peru, U.S., and Chile. The company was founded on September 24, 1951 and is headquartered in Vancouver, Canada.

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