Why Hold Strategy is Apt for Teck (TECK) Stock Right Now

Teck Resources Ltd TECK is poised to gain from its cost-reduction initiatives, solid project pipelines and an innovation-driven efficiency program. However, uncertainties related to the extent and impact of the coronavirus pandemic on demand as well as on commodity prices, suppliers and global financial markets are concerns.

Teck currently carries a Zacks Rank #3 (Hold). It has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), offer the best investment opportunities for investors.

Price Performance

Teck’s shares have appreciated 41.1% over the past three months, outperforming the industry’s growth of 10%.

Forecast-Topping Q2 Results: Teck reported adjusted earnings of 12 cents per share in the June-end quarter, as against the Zacks Consensus Estimate of a loss of 3 cents. Net sales of C$1,720 million ($1,241 million) also surpassed the Zacks Consensus Estimate of $1,235 million.

Underpriced: Looking at Teck’s price-to-earnings ratio, its shares are underpriced at the current level, which seems attractive for investors. The company has a trailing P/E ratio of 12.6, which is lower than the industry average of 54.3.

Growth Drivers in Place

Teck is poised to gain from the Neptune Bulk Terminals facility upgrades and construction of the Quebrada Blanca Phase 2 (QB2) copper project. The Neptune Bulk Terminals project will strengthen the steelmaking coal-supply chain, and meet the long-term requirements of customers for consistent, high-quality products. The company projects annual steel making production capacity of 26-27 million tons.

Construction activities at the QB2 copper project are gradually and safely ramping up, following the temporary suspension in March. The QB2 project will transform the company’s copper business, making it a major global copper producer. Copper production from Highland Valley Copper is expected to be higher during the second half of this year compared with the first half as a result of increased mill throughput and rising ore grades. Currently, Highland Valley Copper, Antamina, Carmen de Andacollo and Quebrada Blanca are operating at full production rates, which the company expects to maintain through the rest of 2020. Furthermore, improvement in metal and crude prices will drive the company’s growth.

Teck has implemented a cost-reduction program to lower its operating costs, and deferred some of the planned capital projects in a bid to counter the uncertain economic conditions. Since the commencement of the program in fourth-quarter 2019, it has so far achieved approximately $250 million in operating-cost reductions and $430 million in capital-cost reductions. Moreover, Teck continues to implement its innovation-driven efficiency program — RACE21 — that is expected to improve productivity across the business.

Few Headwinds to Counter

Teck has issued its guidance for the second half of this year. The guidance reflects uncertainties related to the extent and impact of the pandemic on demand as well as on commodity prices, suppliers and global financial markets.

For the second half of the year, management expects steelmaking coal production between 11 million tons and 12 million tons, down from the prior guidance of 23-25 million tons. The guidance reflects the unfavorable impact of the scheduled shutdown of Neptune Bulk and the pandemic.

Copper production is now expected within 145,000-160,000 tons for the second half of the year. This has been lowered from the previously-issued guidance of 285,000-300,000 tons. Zinc production for this year (including co-product zinc production from the copper business unit) is estimated between 315,000 tons and 345,000 tons, down from the prior projection of 600,000 tons to 640,000 tons.

Recently, Teck’s partners in the Fort Hills Energy Limited partnership agreed to restart the second Fort Hills train. Production will likely reach up to approximately 120,000 barrels per day by the end of this year. However, the company has tightened the Fort Hills’ production guidance for 2020 to nearly 105,000-115,000 barrels per day from the prior estimate of 100,000-120,000 barrels per day. Teck owns 21.3% in the Fort Hills’ annual production.

Bottom Line

Investors might want to hold on to the stock, at present, as it has ample prospects for outperforming peers in the near future.

Stocks to Consider

Some better-ranked stocks in the basic materials space include Barrick Gold Corporation GOLD, AngloGold Ashanti Limited AU and Pretium Resources, Inc. PVG. While Barrick and AngloGold sports a Zacks Rank #1, Pretium Resources carries a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Barrick has an expected earnings growth rate of 80.4% for the current year. The company’s shares have surged 51.2% over the past year.

AngloGold has an estimated earnings growth rate of 124.2% for 2020. The stock has gained 40.3% in the past year.

Pretium Resources has an anticipated earnings growth rate of 20% for the ongoing year. Its shares have rallied 6.7% in the past year.

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