Teck Resources Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Teck Resources is a diversified Canadian mining company, primarily focused on steelmaking coal, copper, and zinc, with operations spanning North and South America.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Teck Resources Limited (TECK) operates within the cyclical and often volatile mining industry, producing key commodities like steelmaking coal, copper, and zinc, along with smaller amounts of lead and silver. Their performance is heavily influenced by global economic activity and commodity prices.

Teck’s revenues are significantly tied to global construction, manufacturing, and infrastructure, which are major consumers of copper and steel. Economic downturns typically reduce demand for these metals and hurt revenues.

  • Steelmaking Coal: The steelmaking coal business is the most significant contributor to the company’s profits and is driven by global steel production demand. Most of their sales are on contracts with a lag effect, meaning prices are not immediately affected by spot prices.
    • The industry is consolidating, with few players controlling the market. Demand is driven mostly by China, Japan, and India, which use the steel to build buildings, infrastructure and ships. There are high barriers to entry due to the significant cost of developing new mines, but there are readily available substitutes from other types of coal, that can decrease prices.
  • Copper: Copper is critical for industrial use and its demand is influenced by economic activity, infrastructure investments, and the trend towards electrification. The electrification trend has created more demand for copper.
    • The market is somewhat fragmented, many players control a small share of the market. There are also readily available substitutions such as aluminum and plastics.
  • Zinc: The demand for zinc is mainly from galvanizing steel, die casting, and alloys, while the overall demand for zinc is relatively slow-growing compared to copper and steelmaking coal.
    • A large portion of the zinc market is in China. Demand for zinc is generally stable, but price swings can affect profits heavily. The biggest issue for investors is that zinc is a commodity with readily available substitutes.
  • Operating Regions: Teck’s major operations are in Canada (steelmaking coal, zinc), Chile (copper), and Peru (zinc and copper). Its geographical diversification reduces some risk of localized problems.

Moat Analysis: 2/5

Teck possesses a narrow economic moat with limitations.

  • Limited Moat Sources: The company’s primary advantage arises from economies of scale and its position as a low-cost producer in certain mining operations. However, this is not a guaranteed sustainable advantage, as rivals can always improve efficiency and cut costs.
  • Commodity Nature: The majority of Teck’s revenues come from commodities. The prices of commodities are very volatile and outside of the companies control, which leads to volatile revenues and profits. Also, there are many competitors and often readily available substitutions in a commodity market which is a negative moat factor.
  • Limited Pricing Power: Teck lacks substantial pricing power. As a commodity producer, their prices are set by global markets. Even if Teck has low production costs, the price increases are more difficult to make and be maintained if competition exists.
  • Geographical Concentration: They operate primarily in Canada and South America, this helps them take advantage of local resources but also makes them susceptible to political/economic changes and natural disasters in these regions.

In essence, while Teck can generate excess returns in the short run thanks to its low production costs and some unique operations, they don’t have long-lasting and durable advantages that can consistently sustain above-average profits for a long time. This is why they get a moat rating of 2/5.

Risks to the Moat and Business Resilience

  • Commodity Price Volatility: Prices for steelmaking coal, copper, and zinc can swing dramatically based on macroeconomic conditions, supply disruptions, and other factors. Sharp price downturns can severely impact profitability.
  • Economic Slowdowns: Decreases in global economic activity typically depress demand for commodities, hurting prices and revenue. China is a big driver for the prices and demand of commodities.
  • Geopolitical Issues: Operating in multiple countries brings geopolitical risks, especially concerning governments. Increased royalties, taxes, tariffs, and changes in regulations can quickly lower the value of assets.
  • Operating Risks: Mining is a difficult operation, with operational risks ranging from accidents, technical issues with extracting materials, and environmental or political incidents.
  • Environmental and Social Concerns: Growing scrutiny over the environmental impact of mining operations and increasing demands for socially responsible practices could drive operating costs higher and reduce production. The industry is often under attack from a political standpoint due to its heavy emissions.
  • Competition: Teck operates in a competitive industry where other producers could introduce new technology or ways to cut costs, affecting the overall supply and demand dynamic. New mines from competitors can drastically reduce prices and erode profitability for all companies.
  • Disruptive Technology: New ways of extracting or replacing metals could disrupt the industry. For instance, advancements in batteries may require less copper.
  • Concentration Risk: Most of Teck’s earnings rely on steelmaking coal which is tied to China, Japan and India. Any downturn in those regions’ economies or disruptions to their exports can create major headaches for Teck.
  • Inflation: High inflation in the world economy has raised the cost of producing commodities and might be hard to pass down to consumers at similar prices.
  • Climate Change: Many of Teck’s operations are in regions that could be affected by climate change and increased carbon regulations. This would force the company to reduce emissions or pay for emission offsets, affecting profits and viability of projects.

Teck has shown signs of resilience by managing costs and having a diversified portfolio, including operations in various regions and commodities. However, its resilience is heavily dependent on global economic conditions and, more specifically, commodity prices. Management has a hard time predicting or managing the prices of the commodities it produces.

Financial Analysis

  • Income Statement: Revenue varies significantly as its primarily dependent on commodity prices and the state of the market. Operating margins are usually high during peak prices but quickly plummet when prices decline, this is the sign of a cyclical business with a limited moat.
    • In 2023, the company’s profit is down as commodity prices have fallen a lot, compared to 2022.
  • There are also significant fluctuations due to one-time write-offs.
  • Balance Sheet: The company’s debt to equity is moderate, and most of their assets consist of tangible property, plant, and equipment. Overall the company has a quite conservative balance sheet, which reduces risks.
  • Cash Flow: Free cash flows fluctuate significantly with commodity prices.
  • Debt: The debt of the company is very stable and mostly long-term.

Overall, Teck’s financial performance is very volatile because of the nature of its business, a miner in the commodity market with high operating leverage. It’s critical for investors to watch out for long-term trends in ROIC, as well as how management behaves with free cash flow during high profits years.

Understandability: 3/5

Teck’s business model is reasonably easy to grasp as a company that extracts and sells commodities with operations primarily in North and South America. However, some aspects increase complexity. The company’s exposure to various types of risk, the volatile nature of commodity prices and foreign exchange, and the accounting complexity involved make the business more complicated to understand. Also, the market dynamics of individual commodities are unique. It is important to note, that the company itself operates multiple mines which adds complexity to analysis. Investors must also be aware that the company has exposure to environmental liabilities which are difficult to forecast. Therefore, the company is given a rating of 3/5, representing moderate complexity in understandability.

Balance Sheet Health: 4/5

Teck has a good balance sheet, mostly composed of tangible assets and a moderate level of long-term debt.

  • Debt to equity is within range and very manageable.
  • The company is very disciplined with its spending and financing, which shows its high priority on balance sheet health.
  • Even through low commodity prices, the company has enough cash on hand to pay its interest expense, as well as invest in future projects. Given the above factors, the balance sheet health of the company is given a score of 4/5.

Recent Concerns, Controversies, and Problems

  • Falling commodity prices: In 2023, the prices of steelmaking coal, copper, and zinc have all been volatile and trending downward, which has decreased revenues and earnings for Teck. Management has tried to offset this by controlling costs, but it remains a main issue for the company.
  • Transitional challenges: Teck’s business is being affected by the world transitioning from a fossil-fuel economy, especially as it’s mainly involved in the production of steelmaking coal. This will lead to less investment and pressure on the company’s business model.
  • Environmental Issues: Teck’s operations have been affected by environmental concerns and potential liabilities. This can affect its future projects negatively and is a major issue for all mining companies.
  • Political uncertainty: They operate in various countries where political instability could create large difficulties in the business environment.

The company has acknowledged these issues in earnings calls and has laid out a plan for the future. However, these risks have the ability to affect the companies future performance negatively and permanently. In the case of environmental and political risks, the issues are very difficult to predict and estimate.