Dundee Increases Price Target for Teck on Higher Zinc Production

Investors pondering whether Teck Resources (TSX:TCK.B) is set to bounce back have more to consider following the company’s Thursday release of its fourth-quarter results.

Though Teck reported both lower revenues and reduced profit attributable to shareholders year-over-year, its share price rose more than 6 percent to gain over a dollar by end of day Thursday, closing at $18.73.

The miner certainly hasn’t been immune to the weak commodities market. Weak weak metallurgical coal prices have certainly taken a chunk out of its profits, and the miner could still be affected by that environment in 2015.

That said, it still recorded record annual production for both coal and zinc and noted record throughput at its jointly owned Antamina copper mine in Peru, and also continues to exceed its initial goals for cost reduction.

“Although 2014 was a challenging year with significantly lower prices for some of our key products, our operations performed well, setting various production records and generating positive cash flows at all sites,” said Teck President and CEO Don Lindsay in a statement.

In a research note on the company, David Charles of Dundee Capital Markets gives Teck credit for maintaining steady production in Q4, but suggests that a lower Canadian dollar “could be the biggest driver in 2015.” Oddly enough, coal’s contribution to Teck’s gross profits is growing due to the exchange rate, and Dundee sees coal profits potentially rising even more, to $100 to $150 million, in the first quarter.

In terms of meeting expectations, Teck’s earnings per share came in slightly higher than Dundee’s estimates ($0.20 vs. $0.18), albeit slightly lower than the consensus ($0.22). The company’s projected capital expenditure guidance came in slightly higher than expected.

That said, Dundee isn’t overly positive on Teck’s continued spending on its Fort Hills oil sands project, suggesting in its note that the company’s cash position could worsen until the project starts to see returns, which is at least three years away. Dundee believes that the company’s financial condition will likely deteriorate in that time and can “eventually see [Teck’s] dividend being cut.”

Certainly, the dividend has been a contentious issue for investors and market watchers. So far, Teck hasn’t made any cuts to its dividend, which was paid out in January, but Dundee’s note states that the issue “was apparently well debated at the board level.” The dividend is due to be reviewed again in May.

On the other hand, Dundee’s note points to something else that’s interesting — Teck’s “significant exposure” to zinc. The firm states that zinc was the biggest contributor to Teck’s gross profit for the second quarter in a row, and is optimistic about how the base metal will affect the company’s performance going forward.

“Given our positive view on the zinc market in 2015, we believe [Teck’s] zinc business will be increasingly profitable, especially since Pend Oreille will ramp-up faster than we originally anticipated,” the note reads. “Teck could potentially also see higher production from Red Dog.”

Certainly, Dundee isn’t the only firm with a positive outlook on zinc. Although Stefan Ioannou of Haywood Securities doesn’t see the tide turning for zinc quite so soon, he definitely believes that the base metal could be poised for an inflection point in the near term.

Overall, Dundee is maintaining its “neutral” rating for the company, and has upped its target price from $19 to $21, mostly based on better financial performance from the company due to higher zinc production. Certainly, those still interested in coal and base metals will be keeping an eye on the company, and on the zinc price.

Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.

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