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Analysts raise target prices on Teck after investor day

The Quebrada Blanca 2 copper project in Chile. Credit: Teck Resources

Analysts at CIBC, Canaccord Genuity, Raymond James and BMO Capital Markets raised their target prices on Teck Resources (TSX: TECK.A/B; NYSE: TECK) following the diversified miner’s September 21 Investor Day, during which the company highlighted the growth of its copper pipeline and its massive Quebrada Blanca (QB) 2 project in Chile.

The company confirmed first production at QB2 is expected in the second half of 2022 and reiterated its capex of $5.2 billion ($5.8 billion on a 100% basis). QB2, in which Teck holds a 60% stake, is one of the world’s largest undeveloped copper resources with an initial mine life of 28 years and potential for further growth.

The company also declined to comment on press reports that it plans to divest its coal assets and pointed to demand for high quality coking coal and strong prices.

Bryce Adams of CIBC increased his 12-18 month price target on the company from C$34 to C$35.50 per share. “With copper demand in de-carbonization categories expected to grow at [a] 26% CAGR [compound annual growth rate] through to 2030, Teck can double its copper production by 2023” with its QB2 project, Adams commented in a research note, adding that the company said it has completed about 60% of the project as of August. “Beyond QB2,” Adams added, “copper growth appears most likely from the Zafranal and San Nicolas projects.”

Teck’s 80%-owned Zafranal copper-gold project is in southern Peru, about 70 km north of Arequipa, and its wholly-owned San Nicolas copper-zinc project is in the state of Zacatecas, Mexico. Both projects could come online as early as mid-2026.

“Longer term, Teck continues to view its coal business favourably, as blast furnaces are expected to remain the preferred steel-production method in Asia over the next 20 years”

Dalton Baretto of Canaccord Genuity raised his price target on Teck from C$28 per share to C$31 per share. “With regard to growth options, Teck stressed their preference for copper and their copper project pipeline, but indicated that they also evaluate other “green metals” such as uranium, lithium, or nickel,” Baretto wrote in a note to clients.

As for its coal business, and recent speculation by Bloomberg and other media that the company plans to sell the business, “Teck would not comment other than to reiterate that they continue to evaluate potential divestment options,” Baretto noted.

“Given that coal pricing is $399 per tonne FOB DBCT or $566/t CFR China today (versus $111/t and $226/t, respectively, on May 1st), the met coal market was a key area of focus,” Baretto said. “Management indicated that the global market is structurally short; global steel production has increased 125mt year-to-date while global coking coal production has decreased by 17mt (primarily due to Covid-19 issues in Mongolia). Coal flows have rebalanced following the Chinese ban on Australian coal in 2020, with India, Japan and Southeast Asia absorbing the excess. The Chinese market is under-supplied by 13-20mt, even as domestic production has increased by 9mt despite stringent regulatory checks, as Mongolian production has decreased by a similar amount.”

While Baretto says he believes met coal prices are “likely to moderate over the next few months,” he has, due to the current tight market, raised his FOB benchmark price estimate for the fourth quarter to $250/t from $150/t, and his estimate for the first half of 2022 to $150/t from $135/t.

“Longer term, Teck continues to view its coal business favourably, as blast furnaces are expected to remain the preferred steel-production method in Asia over the next 20 years and the high coking strength for Teck’s products allows for a relatively lower carbon footprint in the steel-making process,” Baretto commented. “That said, we believe management and the board are well aware of the overhang the business has on the share price multiples.”

While Baretto raised his target price on Teck due to his higher met coal price forecast and “the resultant cash flow generation,” he also maintained his ‘Hold’ rating on the stock “given the limited implied return and the downside risk in met coal pricing.”

Brian MacArthur of Raymond James hiked his target price on Teck from C$37 per share to C$39 per share, noting that the company “offers good exposure to coal, copper, and zinc, and is able to convert EBITDA [earnings before interest, taxes, depreciation and amortization] from its Canadian operations efficiently given its large Canadian tax pools.”

In terms of copper, “QB2 is expected to double Teck’s consolidated copper production (copper growth highest amongst peers) while changing the product mix of Teck meaningfully,” he said. “Given the large QB resource there is also the possibility of QB3, which could potentially provide more copper growth later in the decade.”

As for coal, “in the past, Teck has restructured its portfolio so assuming a “fair price” for the coal assets we believe Teck would consider this,” MacArthur wrote in a research note. “However, if Teck were to divest coal in the near term, given high coal prices, we note it would have a large impact on EBITDA (a $50/t coal price move impacts annual EBITDA by about C$1.5 billion).

“Teck provided no update on this potential divestiture, but it did highlight that high quality coking coal is still likely to be required for the low carbon transition in steel making and without greenfield and brownfield projects there could be deficit post 2025.”

Jackie Przybylowski of BMO Capital Markets raised her target price on Teck to C$44 per share from C$40 per share and upgraded the company to an Outperform rating from Market Perform on strong coal prices and a “solid strategy.”

“The important QB2 project is progressing on schedule, investments in technology are showing significant benefits, and cash flows are strong (especially in the case of sustained spot copper and coal commodity prices),” the analyst wrote in a research note.

(This article first appeared in The Northern Miner)