Proactive Investors - Analysts at Stifel GMP have retained their ‘Buy’ rating on Teck Resources (TSX:TECKa) Ltd (TSX:TCK) after the Canadian miner announced it will spin off its coal business, creating Elk Valley Resources as a pure-play, high-margin steel-making coal producer and allowing Teck to fund growth in its multi-asset copper business.
In a note to clients, Stifel’s analysts highlighted that Teck will retain 90% of free cash flow from its coal business until at least the end of 2028, supporting its copper business growth.
They added that despite a fourth quarter earnings miss owing to higher non-operating expenses and lower sales volumes, with the coal business being spun off and the announcement of a sunset to the dual-class share structure in six years, they see the 4Q update to be “quite positive.
The analysts also maintained their price target of C$70 and noted that they had increased confidence in their investment thesis that the sum-of-the-parts valuation for Teck was greater than the current share price. Teck’s Toronto-listed shares are currently trading at about C$56.73.
Teck trades at 5.3x versus the copper sector average of 6.7x, the analysts noted.
“With the coal business spun off to shareholders, we believe there is strong potential for a re-rating opportunity, moving Teck closer to a pure play copper/base metal producer, resulting in a share price upside.”
The analysts also noted that reducing coking coal’s contribution to Teck’s earnings may bring in a new suite of shareholders, ones who have been on the sidelines due to environmental concerns arising from ownership in coal assets.
“Teck has a strong pipeline of copper growth projects that will continue to position Teck as a catalyst-rich, copper-focused growth company,” the analysts wrote.
“With QB2 (the company’s cornerstone copper growth project) set to commence production, we estimate base metals to overtake coal’s contribution to revenue in 2024, with a potential doubling of copper production by the end of 2024.”
The analysts concluded: “In conjunction with our long-term bullish outlook for copper, we think Teck’s growth portfolio could position the company as a premium copper producer amongst its peers.”