Energy Transition Metals Strategy Aims To Strengthen Future Outlook

Key Takeaways

• Transition to focus on energy transition metals and increased Copper production aims to drive future revenue growth and improve earnings.
  
• Strategic actions, including asset sales and cost management, are expected to enhance margins and cash flow, positively impacting financial performance.
  
• Operational setbacks and geopolitical risks could hinder Teck Resources' production efficiency and growth, affecting future revenue, earnings, and cash flow generation.

Catalysts

Engages in exploring for, acquiring, developing, and producing natural resources in Asia, Europe, and North America.

• The transition to a pure-play energy transition metals company will focus on increasing Copper production, which should drive future revenue growth.
  
• The planned use of proceeds from the Steelmaking Coal sale, including substantial shareholder returns, debt reduction, and funding for growth projects, may improve earnings and net margins.
  
• The ongoing ramp-up of QB operations is expected to lead to higher Copper production and improved cash flow from 2025 onward, impacting revenue.
  
• Significant progress on near-term low capital intensity Copper growth projects for potential sanctioning in 2025 could offer high returns, positively impacting earnings.
  
• Operational improvements and cost management, especially in Zinc production, could enhance net margins, supporting financial performance.

Teck Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Teck Resources's revenue will decrease by -10.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.6% today to 11.8% in 3 years time.
• Analysts expect earnings to reach CA$1.4 billion (and earnings per share of CA$2.82) by about December 2027, up from CA$1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$1.7 billion in earnings, and the most bearish expecting CA$813 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.1x on those 2027 earnings, up from 26.3x today. This future PE is greater than the current PE for the US Metals and Mining industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 1.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.32%, as per the Simply Wall St company report.

Teck Resources Future Earnings Per Share Growth

Risks

• The company has lowered its copper production guidance for both 2024 and 2025 due to lower expected production from certain assets, potentially impacting future revenue and earnings.
  
• There were unexpected maintenance delays and technical issues, such as the failure of the mill feed conveyor and a thickener, which could lead to increased operational costs and negatively affect margins.
  
• The ramp-up of the QB2 project has been slower than expected, with multiple guidance reductions and ongoing challenges in optimizing recovery, impacting projected earnings and cash flow generation.
  
• A noncash after-tax impairment charge was reported for the Trail operations due to several factors, including a challenging environment for treatment charges, which could adversely affect net income.
  
• The political situation in Mexico poses a risk to the San Nicolás project, a key part of the company’s growth strategy, which could delay project sanctioning and impact future revenue growth.

Valuation

• The analysts have a consensus price target of CA$73.28 for Teck Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$87.0, and the most bearish reporting a price target of just CA$45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$11.8 billion, earnings will come to CA$1.4 billion, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 7.3%.
• Given the current share price of CA$64.94, the analyst's price target of CA$73.28 is 11.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.