The soft, scraping sound behind you is becoming more urgent. Don’t look back. Rest assured the source of that cacophony is a clomping pair of red-splattered boots worn by zombie stock,Teck Resources Limited (TCK).
Indeed, this stock appears to be one of those on the ragged edge of the looming apocalypse. Dying sales figures, horrifying commodity prices and grotesque earnings – a 96% second quarter decline – have been sucking the life out of Teck.
The trick will be walking away from Teck as it leads a swarm of undead toward a cataclysm of unspeakable terror. To aid in that effort, TheStreetSweeper offers the top 10 bumps in the night for this stock.
*1. Sales Decline
The Canadian mining company focuses on coal for steel-making, copper and zinc through assets in Canada, the United States, Peru and Chile.
But now the company is clearly struggling as quarterly revenues dropped 13%, which CEO Don Lindsay said was “primarily due to lower prices for all our principal products.” First-half sales dropped 15%:
(Source: Company SEC filing)
The sales trend has been nothing but down, down, down for five years:
Revenue fell 4% in 2015 from the prior year. Since 2011, Teck has seen a staggering 28 percent drop in revenue.
The situation resulted in CEO Lindsay issuing a warning, “we have lowered our coal and copper cost guidance for the full year.”
*2. Valuation Absurd; Profits Plunge
Yet the stock sports a ridiculously oversized forward price-to-earnings ratio of 25.44.
But Teck isn’t even making a net income. Teck earning figures took an epic drop into the red in 2015 … The company lost over $2 billion!
Shareholders continue to take it on the chin this year, too. In the second quarter, profit dropped 96.2%.
That’s right. Teck management said adjusted profit declined to $3 million Canadian, or $0.01 per share, versus $79 million or $0.14 per share last year.
But rather than driving a stake in Teck’s heart, the terrible July 28 financials fueled the rocket ship:
The desperate company has been deferring capital expenditures, gradually laying off 1,000 of its 3,000 employees, selling assets and even shutting down its Coal Mountain project, a British Columbia mine once anticipated to produce 2.7 to 3.5 million tons of coal.
But even those efforts likely will not be enough for this commodity-dependent company. Such commodity businesses have taken a beating for a couple of years.
More trouble lies dead ahead…
*3. Commodity Prices Forecast: Demand Declines
Judging by the stock run, the market must have bought into the CEO’s second quarter comments on his commodity business.
“While the commodity cycle continues to be challenging, we are starting to see some positive changes in the direction of zinc and steelmaking coal prices,” said Mr. Lindsay in a statement.
But the world steel industry itself indicates the future appears gloomy.
Global steel demand contracted -3% in 2015 and the World Steel Association believes demand will decrease once again by -0.8%.
China has been Teck’s chief customer. Yet the World Steel economics committee chairman, TV Narendran, said the greatest weakness in steel demand is expected to be in China:
“The economic environment facing the steel industry continues to be challenging with China’s slowdown impacting globally across a range of indicators contributing to volatility in financial markets, sluggish growth in global trade and low oil and other commodity prices…
“In 2016, while we are forecasting another year of contraction in steel demand in China, slow but steady growth in some other key regions including NAFTA and EU is expected. Growth for steel demand in all markets except China is expected in 2017.”
(Source: World Steel Association)
Indeed, World Steel anticipates China’s demand to drop 4% this year and another 3% next year. Annual steel product demand is expected to be 626.1 million tons … a whopping 15% lower than in 2013.
*4. Negative: Free Cash Flow
Meanwhile, the company is already failing to generate cash. In fact, last quarter’s negative free cash flow hit a stunning $-87.86 million.
That makes negative cash flow in each of the last three quarters … adding up to negatives in 8 of the past 11 quarters (here).
Free cash flow is the lifeblood of healthy companies, used to make new investments and pay dividends. So Teck’s dividend payments have now turned into a huge, foot-dragging issue for stockholders …
*5. Dividends: Distressing Drop
With one disaster building on another, Teck has suspended dividends at times. The company has paid dividends 25 times since 1998, Nasdaq records show. The most recent payouts have been the lowest ever paid.
In December, dividends were just $0.0368. And the dividend payout in June was essentially the same at $0.0387.
Those dividends are 40% lower than what Teck first paid 18 years ago:
The company’s financial condition and dividend trend cast doubt on its ability to sustain dividend payments. And since investors love dividends, suspending those payments would almost certainly push the stock into a freefall.
*6. Howling Debt; Junk Rating
Amid pressure from dividends and negative cash flow issues, Teck is shrieking with debt … $7 billion worth.
But both Standard & Poor’s and Moody’s have given the company a “junk” credit rating.
“The downgrade of Teck’s rating is driven by low commodity prices that could push leverage over 7x by the end of 2017, together with potential refinancing challenges after 2018.” (Jamie Koutsoukis, Moody’s Vice-President, Senior Analyst)
Moody’s noted, “The rating outlook is negative.”
The company is in the midst of diversifying into oil primarily through the Fort Hills project. But Moody’s worries about the project draining an immense amount of cash.
“The company’s significant spending on the Fort Hills oil sands development project (of which it does not control the capital decision process), at a time when commodity prices continue to be under pressure, will cause Teck’s free cash flow consumption to total approximately C$800 million in 2016 and C$500 million in 2017.”
The investor service predicts a “fundamental downward shift in the mining sector,” a longer, tougher recovery and “increased credit risk and weaker metrics” for Teck and the entire mining sector.
Moody’s said, “(C)ash flow will remain sizably negative through at least 2017, and with US$1.6 billion of unsecured notes maturing over the through 2017-2019 period, we have concerns regarding the company’s ability to refinance the debt.”
*7. Environmental: Controversies
While Teck has spent more than $1 billion in environmental improvements and been recognized for sustainability efforts, the company has come under fire for environmental issues.
Last month, a U.S. judge ordered Teck to pay an aboriginal group $8.25 million in costs related to an ongoing legal battle alleging hazardous substances from its Trail, B.C., smelter were disposed of in Washington state’s Columbia River.
In 2012, Teck admitted effluent from its smelter had polluted the Columbia River for a century.
Teck said its Trail plant in British Columbia “discharged solid effluent, or slag, and liquid effluent into the Columbia River that came to rest in Washington state, and from that material, hazardous materials under (U.S. environmental laws) were released into the environment,” Dave Godlewski, vice-president of environment and public affairs for Teck American, told Huffington Post in a telephone interview.
Earlier this year, Teck was fined $3 million for three British Fisheries Act offenses related to polluting the Columbia.
In 2014, rather than building a wastewater pipeline away from its Red Dog Mine in northwest Alaska, Teck decided to absorb an $8 million fine defined in a 2008 lawsuit settlement. Residents of a nearby village sued Teck alleging Clean Water Act violations from water discharged from the mine, then treated and dumped into a creek that empties into the Kivalina village’s drinking water.
Future regulatory and environmental issues will only continue to be a cause of investor concern.
*8. Coal, Zinc Companies: Bankruptcies
Teck isn’t the only one in a desperate situation. In April, the United State’s largest coal producer, Peabody Energy (BTU), filed for bankruptcy, blaming declining coal prices and an “unprecedented industry downturn.”
The debt-riddled company also made a poorly timed acquisition in 2011, underestimated rivals’ coal supply and overestimated China’s consumption growth, according to The Washington Post.
Alpha Natural Resources and Arch Coal (ACI) also filed for bankruptcy amid troubled coal markets. Though Arch’s restructuring plan has won court approval, The Wall Street Journal wrote that the arrangement would wipe out current shareholders.
Zinc mining is another Teck interest. But bankruptcies are beginning there, too, with Horsehead Holding filing in February amid low zinc prices, which later improved but are now down for the month to $1.02 per pound.
*9. Analysts: “Sell”
So much has gone wrong with Teck that, even in today’s optimistic environment, most analysts can’t hide their pessimism.
In fact, Teck has been hit with an astounding 20 hold or sell recommendations:
Highlights from analyst reports include:
*Goldman Sachs: Downgrades Teck from “Buy” to “Neutral,” with a $13 one-year price target. The analyst believes that a 20% premium to peers makes the stock unattractive. Since the approximate Aug. 1 note to investors, the stock has jumped 11%.
*Morgan Stanley: Upgrades Teck from “Underweight” to “Equal-weight,” raising the price target from $7 to $18. Analyst comments coal futures prices should add to the cash flow, though we note free cash flow is stunningly negative at -$87.86 million.
*Deutsche Bank: Maintains a “Sell,” with an $11.50 price target.
*Jefferson Research: Issues “Sell” rating in response to Teck’s most recent financial report, noting three major weaknesses:
(Source: Jefferson Research)
*S&P Capital notes:
“Annual Cash Flow Change vs. Previous Year Summary: TCK generates less sales from the use of its assets than nearly any other company in the Diversified Metals & Mining group.”
*RBC Capital Markets downgrades Teck, mostly on valuation, commenting:
RBC would likely buy if shares drop below $17. Price uptick for zinc, only a 19% revenue generator, is already baked in.
The firm expects cooling coal market and weakened demand … “recent record Chinese steel output seems unlikely to continue, suggesting a weakening demand for coking coal, limited further upside potential for prices in the near-term.”
Overall, Teck has received the worst ratings of any company in recent memory. And TheStreetSweeper agrees wholeheartedly with that negative sentiment.
*10. Executive Pay Up: Shareholder Value Down
There’s a lot more money in coal than one might think … at least for company leaders.
Executives who have overseen the deterioration of the company are making over $22 million.
CEO D.R. Lindsay alone is making more than $10 million.
(Source: Company SEC filing)
As executive pay has risen, the most loyal stockholders have watched things grow progressively worse:
(Source: Company SEC filing)
The company website is here and other viewpoints are here.
Virtually everything is wrong with this company – revenue and profit downtrend, negative cash flow, projected lower Chinese steel demand, terrible commodity prices, dividend depression, high executive enrichment, industry bankruptcies, credit junk rating – even Wall Street analysts think the stock is junky. Yet the stock has risen 171% this year.
As the apocalypse nears, one analyst says “Sell Everything!” to which we’d add, “Start With Teck!”
TheStreetSweeper expects a blood-curdling cry from this zombie stock as it stumbles near-term and drops to $10 per share.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in TCK and stand to profit on any future declines in the stock price.
Editor’s Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to email@example.com.