Teck Resources Ltd. (B) (TECK.B.TO)

Short. Coal is definitely one of the key drivers on the valuation. This has a near perfect combination of negative headwinds. 1) Poor commodity pricing on zinc and coal and 2) a stressed balance sheet. Low return on equity at about 2.1X. Have missed multiple earnings reports and have negative cash flow. He has also started to see some stress in the credit market. Dividend yield of 2.58%.

This keeps falling and he keeps getting tempted to say there is going to be a trade because it has fallen so far. Doesn’t like where they are positioned right now. Coal looks awful. Copper, their other major asset, looks awful too. All their excess cash flow over the next couple of years is going into Fort Hills and he doesn’t think they can even sustain the dividend at current levels.

This is a coal conversation. He owns less in the commodity area. This is the only name. He is there just in case he is wrong. He is negative on commodities across the board. They trade in decade long cycles and we are half way through a negative cycle. There is no rush to be in commodity stocks. He has a little bit of this one in case he is dead wrong.

He owned it when the Chinese were major buyers of coal for steel production. TCK.B-T is a price taker. They can’t do much about the prices of what they sell. They are low now and they can’t do very much about it. He sees weakness in China. He is staying away from all the metals and minerals.

It is in a long term downtrend. It just makes lower lows and lower highs. We are back at the lows again and the question is whether it will hold and we build a base. Buying in here with a stop below the previous low will get you out if it is still going to keep making lower lows. The $20 area is a strong resistance. The stock has not bottomed yet. He does know if the copper and steel space is going to get strong for a few years.

His clients’ cost base is high. He probably should have sold, but did not. He is keen on copper because of the North American recovery. He is also keen on zinc. Met Coal has gone down. The hope is that eventually China will start using more coal, but they may not because of reasons of pollution. If you see a better alternative in the metals field, you may want to take a tax loss. But hold for now.

They have to take production off in the coal market.

The most notable news on this was the recent cut back. They are shutting down their coking coal production, a 6% reduction for the year. This is recognition of the fundamental weakness in coking coal prices. It is still a copper, coking coal producer. Copper still looks pretty decent at $2.75 which could be closer to $3 into 2016. Probably a good buy in the mid-$13 range, might bounce back up to the $16 range.

This is an ugly duckling. It has been an ugly story for a long time. Commodities are in a bear market that should last for another 5 years. He doesn’t see any hope for this particular stock.

This is the only mining stock that he owns. This is more in metallurgical coal, zinc and copper. Most of its mines are in friendly environments. It prudently cut its dividend recently, rather than borrowing. It will come back when profitability comes back.

In the near term this is clearly facing some serious challenges. Their big main product is coking coal for the manufacturing of steel, with China being the big customer. China is going through a transition slowdown, so the price is not very good right now. It will take a little while. They cut their dividend but he thinks they will be okay for now. If you can hold onto it for a couple of years, this company will be around and will make a lot of money when the cycle turns for them.

[Caller did this trade: Sell Jan/17 $11.00 Put for $1.50, Buy $20 call for same expiry date]. He has created a synthetic position on TCK with a low price. His downside is 0 and upside is infinite. It is a good trade if you like TCK.B-T.

The major problem here is the coal business. The price of met coal is down $50 a ton from where it used to be, and doesn’t appear to be going anywhere fast. As long as that condition prevails, he doesn’t see the company going anywhere. Zinc is in short supply and that is a great positive. If he is right on the economy, copper will do better, and he believes this company has indicated they would like to make an acquisition.

He looks for sectors where there have been some macro shifts that can lead to multiple expansion going forward. In the commodity sector, it looks as though 2012 marked a cycle peak for commodities. We are into a period where money is leaving commodities in favour of investing in equities and consumer led economies. Expecting relative underperformance for commodities going forward.

Historically this does very well from October to probably through April of each year. However, this year the stock is not doing what it normally should do on a seasonal basis. It has actually established a short downward trend. Trading below its 20 day moving average and underperforming the TSE Composite. There are better opportunities elsewhere, within the base metal sector.