High Metallurgical Coal Prices Drive Teck’s Spectacular 2022 Result

Surging metallurgical coal prices drove no-moat Teck’s TECK.B record result in 2022. Adjusted net profit after tax rose 59% to CAD 4.9 billion or CAD 9.09 per share, compared with 2021. Adjusted EBITDA also rose, by 46% to CAD 9.6 billion almost entirely due to higher metallurgical coal prices. Teck’s average realized price for metallurgical coal was USD 355 per metric ton, up 70% on 2021. Higher unit cash costs due to inflation were the biggest headwind. Teck will pay a CAD 0.625 final dividend, comprising a CAD 0.125 quarterly base dividend and a CAD 0.50 supplemental dividend, in March. It also intends to repurchase up to CAD 250 million in shares, immaterial given it’s only about 1% of shares on issue. With net debt around 0.6 times adjusted EBITDA, the balance sheet remains strong.

We incorporate 2023 guidance and lower our fair value estimate for Teck to USD 28.50 per share, down from USD 31.00, driven by higher near-term unit cash costs and capital expenditure due to inflation. Teck proposes to keep its copper and zinc businesses—to be renamed Teck Metals—and spin off its metallurgical coal business as Elk Valley Resources, or EVR. Teck shareholders will receive one EVR share for every 10 Teck shares plus their share of CAD 200 million in cash, or about CAD 0.39 per Teck share. Teck Metals effectively keeps much of the economic value of EVR through to at least 2028. Teck Metals will receive 87.5% of the following: a minimum of CAD 7 billion in royalties from EVR, CAD 4.4 billion from EVR’s repurchase of preferred shares, and 6.5% cumulative dividends on the preferreds while outstanding.

On first impression, we think the proposed transaction strikes a fair balance between satisfying investor ESG concerns over Teck’s coal exposure while retaining most of the cash flow from metallurgical coal to end 2028 to invest in its large copper pipeline. We will have more to say on the merits of the demerger ahead of the shareholder meeting for its approval, set for April.