1 Dividend Stock to Snag as a Copper Shortage Looms - The Globe and Mail

Oct 18, 2024

After surging to new highs earlier in 2024, copper (HGZ24) prices are back in focus amid concerns about ongoing supply constraints in the face of rapidly growing demand. With the red metal stabilizing after a pullback from those peaks, analysts at JPMorgan recently warned more broadly on the looming copper deficit, which it expects to be driven by rising demand from artificial intelligence (AI) and electrification.

Recent forecasts predict that global copper demand will increase by about 40% by 2040, with the market size expected to reach $548.20 billion by 2034, growing at a CAGR of 5.11% from 2024 to 2034.

With fundamental demand for the key industrial metal still robust, Teck Resources Limited (TECK) is one mining giant for investors to consider. In its second-quarter results for 2024, Teck reported record quarterly copper production, with a 71% increase year-over-year. Once known for its coal prowess, the company's strategic shift towards metals crucial for global development and the energy transition has left Teck particularly well-positioned to capitalize on growing copper demand.

Here's a closer look at this dividend stock for investors looking to add some strategic copper exposure.

Valued at $23.7 billion, Vancouver-based Teck Resources (TECK) is a major player in the mining industry. The company's business model focuses on the exploration, acquisition, development, and production of natural resources across Asia, Europe, and North America, with a recent shift towards becoming a pure-play energy transition metals company.

In terms of stock performance, Teck has demonstrated resilience over the past year. The stock has gained 11.3% on a year to date basis, and is up 36.9% from its 52-week lows, set last November.

This performance is supported by its robust earnings in the second quarter of 2024, with adjusted EBITDA of $1.7 billion driven by record copper production at the Quebrada Blanca (QB) site and strong copper prices. Profit from continuing operations before taxes reached $658 million, while adjusted profit attributable to shareholders was $413 million, or $0.80 per share. This performance underscores Teck's transformation into a pure-play energy transition metals company, focusing on copper, with QB alone contributing 51,300 tonnes in the quarter.

Teck Resources also upwardly revised its 2024 annual copper production guidance to a range of 435,000 to 500,000 tonnes, reflecting its confidence in ramping up operations at QB. This is complemented by a molybdenum production guidance of 4.3 to 5.5 thousand tonnes, with copper net cash unit costs projected between $1.90 to $2.30 per pound.

From a valuation perspective, Teck's EV/EBITDA ratio of 8.55 and price/book ratio of 1.27 suggest that the copper giant is reasonably valued around current levels, relative to its peers.

Teck Resources is making strategic moves to solidify its position as a leader in the energy transition metals market. A significant step in this direction is Teck's recent decision to restructure its business to focus solely on energy transition metals. This shift is underscored by the sale of its steelmaking coal business to Glencore, (GLNCY) netting Teck $7.3 billion.

The divestment not only streamlines operations but also provides substantial funding for copper growth projects, setting the stage for a projected 30% increase in copper production by 2028. This pivot towards copper and other essential metals aligns with global trends favoring sustainable energy solutions, potentially enhancing Teck's market appeal and stock performance.

Alongside these strategic changes, Teck has demonstrated a continued commitment to rewarding shareholders. The company most recently declared a quarterly dividend of $0.625 per share, which included a $0.50 one-time supplemental dividend, reflecting its robust financial health and shareholder-friendly policies. This payout is part of a broader $3.5 billion return to shareholders, which includes share buybacks, underscoring Teck's confidence in its future growth and cash flow generation.

These fundamental strengths and strategic initiatives position Teck favorably in the market, potentially driving long-term value for investors as the demand for copper and other transition metals continues to rise.

Analysts are taking note, with a consensus rating of "Strong Buy" for TECK stock. Out of 19 analysts, 14 have issued a “strong buy,” 4 say it's a “moderate buy,” and just 1 recommends a “hold.”

The average price target for TECK stands at $57.11, suggesting a potential upside of approximately 21.4% from the current price.

Notably, UBS recently upgraded Teck to “buy” from “neutral” on expectations for higher copper prices, while analysts at JPMorgan and CIBC have also highlighted the stock's copper-related upside.

In conclusion, Teck Resources is a compelling dividend investment opportunity amid the looming copper shortage. As the well-established mining giant looks to ramp up production of a key energy transition metal, Teck looks particularly well-positioned to capitalize on the growing demand for copper. Given that the company continues to enhance its production capabilities and reward shareholders with regular returns, it presents a promising avenue for investors looking to strike gold — or rather, copper — in their portfolios.