Mispriced match-up: Teck vs. Xstrata

Given market conditions, either Xstrata is seriously overpriced, or Teck woefully underpriced.

JOHANNESBURG - 

Market valuations of listed mining stocks, even assuming lots of sellers and buyers, can sometimes reflect disparities that defy ready explanation, a position that has apparently prevailed for many a month in the case of Canada-based Teck, and London-listed Xstrata.

The two stocks offer a range of overlaps; in coking coal, where BHP Billiton is by far the biggest globally, Teck ranks second and Xstrata third. In zinc, Xstrata ranks first, and Teck fourth; in copper Xstrata ranks fourth, with Teck in the top ten. Xstrata also produces steam coal, where it ranks No 1, and ferrochrome, also No 1. Teck is also a substantial producer of molybdenum, lead and silver.

On the financial and business model fronts, Teck and Xstrata differ by a wide margin. Since listing in 2002, Xstrata's issued shares have increased from 250m to 2.9bn, a feat that ranks as superlative among any company of size, for the wrong reasons. Teck has steered, like BHP Billiton and some others, in the other direction, making extraordinary efforts to resist issuing new shares, and focusing, rather, on stock buybacks when appropriate.

Both Teck and Xstrata have been acquisitive; Xstrata especially so. The difference has been in the choice of metals and commodities . . . and, of course, timing. Xstrata's single biggest splash was seen in 2006, when it paid USD 18.8bn in cash for Falconbridge; the bent for nickel continued right into 2008, when USD 2.8bn was paid for Australia's Jubilee. Sadly, the pricing for nickel (and aluminium) has been permanently weakened by processing-related developments in and around China.

The extraordinary spike in nickel prices, seen up to mid-2007, allowed Xstrata, like other nickel kings, to declare stunning profits in line with the nickel price cycle. One sample was the 2008 fall in EBIT (earnings before interest and tax) from Xstrata's Falcondo operation in the Dominican Republic, to USD 76m, a collapse nearing 90%, from USD 655m in 2007. Falcondo was temporarily suspended in August 2008, and subsequently went into care and maintenance.

There were other big players who fell foul of the riches once offered by nickel; in 2007, Vale made a rare departure from its mix of optimistic conservatism and calculated entrepreneurship when it threw USD 18.9bn at the acquisition of Inco. In the same year, Norilsk paid USD 5.8bn for LionOre. Xstrata had bid for both targets but luckily, in hindsight, it backed out.

For Teck the big acquisition was of Fording, a coking coal king, in 2008 for CAD 11.6bn, towards the end of the commodities supercycle that had commenced early in 2002. But this is a very different commodity; in its financial year to 30 June 2009, coking coal was BHP Billiton's second biggest money spinner, after iron ore, contributing USD 4.7bn to underlying earnings, compared to the USD 6.2bn from seaborne iron ore, in itself, the world's most profitable mining franchise.

Coking coal is, of course, a bedfellow of iron ore. It can safely be ranked as the world's second most profitable mining franchise, with few players. Its potency in the Xstrata stable is diluted somewhat by size, and also Xstrata's wider diversification.

Both Teck and Xstrata ended 2008 ranking amongst the world's most indebted mining companies. Net debt (including cash) for Teck was at CAD 12bn, compared to USD 16.3bn for Xstrata. Now that numbers for 31 December 2009 are in, Teck has seized the frontline, with a reduction to CAD 6.6bn in net debt, compared to a smaller reduction by Xstrata, to USD 12.6bn.

It should be noted that Xstrata raised fresh equity of USD 5.7bn during 2009, compared to the far more modest CAD 1.7bn raised by Teck. At the same time, Xstrata made another acquisition, of USD 2.0bn, from its largest shareholder, during 2009. Subject to the sale of Waneta Dam, Teck's net debt could reduce to CAD 5.4bn within a few weeks.

Teck's greater agility stems from its ability to dispose of certain non-core assets, but, more important, it was able to generate far heavier positive cash flows than Xstrata during 2009. Teck's capital expenditure was lighter, reflecting the relatively happy state of developed assets at positions in the cycle when cash is tight. Xstrata has committed itself heavily for the future: "Capital expenditure" according to its own advertisements, "will rise accordingly with expected expansionary capital spending of approximately $14 billion over the next three years, including $4.9 billion in 2010".

This is an extraordinary commitment, given that Xstrata only managed to generate free cash flow (operating cash flow less capital expenditure) of USD 563m during 2009. The Xstrata business model, like a freight train unleashed in 2002 and still thundering across the plains, could soon be yelling out for yet another bout of heavy duty refueling. Shareholders who bought into the stock upon its IPO in 2002 have already been diluted ten fold, and, if still holding like faithful hounds, should now prime their appetites for a fresh bout of charm offensives. Xstrata, always tuned into just how to play the London double base, has reinstated dividends.

Looking forward, Teck's planned capital expenditures for 2010 are initially set at around CAD 1.1bn, sharply up on 2009. About 60% of the 2010 total will be spent on development projects. At the production level, Teck already in December announced that its coal production is planned to increase by 25% to 30% in 2010 to between 23.5 and 25m tonnes. Copper output is set to rise, and zinc production to increase sharply.

The rub, however, is in the market valuation comparison, with Xstrata at USD 47.5bn, and Teck at well less than half that, at USD 19.7bn. It may be counterproductive to argue for parity, but, given market conditions, either Xstrata is seriously overpriced, or Teck woefully underpriced.

SUBSCRIBE to Mineweb.com's free daily newsletter now.

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

Print story      Email story      Subscribe to free newsletter

Back

 

responses to this article

askhnr@mail.com www.uggbootssale.org The UGG Boots Sale many colors to meet the different taste such as black,red,sand and gold colors,which are attractive and brightness.Of course the classic colors such as the black,coffee,chocolate,sand and chestnut are the . .more best seller in every year. . .less by Ugg Boots Sale on February 09 2010, 19:59 Find this comment inappropriate? Report it

Name
Subject
Comment