UBS Upgrades Teck Resources (TCK) to Buy

UBS upgraded Teck Resources (NYSE: TCK) from Neutral to Buy with a price target of C$20. Analyst Brian MacArthur thinks its dividend can be funded at lower prices.

"At US$60/bbl oil and $0.85 CAD/USD, we believe Fort Hills should realize net backs of ~C$45/bbl vs. C$65/bbl previously, assuming US$100/bbl oil and $0.95 CAD/USD. We note that while project economics deteriorate with lower oil prices, Fort Hills could benefit from a variety of other factors including a lower oil differential, lower diluent, and likely a lower CAD. Based on the initial C$2.94B investment we calculate the pretax FCF yield would still be ~7%. Significant tax losses are also available to shield operating cash flow in the initial years of production."

"While low oil prices are a negative for Fort Hills, Teck's other business lines could realize benefits as lower prices and a weakening CAD contribute to lower costs. We note that for each $0.01 decrease in CAD versus the USD, Teck's annual EBITDA improves by ~C$60M. Similarly, each $30/bbl decrease in the price of oil increases EBITDA by C$180M per year. Teck estimates that recent oil price and Canadian dollar declines could add an additional C$400M to its annual EBITDA, assuming base metal prices do not decline significantly," continued the analyst.

"Teck pays a dividend of $520M/yr and currently yields 7%. Assuming no capex overruns, to fund the dividend, cover capex, and pay debt we estimate Teck needs to generate $7.3B between 2015 and 2017. Even at US$108/t met coal, US$2.85/lb copper, US$1.00/lb zinc, and $0.86 CAD/USD we estimate Teck can generate ~C$6.0B in operating cash flow between 2015 and 2017 indicating that, while it would have to draw on the revolving credit facility, it could maintain the dividend (if it choose to) given cash of $1.7B and undrawn credit of $3B as of Sep. 30th," he added.

For an analyst ratings summary and ratings history on Teck Resources click here. For more ratings news on Teck Resources click here.

Shares of Teck Resources closed at $11.19 yesterday.

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