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Why Teck Stock Surged on Tuesday

Diggers and trucks in a coal mine
Image source: Getty Images.

Written by Amy Legate-Wolfe at The Motley Fool Canada

Teck Resources (TSX:TECK.B) shares surged this week, as the company announced it would be selling its steel-making coal business. The sale would go to Glencore through a series of deals that value its operations at a whopping US$9 billion. Shares of Teck stock were up 6% since the news came out this week.

What happened?

The deal for Teck stock ends a months-long saga between Glencore and Teck stock. The Swiss commodities company would now acquire the majority ownership of the company’s steelmaking coal business, with Glencore agreeing to pay US$6.9 billion for a 77% stake in Elk Valley Resources, the coal business itself.

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Furthermore, Japanese company Nippon Steel would acquire a further 20% of a stake in exchange for an interest in Teck stock’s coal operations and US$1.7 billion in cash. The remaining 3% would go to South Korean steelmaker POSCO, which will trade its interest in a pair of Teck stock’s coal operations for the stake.

So what?

The deal comes after the company was turned down for creating a spinoff business for its steel-making coal business. The plan didn’t meet shareholder approval, and so a sale became evident. This, too, came after a hostile takeover bid by Glencore that came down on Teck stock earlier in the year. The board rejected the offer, but Glencore continued a dogged pursuit of the coal business.

The government even got involved to make sure that Glencore would ensure the transaction benefitted Canada. Further, Glencore management said in a statement that it would “engage constructively and meaningfully with the Indigenous Nations in the Elk Valley.”

Yet as the sale now comes to a close, Teck stock believes this will prove quite beneficial for the company. It will help with debt reduction as well as create cash on the balance sheet and help pay transaction-related taxes. These are estimated at a whopping US$750 million.

Now what?

Yet another part of this cash will go towards shareholders. This could include a dividend increase, with Teck stock currently holding a yield of 0.99% as of writing. It’s now valued quite highly, trading at just 11.98 times earnings and 0.97 times book value. Further, its enterprise value over earnings before interest, taxes, depreciation and amortization is at just 6.34. This all points to major value and, indeed, undervalue of the stock.

Yet another way the company could support growth, if not through a dividend increase, is through share buybacks, which look promising given the value of the stock right now. Whatever is chosen, it looks like today’s investors are getting a deal and could see shares climb even higher. Even now, shares are up 10% in the last year for the stock.

Finally, while a sale is great, this has led Teck stock to be able to focus on its very lucrative and future-forward investments. This includes its fertilizers, chemicals, copper, and silver deposits. With more focus on these continuously needed products, Teck stock could see even more growth in the future.

Certainly consider Teck stock for a buy today, given its share performance and the sale. But hold it long term for its major diversification.

The post Why Teck Stock Surged on Tuesday appeared first on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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