Teck Resources Ltd (USA) (NYSE:TCK) rallied more than 14% on Wednesday after the company entered into a long-term agreement with Franco-Nevada Corporation (NYSE:FNV) concerning silver production in Teck’s Antamina mine. Teck Resources will receive $610 million in upfront payments in addition to 5% of the spot price at the time of delivery in exchange for delivering at least 86 million ounces of silver to Franco-Nevada Corporation from the company’s 22.5% ownership of the Antamina mine. Let’s take a closer look at the deal, and examine what top investors think of these two commodity companies.
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From Teck Resources Ltd (USA) (NYSE:TCK)’s press release:
“Teck will deliver silver to Franco-Nevada equivalent to 22.5% of payable silver sold by CMA, using a silver payability factor of 90%. After 86 million ounces of silver have been delivered under the agreement, the stream will be reduced by one third. Closing of the transaction is subject to completion of certain corporate matters and customary conditions and is expected to take place in the first half of October.”
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China consumes a substantial percentage of the world’s commodities production and the nation’s recent economic slowdown has sent the price of many commodities that Teck Resources produces lower. Copper spot prices are down 15.8% year-to-date, while zinc spot prices are off by 23%. Coal prices are substantially lower too. Because Teck Resources derives roughly two thirds of its income from copper and zinc and one third from coal, the company has had nowhere to hide and its recent financial reports have been disappointing. The sharp drop in operating income along with nine billion of debt on the balance sheet have sent Teck Resources shares down 49% since the beginning of 2015.
Teck Resources’ deal with Franco-Nevada Corporation (NYSE:FNV) will reduce its net debt and buy more time for the company to wait out the bad part of the commodity cycle. Analysts at Citigroup estimate that the deal will add at least one year of liquidity for Teck while other investors calculate even longer durations. If the deal preempts dilution and allows Teck Resources to keep operating until a time where commodity prices are substantially higher, it will be a win for Teck shareholders. The deal will also be a win for Franco-Nevada Corporation as long as silver prices don’t crater and Teck Resources doesn’t go out of business.
Hedge funds from our database increased their positions in Teck Resources in the second quarter. Of the around 730 elite funds we track, 15 funds owned $97.69 million worth of the company’s shares (representing 1.70% of the float) at the end of June, versus 12 funds and $35.33 million on March 31. Jonathan Barrett And Paul Segal’s Liminus Management established a new position of 4.75 million shares, while Ray Dalio‘s Bridgewater Associates trimmed its stake by 6% to 262,400 shares.
Similar to Teck, smart money is cautious towards Franco-Nevada, from what it looks like. A total of 16 funds held stakes worth $227.1 million on June 30, and while the number of funds remained flat, the total value of their holdings slightly grew from $202.24 million on March 31. First Eagle Investment Management increased its holding by 70.5% to 1.71 million shares.
Disclosure: None
