In 2016, Teck Resources (TSX:TECK.B; NYSE:TECK), B.C.’s largest mining company, did not even make Business in Vancouver’s Top 100 Most Profitable Companies List, due to a commodities price crash that resulted in the company recording a $3.6 billion impairment and posting a $2.5 billion loss in 2015.
Two years later, it’s No. 1 – a position it last held in 2012, at the end of a commodities supercycle – based on its 2017 net profits.
Teck ended 2017 with record revenue of $12 billion and record cash flow of $5.1 billion. According to Teck’s annual audited financial statements for 2017, the company posted $2.5 billion net profit compared with 2016’s $1 billion.
While that jump back onto the top spot has something to do with a recovery in commodity prices, it also has a lot to do with the way the company is structured and the way it positions itself.
Teck’s basic operating principle is to build for the long term, expect the bottom to fall out of commodities and position itself in the right spot to catch the next upturn.
Continuity in the company’s upper echelons – with Don Lindsay serving as CEO since 2005 and Norman Keevil serving as chairman since 2001 – helps the company stick to its long-term plans.
“Teck has done a great job of buying and advancing world-class, long-life, multi-cycle projects,” said Marin Katusa, founder of investment research firm Katusa Research.
“The board of Teck, led by Norm Keevil, backed Don Lindsay [following] exactly that strategy during the global financial crisis.… The aggressive moves in building a diversified commodity production base spearheaded by Don is why Teck is now one of the most profitable companies.
“The projects are cycle-proof, meaning they won’t implode because of a few lean years in the commodity sector.”
Teck is distinguished from some of its peers by its diverse business model and its ownership structure. This has given the company a longer-term focus and has shielded it somewhat from impatient shareholders, who may push companies to make decisions based on short-term gains.
Teck has had a dual-class share structure since 1969 that gives its Class A shareholders more clout. Those shareholders tend to be in it for the long haul, not the short sprint to profit.
There are only 7.8 million Class A Teck shares, compared with 566 million Class B shares, but a single Class A share gives the holder the equivalent voting rights of 100 Class B shares. As a result, Class A shareholders have 57.87% of the voting rights; Class B shareholders hold 42.13%.
Temagami Mining Co. owns more than half of the Class A shares, with the Keevil family owning 51.62% of Temagami. Other large shareholders include Sumitomo Metal Mining Co. and the China Investment Corp. These large shareholders support Teck’s long-term approach to business.
“The board considers that this longer-term perspective has permitted Teck to make decisions which have helped it to grow shareholder value significantly over the last number of decades and will continue to be of benefit to all shareholders,” Teck says in a recent management information circular.
During a five-year downturn in demand and prices for key commodities like metallurgical coal – Teck’s bread and butter – and copper, the company managed to stick to a five-point plan, which included achieving annualized cost savings of $1 billion without selling off any core assets, whittling away at its debt and investing in new multibillion-dollar projects.
“Coming out of the down cycle, we emerged a much stronger company than going into it,” Lindsay told investors and analysts in April.
Metallurgical coal, which is used to make steel, accounts for nearly half of Teck’s profits, followed by zinc, copper and, more recently, oil.
While still coming out of a commodities bear market, including an oil price crash, Teck began investing in the $17 billion Fort Hills oilsands project, marking its entry into the bitumen business. The company owns a 21% share in the project.
The new project began producing this year and generated $209 million in oil revenue for Teck in the third quarter. Lindsay said Fort Hills has a 45-to-50-year life and expects it will “catch several cycles.”
“As you know, in this business, I’ve said many times, whether you are in copper or zinc or oil or coal, you know it’s going to be cyclical,” Lindsay told investors and analysts earlier this year. “People run their models and so on, they use long-term prices. The reality is the models will be wrong from the day they’re calculated.
“What you do know, in any commodity, is it’s cyclical and you get all your capital back in two or three good years. You just don’t know when those two or three years are going to be. But if you have a 50-year asset, you do know you’re going to get those two or three years several times.
“It’s why we stress long-life assets so much in our company.”