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Trade view / 11 January 2017 at 8:23 GMT

Teck to ride the mining bull market in 2017 – #SaxoStrats

Head of Equity Strategy / Saxo Bank
Denmark
Instrument: TECK_B:xtse
Price target: 40
Market price: 29.63
image
 
Background

Momentum continues to be strong in the metals & mining segment, outpacing all other industries globally. Given recent macro indicators we believe good conditions will remain well into 2017. The Chinese PPI y/y has risen 12 percentage points the past year to 5.5% y/y in December, signalling that China is now exporting significant inflation into the global economy. In addition, inflationary pressures are building in both the US and Europe.

Mining momentum



















Source: Bloomberg, Saxo Bank

Coupled with more fiscal expansion across G20 countries growth will likely improve in 2017 and with it metals prices will go higher. Metals prices are up 34% since the bottom in early 2016 but still 24% below their average since March 2009, so alone from a mean reversion perspective we see further upside in metals prices.

BBG Industrial Metals Index
Bloomberg Metals Price Index
Source: Bloomberg 

With the mining segment we are most positive on Canadian based Teck Resources (TECK_B:xtse) with its business almost evenly split between coal, zinc and copper. All three metals are seeing improving fundamentals and especially the coal segment is seeing stronger sentiment since Trump's victory back in November.

Teck Resources shares are cheap, despite a 560% rally from the lows in January 2016, measured on 12-month forward EV/EBITDA now at 3.6x or around minus 1.5 standard deviations from the mean since early 2006. Obviously expectations are have gone up but these are not long-term expectations but something that looks reasonable given the current outlook.

Teck Resources valuation

 
Management and risk description
We are issuing a buy recommendation on Teck Resources (TECK_B:xtse) but implementing a rather tight stop at 26.50 in order to not be caught on the wrong side should momentum reverse sharply due to deteriorating macro fundamentals over the coming months.

Teck Resources 5-year weekly price chart
Teck Resources weekly share price
Source: Saxo Bank

Key risks to this trade idea are obviously macro indicators and especially growth and inflation indicators because those directly impact metals prices. Trump policies are also a risk to especially the coal segment.

Parameters

Entry: buy TECK_B:xtse at market 

Stop: we are recommending a stop order at 26.50, as a breakout below this level indicates that the strong momentum has reversed.

Target: we issue this trade idea with a target price of 40 indicating 35% upside from yesterday's close price.

Time horizon: the tight stop indicates that we do not see this as a strategic trade but more a continuation of the strong momentum. As a result the time horizon is expected to medium with our expectation around six months.

— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more

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