I always enjoy reading the letters from David Einhorn (Trades, Portfolio)'s Greenlight Capital. While the fund's performance has been relatively disappointing over the past couple of years, the fund manager has still, in my opinion, managed to find some interesting value opportunities.
In his fourth-quarter and full-year 2021 letter to investors, Einhorn reviewed his analysis of a holding he first outlined at the beginning of 2021, Teck Resources (TECK, Financial). The value investor first profiled Teck at the 2021 Sohn Investment Conference in New York.
Undervalued mining opportunity
Einhorn's thesis for the stock is relatively simple. He believes that due to the rising demand for electric vehicles and the general rush towards renewable energy, the need for copper will outpace supply in the years ahead.
Against this backdrop, Teck looks unloved and undervalued. The company is a 50% owner of a larger copper mining expansion project in Chile. At the time of the initial Sohn presentation, this project was due to come online in the second half of 2022. Einhorn argued that the expansion project could be worth more than Teck's entire market capitalization at the time if the price of copper hit $6.80 per pound.
Clearly, there were a lot of projections attached to this investing thesis. Mining is a notoriously difficult industry to analyze. Cost and time overruns are common because miners do not really know what they are going to find until they get underground.
The industry is also currently facing a backlash from ESG investors. Mining can be a dirty and polluting industry. Despite the essential nature of resources such as copper for the energy transition, many miners are coming under fire for their polluting activities.
Teck is no different. The group's biggest business division at present is mining metallurgical coal. While coal prices have rallied strongly over the past 12 months, ESG concerns seem to be clouding the picture for investors when it comes to Teck's potential.
Rising prices could bring earnings per share for 2021 to $3.49 from the $1.67 projected at the beginning of the year. The figure is projected to hit $5.52 for 2022, up from $4.50. Considering these growth projections, it is incredible that the stock only returned 59% during 2021.
The coal mining exposure certainly seems to be hitting sentiment, but as Einhorn explains in his letter, management is now planning to split the business, which could lead to a re-rating of the shares:
"It appears that Teck's management is evaluating the possibility of splitting the met coal business from the "green metals" business, which would likely unlock substantial shareholder value as certain investors are sensitive to exposure to coal."
There seems to be an opportunity here for value investors. Based on current earnings estimates, the stock is currently selling at a forward price-earnings ratio of 6.9 for fiscal 2021, falling to 5.9 for fiscal 2022. These figures only include limited exposure to the new copper project, which, as noted above, could provide a huge earnings uplift for the firm.
Stocks that look cheap can remain cheap for years unless there is a catalyst to unlock value. It seems there are two catalysts on the horizon with management's spin-off plans and the new copper project.
It is difficult to put a value on what the remaining "green metals" business could be worth after the spin-off, but UK-listed Antofagasta (LSE:ANTO, Financial), a pure-play copper and precious metals miner, is currently selling at a multiple of 13 times forward earnings. There's a broad gap between the two valuations here.
Until Teck's Chile project gets off the ground, it is challenging to say how much this business could be worth as a stand-alone entity. Nevertheless, it seems clear to me that there are catalysts on the horizon for the stock.
