In the last financial crisis, many investors thought Teck Resources (TCK.B) was headed toward bankruptcy. It was common on Bay Street at the time to short the stock, as the commodity world was ‘surely ending’ with all commodities in a steep plunge. Teck though, surprised all the naysayers. In July 2009, state-controlled China Investment Corp. (CIC) bought 101 million Class B Teck shares at $17.21 per share, giving CIC a 17.5% equity stake in Teck (6.7% voting stake) and a much-needed lifeline for survival.  Teck shares rose to roughly $38 in early 2013, for a gain of more than 10-fold from the crisis low.

While at the time Teck had a lot of debt, the Chinese equity-sale was surprising as the company was expected to sell assets instead of diluting shareholders: “The move is surprising given recent company quotes that it was not looking to raise equity but rather potentially sell a stake in the Elk Valley [metallurgical] coal operations,” BMO Nesbitt Burns analyst Tony Robson said in a report to clients at the time.

Today, CIC (through FullBloom Investment) still owns 17.87% of Teck, but it has lost 71% of the value of its investment in six years. Teck shares have lost 68% of their value this year.

We recently upset some 5i Research clients by suggesting that things at Teck are worse today than they were in 2009 when it needed a Chinese rescue. But if we look at Bloomberg LP data, the situation is fairly clear: Compared with year-end 2009 financials, Teck now has more debt ($9.7 billion versus $8.0 billion) and less cash flow to support it ($2 billion in the last 12 months versus $2.9 billion in all of 2009). Teck has marginally more short-term liquidity ($1.5 billion versus $1.3 billion) but it has already cut the dividend twice this year, and taken a $2 billion+ asset write-down, largely because of the coal assets. In the last 12 months, interest expenses on Teck’s debt amounted to about 25% of its operating cash flow.

One of the most dangerous phrases in investing is ‘it is different this time’. Certainly, though, the current downturn in commodities feels different than in 2008/2009. Back then, there was a massive, sharp drop, and a “V” shaped recovery. Today, commodities simply seem to be in a perpetual, sustained, never-ending downturn. Demand is weak, supply is everywhere, and US dollar strength is making matters much worse. The coal industry is being attacked on all sides, and copper producers continue to operate without regard to costs or supply. The metals industry seems to be taking the strategy of solving the supply issue with ‘more supply’, in the hopes that low prices will force higher cost producers to cut or close down production.

While many are worried about metals, don’t forget Teck’s energy exposure. Teck likes to talk about the strong cash position, but the Fort Hills oil sands project requires $1.5 billion in capital to complete. With oil prices quickly approaching financial crisis levels, is Teck about to throw good money after bad?

In addition to the dividend cut, Teck has cut jobs and reduced capital spending just about everywhere else.

We don’t really want to pick on Teck. Other companies of course are in similar situations, and we have no doubt that, when the commodity market recovers, Teck will do very well. Its earnings leverage to commodities prices is huge. What concerns us, though, is the risk between now and whenever that happens. If Teck needed $1.7 billion to survive the last down cycle, we can’t rule out the possibility of another equity issue these days. We are sure the company does not WANT to issue equity, but it might be the best option here to ensure it sticks around for the good times. Remember, Teck stated it didn’t intend to issue equity in the last cycle as well.

Less than five years ago, Teck shares were $64. In the bottom of the last cycle (March 2009) they hit $3.42. Today, at $4.95 or so, that old low is starting to look like it could be taken out if weak conditions continue much longer. The short position on the stock is now 21.4 million shares on the TSX.

We, of course, do not know where the bottom is. Tax-loss selling could still be ugly on the stock prior to year-end. We are no longer recommending the stock. If you own it, we would just get yourself prepared: things may get worse before they get better.