Teck adds caution to 2012 outlook due to slumping coal market

Teck Resources Ltd. (TSX:TCK.A and TCK.B, NYSE:TCK), Canada’s largest producer of metallurgical coal, reported Feb. 9 that slumping markets has led it to offer for 2012 a less than aggressive predicted coal production range of 24.5 million to 25.5 million tonnes.

The 2012 actual production will depend upon improvements in customer demand for deliveries of steelmaking coal. Should deliveries not improve, Teck said it may adjust its coal production plans, depending on market conditions and the sales outlook. The company has the flexibility to devote additional resources to pre-stripping at the mine sites in these circumstances.

Actual coal production in 2011 was 22.8 million tonnes, down from 23.1 million tonnes in 2010.

Gross profit before depreciation and amortization from the coal business unit increased by C$209m in the fourth quarter of 2011 compared with a year ago, primarily due to significantly higher coal prices. Lower sales volumes and higher unit operating costs partially offset the higher coal prices.

Coal production was on target in the fourth quarter, increasing by 11% over the year-ago quarter to 6.7 million tonnes. This was the result of significant investment in mobile equipment and workforce to implement planned expansion. Unit cost of product sold in the fourth quarter, before transportation and depreciation charges, of C$65/tonne improved from previous quarters in 2011 but increased by 20%, or C$11/tonne, over the same quarter of 2010 due primarily to increased contractor costs, higher strip ratios and significantly higher prices for diesel and explosives.

Coal sales of 5.5 million tonnes in the fourth quarter were below production levels and 7% lower than the same period last year. The decrease in fourth quarter sales volume compared with the same quarter in 2010 reflects the weaker market conditions. Global economic conditions and softer steel prices have caused many steel producers to slow production and show caution in purchasing raw materials. Teck realized an average coal price of US$253/tonne in the fourth quarter, which was lower than the record high prices achieved earlier in 2011, but still up 27% over the same period a year ago.

Note that international coal prices, as in this case, are generally reported in U.S. dollars, while Teck reports its financial results in Canadian dollars.

The average coal sales prices in the fourth quarter of US$253/tonne, up from US$200/tonne in the year-ago quarter. The average sales price for all of 2011 was US$257/tonne, up from US$181/tonne in 2010.

New equipment in place for production boost

Production for the fourth quarter increased by 11% compared with the same quarter of 2010. Movement of overburden that must be removed to expose raw coal in the fourth quarter was up 14% over the prior year. Investments in mobile equipment and workforce, made to advance Teck’s expansion plans, have significantly increased its capacity to move overburden and expose raw coal. During 2011, Teck increased its haul truck fleet by 23 units and the shovel fleet by two units. In addition, Teck replaced 21 existing haul trucks and three existing shovels. This new large capacity equipment increases the overall productivity and efficiency of the mobile equipment fleets.

Teck also completed the expansion of the processing plant at the Greenhills mine during 2011 and the plant expansion at the Elkview mine is expected to be completed in the first quarter of 2012.

The average coal price of US$253 per tonne in the fourth quarter was down from the record high prices achieved earlier in 2011, but still up 27% over 2010. Market conditions turned downward in the third quarter and continued to weaken through the fourth quarter as uncertainty over the global economic conditions grew. By historical standards, however, prices for high quality steelmaking coal remain relatively high.

Teck said it has agreed on prices with its quarterly contract customers for the first quarter of 2012. Pricing of about US$235/tonne for its highest quality product is consistent with prices reportedly achieved by its competitors. As of Feb. 9, Teck has sold approximately 5.3 million tonnes of coal for delivery in the first quarter at an average price of US$230/tonne. It may choose to sell additional tonnage on the spot market, which would increase sales volumes, but such gains could be offset by delays in customer vessels.

Vessel nominations for quarterly contract tonnage are determined by customers and deliveries depend on vessels arriving at port as scheduled. The spread between the quarterly benchmark price and spot prices tends to widen in a weaker market, Teck noted. Additional spot sales or further delays to quarterly contract vessels could cause average pricing to decline.

Teck currently expects its 2012 annual cost of product sold to be C$72 to C$78 per tonne, based on current production plans.

As a result of an exploration drilling program at its coal mines, Teck said it has expanded its high quality reserves by 62% from 665 million tonnes at the end of 2010 to about 1.1 billion tonnes.

The feasibility study for re-opening the long-shut Quintette strip mine in northeast British Columbia is progressing. Additional work is ongoing to ensure water management plans are complete for inclusion in the permit application and to update the mine plan based on additional drilling. This information will be included in the study, which is now due for completion in the second quarter of 2012. Long-lead equipment items, including trucks, shovels and drills, have been ordered, preliminary on-site work has begun and stakeholder consultation processes are ongoing. The mine could be in production in the second half of 2013 with production ramping up to approximately 3 million tonnes per year.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.