Teck still sees strong demand, but lower prices for export coal

Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK), Canada’s largest producer of metallurgical coal, reported April 24 that its coal production increased to 6.3 million tonnes in the quarter, up 43% from the first quarter of 2011.

“Our strong first quarter results demonstrate continued solid operating performance and the successful execution of our ongoing expansion programs, particularly in coal,” said Don Lindsay, President and CEO. “Gross profit was similar to the first quarter of 2011, but cash flow from operations was up 14%. Our near-term copper growth projects are on track and, with the acquisition of SilverBirch, we increased our contingent bitumen resources by 67% to 3.5 billion barrels. With a strong balance sheet and strong cash flow, we are well positioned to successfully pursue our longer term growth plans.”

Teck achieved record first quarter revenues and gross profits of C$2.5bn and $918m, respectively, in the first quarter of 2012. Profit attributable to shareholders was $218m and EBITDA was $781m in the first quarter.

The big coal production increase in the first quarter was the result of the successful execution of an ongoing expansion program. In addition, coal production in the first quarter of 2011 was negatively impacted by unusual weather-related events and a strike at the Elkview mine. Unless it is required to restrict production because of customer demand, Teck expects to produce 24.5 million to 25.5 million tonnes of coal in 2012.

To date, Teck said it has reached agreements with customers to sell 6.3 million tonnes of coal in the second quarter of 2012 at an average price of US$202/tonne. It expects to conclude additional sales over the course of the quarter as demand has improved and coal supplies, particularly from Australia, have been constrained. Contract coal prices and coal markets remain weaker than those it experienced in the previous nine months, but are higher than in the same quarter last year.

Gross profit before depreciation and amortization from the coal business unit increased by C$168m in the first quarter as a result of higher coal prices, increased sales volumes and lower unit costs. The average coal price of US$223 per tonne in the first quarter was up 8% over the first quarter of last year despite the weaker market conditions. Unit cost of product sold in the first quarter, before transportation and depreciation charges, improved to C$70 per tonne compared with C$76 per tonne a year ago as the fixed costs were spread over a significantly larger production volume.

The coal business unit represents Teck’s interest in six operating surface mines. It wholly owns the Fording River, Coal Mountain, Line Creek and Cardinal River mines, and has a 95% partnership interest in the Elkview mine and an 80% interest in the Greenhills mine.

Teck continues to execute its growth strategy, with about C$65m of investments in expansion capital made during the quarter, including investments in the Quintette mine re-opening project, expansion of the maintenance shop at the Fording River mine to accommodate new larger capacity haul trucks, and the expansion of the processing plant at Elkview, which has now been commissioned.

Coal prices slide by roughly US$20 per tonne 

The average coal price of US$223 per tonne in the first quarter was up 8% over last year. Quarterly contract prices for the first quarter of 2011 were finalized in late 2010 before severe flooding in Australia that impacted coal mines and coal transport infrastructure caused significant supply disruptions in the seaborne steelmaking coal market, which resulted in a spike in prices in early 2011. Market conditions subsequently turned downward later in 2011 as supply gradually returned to normal and uncertainty over the global economic conditions grew.

Teck has agreed on prices with the vast majority of its quarterly contract customers for the second calendar quarter of 2012 based on pricing of about US$206 per tonne for the highest quality product. As of April 24, Teck had sold about 6.3 million tonnes of coal for delivery in the second quarter at an average price of US$202 per tonne, which is roughly balanced with expected production for the quarter. Vessel nominations for this tonnage are determined by customers and final sales for the quarter will depend on vessels arriving at port as scheduled, as well as on the level of extra spot sales.

Unit cost of product sold in the first quarter before transportation and depreciation charges of C$70 per tonne improved over 2011 as the fixed costs were spread over a significantly larger production volume. Teck continues to experience cost pressures from general inflation in most of its input cost categories and expects 2012 annual cost of product sold to fall within a range of C$72 to C$78 per tonne for its current production plans. Unit transportation costs were unchanged quarter-over-quarter and Teck continues to expect 2012 annual unit transportation costs to be C$34 to C$38 per tonne.

The feasibility study for the re-opening of Quintette in northeast British Columbia is progressing and due for completion this quarter. Long-lead equipment items, including trucks, shovels and drills, have been ordered, preliminary on-site work has commenced and stakeholder consultation processes are ongoing. Assuming things go as currently planned, the mine could be in production in the second half of 2013 with production ramping up through 2014 to about 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.