Teck Resources (TSX: TCK.A and TCK.B, NYSE: TCK), Canada’s largest producer of metallurgical coal, said July 25 that it date it has reached agreements with customers to sell 5 million tonnes of coal in the third quarter of 2012 and expects to conclude additional sales over the course of the quarter.
“While prices for our premium coal have been agreed at US$225 per tonne, the average price for all products is approximately US$198 per tonne,” the company added in its second quarter earnings statement.
Coal production in the second quarter was reduced by approximately 700,000 tonnes due to the nine-day Canadian Pacific Railway labor disruption which caused a complete shutdown of rail operations from Teck’s Elk Valley mines. However, material moved was maintained at first quarter levels during the railroad shutdown period and this will benefit production in future periods. Contract coal prices in the second quarter were weaker than those experienced in the previous quarter, but coal sales volumes increased. Unit operating costs at the coal operations rose slightly as a result of the effect of lower production levels as Teck was forced to temporarily curtail production due to the rail strike.
Gross profit before depreciation and amortization from the coal business unit decreased by C$248m in the second quarter compared to the same period a year ago as a result of significantly lower coal prices, despite increased sales volumes. Coal production was 5.7 million tonnes in the second quarter, similar to the same period a year ago. The reduction in production volume increased unit costs of production and costs of sales in the quarter. Sales volumes were 6.7 million tonnes in the second quarter compared with 5.6 million tonnes in the second quarter of 2011.
The average coal price of US$202 per tonne in the second quarter decreased by 26% from the second quarter of last year. Coal prices last year had reached record high levels due to the combination of strong demand for seaborne, high-quality steelmaking coal and weather-related restrictions on the supply of coal from Australia. Total unit cost of sales in the second quarter, including depreciation and transportation charges, were similar to the same period last year.
Unit cost of product sold in the second quarter before transportation and depreciation charges was C$77 per tonne compared with C$73 per tonne in the same period a year ago before a C$7 per tonne one-time labor charge and C$70 per tonne in the first quarter of this year. The higher unit costs were primarily due to increased waste stripping activities, as strip ratios increased to 11.7 in the second quarter compared with 10.6 in the second quarter of 2011. Additional waste stripping took place while the rail strike prevented any rail shipments. The 2012 annual cost of product sold is expected to fall within our current guidance range of C$72 to C$78 per tonne for current production plans.
Teck works around coal terminal construction
Unit transportation costs increased by C$4 per tonne compared with the same quarter a year ago partly due to higher port costs and increased ocean freight costs as a higher portion of sales being made is inclusive of ocean freight. The rate under a new port services agreement for westbound coal into Teck’s primary west coast port facility increased starting in April.
A number of opportunities are being pursued to utilize different coal terminals in North America as a means of supplementing capacity during the planned outages, which are required to complete expansion programs at the Vancouver terminals, and as a risk reduction measure. These include Pacific Coast Terminals in Port Moody and the Port of Quebec. The additional costs incurred to ship to these alternative locations also contributed to the higher transportation costs in the second quarter. Annual unit transportation costs are expected to remain within the range of C$34 to C$38 per tonne.
Execution of Teck’s coal growth strategy continued during the quarter and C$57m was invested in expansion capital, mainly related to the Quintette re-opening project, a shovel purchase at Cardinal River, pre-stripping spending that will maximize Line Creek capacity, and the Neptune Bulk Terminals expansion project.
The feasibility study for the reopening of the Quintette mine in British Columbia is progressing with completion expected in the third quarter of this year. The Mines Act Permit Amendment application was submitted in April and is being reviewed with the provincial regulators in order to comply with the newly issued draft guidelines pertaining to caribou management plans. Permit approval is not expected before the first half of 2013. First coal production could occur approximately 12 months after receipt of this permit.
Neptune Bulk Terminals, where Teck has a 46% ownership interest, will expand its annual coal throughput capacity by an additional 6 million tonnes within the existing footprint. Neptune’s annual coal handling capacity is currently 9 million tonnes. This will be increased to 12.5 million tonnes with the addition of a second stacker reclaimer, already in the fabrication phase, in the spring of 2013. This next expansion phase is expected to take terminal capacity to 18.5 million tonnes per year. The proposed upgrades include a second railcar dumper and associated conveying system, a new rail track within the existing rail loop, and replacement of a ship loader and foundation reinforcement of the loading berth. The expansion feasibility study is expected to be completed in the third quarter, Teck noted.