Teck reports major drops in Q3 coal sales, prices

Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK), Canada’s top producer of metallurgical coal, said Oct. 24 that gross profit in its coal segment fell substantially compared with last year due primarily to sharply lower coal prices, lower sales volumes and higher operating and transportation costs.

Coal production in the third quarter increased by 6% compared with the same quarter in 2011 despite a decision to reduce production starting in mid-August to align with the declining demand for coal. Production levels increased in July and the first part of August after completing the plant upgrade at the Elkview mine and the de-bottlenecking efforts across its operations.

Overall, Teck reported third quarter adjusted profit of C$349m, or C$0.60 per share, compared with C$742m or C$1.26 per share in 2011. Teck produces various commodities besides coal, including copper and zinc.

“The uncertainty in global economic conditions resulted in lower commodity prices and sales volumes of steelmaking coal compared with the third quarter of 2011,” said Don Lindsay, President and CEO of Teck. “This resulted in profits and cash flow from operations being less than the third quarter of last year. However, our quarterly operating results continued to be strong with another quarterly record for copper production at 99,000 tonnes, up 29% from the third quarter of last year. Our balance sheet remains strong, with a current cash balance of [C]$4.2 billion and we are well positioned to continue with our growth plans. Notwithstanding our strong financial position, some of our planned capital spending has been deferred for a variety of reasons and we have also implemented a cost reduction program.”

Coal sales of 5.5 million tonnes in the third quarter were 12% below production levels and 10% lower than the same period last year. The average coal price of US$193 per tonne in the third quarter was 33% lower than the same quarter a year ago. The decline in sales volume and average coal price reflects weak market conditions. Concerns surrounding the slowdown of global economic activity and softer steel prices have caused many steel producers to reduce their production, Teck noted.

Coal prices have been agreed with the majority of the quarterly contract customers for the fourth quarter of 2012 based on pricing of about US$170 per tonne for the highest quality product, which is consistent with prices reportedly achieved by competitors. As of Oct. 24, contracted sales are about 6.2 million tonnes of coal for delivery in the fourth quarter at an average price of US$163 per tonne.

“We remain in quarterly contract discussions with a small number of customers and are anticipating selling additional tonnage on the spot market as well,” Teck added. “Vessel nominations for quarterly contract tonnage are determined by customers and final sales and average prices for the quarter will depend on vessels arriving at port as scheduled, and on the level of additional spot sales.”

Unit cost of product sold of C$77 per tonne, before transportation and depreciation charges, was C$7 per tonne higher than in the same quarter of 2011. Cost reduction efforts at the mines, which accompanied the reduction in production beginning in mid-August, were successful and further reductions are being made. Costs in the third quarter, other than those for labor, were generally consistent with prior year levels. The increase in unit labor costs year-over-year was primarily due to the effect of new annual collective agreements at all mines, and a one-time charge from the recently settled Cardinal River mine collective agreement. The 2012 annual cost of product sold is expected to fall within the current guidance range of C$72 to C$78 per tonne under current production plans.

Unit transportation costs in the third quarter were C$37 per tonne, or 19% higher compared with the same quarter a year ago mainly due to higher port and ocean freight costs. Port costs rose due to an annual increase in contract rates and inflation adjustments. Ocean freight costs this quarter also increased due to a higher portion of coal that is being sold inclusive of ocean freight. The additional costs of utilizing different coal terminals as a means of supplementing capacity during outages that occur as part of expansion programs at the ports in greater Vancouver, British Columbia, also contributed to the higher transportation costs in the third quarter. Annual unit transportation costs are expected to remain within the current guidance range of C$34 to C$38 per tonne.

Teck works around expansion project at Westshore

Westshore Terminals is completing planned capacity expansion work at its facility in the fourth quarter that will result in reduced rail dumping capacity during the construction period. Teck said it does not anticipate any impact on sales with greater use of the Neptune, Ridley and Pacific Coast terminals. Additionally, it will draw down stockpiles at Westshore to take advantage of vessel loading capacity that is available during the dumper work.

Ongoing CP Rail investment in its network, supported by the recent rail loop extension at Neptune Terminals, is adding rail capacity for coal through longer trains, Teck noted. More than half the trains in CP export service are now running at 152 cars in length, allowing more coal to be transported with fewer trains. Teck expects to see average train lengths to increase further in 2013.

The feasibility study for the re-opening of the Quintette mine in British Columbia was completed in the third quarter of this year. The study estimates the capital cost to re-open Quintette at C$858m, not including escalation or interest during construction. The study contemplates an average clean coal production rate of 3.5 million tonnes per year over an estimated 12-year life. Teck is evaluating options that would extend the life of mine beyond the present mineral reserve of 42.5 million tonnes of clean coal.

The Mines Act Permit Amendment (MAPA) application for Quintette was submitted earlier this year and has been delayed as a result of newly-issued provincial interim guidelines for caribou management. The delay in the permitting process has resulted in a reduction in capital spending of C$224m in 2012. Teck expects to receive the permit approval in the first half of 2013, with first coal production now expected in the first half of 2014. By the fourth quarter of 2014 Quintette is expected to be producing at a rate of 3 million tonnes/yr.

Teck is developing selenium management plans for each of its six operating coal mines and the Quintette project. It is possible that permitting for current and future projects may be delayed or withheld until appropriate selenium management plans are developed and implemented, it noted. Water treatment is being planned at three mine sites in the Elk Valley entailing expenditures of about C$175m over the next three years. Construction has commenced at the Line Creek Operation on the first water treatment plant for selenium. In addition, an extensive applied research and development program focused on the development of long-term, lower-cost methods of mining to reduce selenium generation has been initiated this year with planned costs of about C$12m annually for the next three years.

Neptune Bulk Terminals, where Teck has a 46% ownership interest, is expanding its annual coal throughput capacity from 9 million tonnes to 12.5 million tonnes by the spring of 2013 with the addition of a second stacker reclaimer. Completion of the feasibility study for the next expansion phase, which may further increase capacity from 12.5 million tonnes to 18.5 million tonnes, is expected in the fourth quarter of 2012. The proposed upgrades will include a second railcar dumper and associated conveying system, a new rail track within the existing rail loop, the replacement of a ship loader and foundation reinforcement of the loading berth, Teck said.

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.