Teck reports better coal sales in the fourth quarter than it projected

The coal production in 2013 of Canadian commodities producer Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK) is expected to be in the range of 24 million to 25 million tonnes, against coal sales of 24 million tonnes in 2012.

“Our actual production will depend primarily on customer demand for deliveries of steelmaking coal,” Teck noted in a Feb. 7 earnings statement for the fourth quarter of 2012. “Depending on market conditions and the sales outlook, we may adjust our production plans. We have the flexibility to devote additional resources to pre-stripping in these circumstances. Our current production capacity is approximately 27 million tonnes and is expected to grow to 28 million tonnes by the end of 2013.”

“From an operations perspective, 2012 was a good year,” said Don Lindsay, President and CEO. “Our copper production was a record, we continued to increase our steelmaking coal production and we obtained new labour agreements for a number of our operations. However, due to uncertain global economic conditions, prices for all of our major products were down compared to last year, which resulted in lower earnings and cash flows than in 2011.”

Gross profit before depreciation and amortization from the coal business unit decreased by C$544m in the fourth quarter of 2012 compared with the same period a year ago as a result of significantly lower coal prices, despite a 16% increase in sales volumes. The average coal price of US$159 per tonne in the fourth quarter was 37% lower than the same quarter a year ago, reflecting weaker steelmaking coal market conditions.

Fourth quarter sales volumes were better than expected

Coal sales of 6.4 million tonnes in the fourth quarter were 16% higher than the same period last year and exceeded prior guidance of 6.2 million tonnes. The increase in sales volume mostly reflects strong demand for coal delivered to China, partially offset by lower demand in traditional markets. Production in the fourth quarter decreased to 6.4 million tonnes, down 5% compared with the same quarter in 2011, as a result of a decision to reduce production starting in mid-August through to the end of the year to align with customer demand.

Cost of product sold in the fourth quarter was $62 per tonne, before transportation and depreciation charges, or $3 per tonne lower than the same quarter a year ago, and 17% lower than in the first three quarters of 2012, reflecting cost reduction efforts at the coal mines. Transportation costs in the fourth quarter were $41 per tonne, 24% higher compared with the same quarter a year ago, as a result of higher ocean freight, port, rail costs and a higher than normal proportion of coal being sold inclusive of ocean freight.

In 2012, Teck’s production capacity increased, reflecting growth objectives, with the completion of the Elkview plant expansion and additions to the mining fleet. Teck’s current production capacity is about 27 million tonnes and is expected to grow to 28 million tonnes by the end of 2013.

Teck says it should be able to work around Westshore problem

Production for the first quarter of 2013 is not expected to be materially impacted by the damage incurred in December 2012 to Berth 1 at Westshore Terminals, through which Teck transloads from rail to ship much of its coal. Teck will use alternative shipping options for the duration of the repairs at Westshore, including securing additional capacity through Neptune Terminals, Pacific Coast Terminals and Ridley Terminals. On the basis of Westshore’s estimated repair schedule for Berth 1 and expected loading capacity for Berth 2, Teck expects to have total shipping capacity of about 6 million tonnes in the first quarter of 2013, although this shipping capacity can be affected by adverse weather conditions.

Coal sales of 6.4 million tonnes in the fourth quarter were 16% higher than the year-ago period and exceeded prior guidance of 6.2 million tonnes. The average coal price of US$159 per tonne in the fourth quarter was 37% lower than the same quarter a year ago and reflects the weaker steelmaking coal market conditions. The increase in sales volume predominantly reflects strong demand for coal delivered to China, partially offset by lower demand in traditional markets. Sales to China in the fourth quarter reached a record high level. But, the ratio of Chinese sales to total sales in 2013 is expected to decline to be similar to what was experienced in the first three quarters of 2012.

Coal sales in 2012 reached 24 million tonnes, an increase of 1.8 million tonnes over 2011 and the third highest year on record. Increased sales were achieved through continuing progress in growth markets and occurred despite weaker demand in some of our traditional markets.

Teck points to US$165/tonne benchmark for the first quarter

“Coal prices have been agreed with the majority of the quarterly contract customers for the first quarter of 2013 based on pricing of US$165 per tonne for the highest quality products, which is consistent with prices reportedly achieved by our competitors,” Teck noted. “As of the date of this release, contracted sales are approximately 6.0 million tonnes of coal for delivery in the first quarter at an average price of US$159 per tonne. We remain in quarterly contract discussions with a small number of customers and are anticipating selling additional tonnage on the spot market. Vessel nominations for quarterly contract tonnage are determined by customers and final sales and average prices for the quarter will depend on timely arrival of vessels and the performance of our coal-loading facilities.”

CP Rail’s ongoing investment in its network, including additional rail sidings and the extension of the Elkview load out loop supported by the recent rail loop extension at Neptune Terminals, has added rail capacity for coal through longer trains, Teck noted. All the trains in CP export service are now running at 152 cars in length compared with an average of 126 cars before, allowing more coal to be transported with fewer trains.

The Quintette strip mine re-start project continues to progress on the basis of the study with an estimated capital cost of $858 million. The Mines Act Permit Amendment application process is proceeding and Teck continues to expect to receive the permit approval in the first half of 2013 with first coal production expected in the first half of 2014. By the fourth quarter of 2014, Quintette is expected to be producing at an annualized rate of three million tonnes.

Neptune Bulk Terminals, in which 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. A feasibility study for the next expansion phase, which may further increase annual capacity from 12.5 million tonnes to 18.5 million tonnes, was completed 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.

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.