Due to continued seaborne coking coal market weakness, Canada’s Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK) said July 25 that it has delayed the restart of its long-shut Quintette strip mine in British Columbia.
Teck’s profits have declined in comparison to last year as a result of lower prices for all of its principal products. Coal and copper prices in the second quarter declined by 23% and 9%, respectively, compared with the same period a year ago. These lower prices have reduced Teck’s revenues by approximately C$350m in the second quarter based on 2013 sales volumes.
Teck is Canada’s largest producer of metallurgical coal out of several strip mines.
As a result of market conditions and other factors, Teck has slowed the development of certain internal growth projects and deferred capital spending. At Quintette, it has delayed the final stage of development for the mine and will not commence production until the steelmaking coal market recovers.
“After reviewing market conditions, we have decided to delay a final decision to place Quintette into production,” Teck explained. “Our revised project plan will defer [C]$300 million of previously contemplated capital expenditures in 2013 and an additional [C]$350 million in the first part of 2014. We are continuing to proceed with detailed engineering work so that if a decision is made in early 2014 to proceed with the reopening, the operation could be in commercial production in mid-2015.”
In the coal unit, gross profit before depreciation and amortization in the second quarter declined compared with last year due primarily to lower coal prices. Sales volumes were lower than in the second quarter of 2012, although sales for the first half of 2013 were higher than in the first half of 2012.
Production in the second quarter was 5% higher than in the same period of 2012. The mines effectively managed inventories and produced coal at a pace which aligned production rates with demand.
Flooding in southeast British Columbia in late June caused minor damage to mine access roads and rail infrastructure in the area, which led to several days of lost production. No key mine infrastructure was damaged and total annual production will not be affected. Sales throughout the period were not impacted as ocean vessels were able to be loaded from existing port inventories. All critical rail and mine access infrastructure was rapidly repaired and is operating normally.
Teck’s average coal sales price tumbles 23% from a year ago
Coal sales of 6.3 million tonnes in the second quarter were 6% lower than the same period last year. The average coal price of US$156 per tonne in the second quarter was 23% lower than the same period a year ago, reflecting weaker steelmaking coal market conditions, and a reduction in spot market pricing levels through the quarter.
Coal prices for the third quarter have been agreed on with the majority of the quarterly contract customers based on US$145 per tonne for the highest quality products, which is consistent with prices reportedly achieved by Teck’s competitors. Teck currently expects coal sales in the third quarter to be at least 6.4 million tonnes and it is continuing contract discussions with customers and anticipates selling additional tonnage on the spot market.
The cost of product sold in the second quarter, before transportation and depreciation charges, was C$50 per tonne compared with C$59 per tonne in the same period a year ago. Cost reduction efforts at the mines, which accompanied the reduction in production levels beginning in mid-August 2012, have been successful and are ongoing. Cash production costs in the second quarter were over C$16 per tonne lower than a year ago. This decrease resulted from reductions in the consumption of repair parts and minimizing the use of maintenance contractors and contract miners. Teck expects the 2013 annual cost of product sold to be in the range of C$51 to C$58 per tonne, based on current production plans.
Transportation costs in the second quarter were C$39 per tonne, C$2 per tonne or 5% higher compared with the same quarter a year ago. This increase was primarily due to higher port charges incurred throughout the quarter, resulting from an outage at Neptune Bulk Terminals in British Columbia while a new stacker reclaimer was erected and some vessels were loaded at higher cost port facilities. The installation of this piece of equipment was completed on schedule and commissioning is expected to be completed by the end of July. The stacker reclaimer upgrade increases the capacity of Neptune up to 12.5 million tonnes per annum.
Detailed engineering work supporting the next expansion phase at Neptune is also underway. This expansion would further increase capacity from 12.5 million tonnes to 18.5 million tonnes. The 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. The timetable for this project is dependent on market conditions.