Despite lower pricing, Teck sells a record amount of coal in Q3 2013

Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK), Canada’s largest producer of metallurgical coal, said Oct. 24 that its third quarter sales of 7.6 million tonnes of met coal set a record, despite a soft international coal market.

“We are pleased with our operating performance this quarter,” said Don Lindsay, President and CEO. “Our steelmaking coal sales of 7.6 million tonnes set a quarterly record and demand from customers is strong. However, the current price for steelmaking coal remains below what we believe is required to sustain adequate production in the industry in the long term. With the current market conditions, our near term efforts are focusing on our [C]$330 million cost reduction program, reducing our sustaining capital spending and reviewing the timing of our various development projects.”

To date, Teck said it has reached agreements with coal customers to sell 5.6 million tonnes of coal in the fourth quarter of 2013 at an average price of US$145 per tonne and expects total sales in the fourth quarter, including spot sales, to be at or above 6.3 million tonnes.

Coal cost of coal sales before transportation costs declined to C$50 per tonne in the third quarter compared with $58 per tonne a year ago.

Teck noted that it has received the British Columbia Environmental Assessment Certificate for its Line Creek Phase 2 surface mine project which will maintain production and extend the mine life by 18 years.

At the Quintette surface coal mine in British Columbia, which was being prepared for revival after many years of being shut, Teck delayed the final stage of development for the mine and said it will not start the development until it sees a sustained improvement in demand for steelmaking coal.

Gross profit in the coal sector before depreciation and amortization in the third quarter declined by C$131m compared with last year due primarily to significantly lower coal prices. The lower coal prices were partially offset by the effect of a stronger U.S. dollar and significantly increased sales volumes that were 2 million tonnes higher than the same period in 2012. Year to date sales volumes in 2013 of 20.4 million tonnes represent an all-time record for the nine-month period.

Production in the third quarter was 6.7 million tonnes, or 6% higher than in the same period a year ago. The mines effectively managed inventories and as a result of the strong demand for products, Teck has been increasing production rates to ensure sufficient coal is available to fulfill customer requirements.

Strong demand from contract customers, sales to new customers, good spot sales, and consistently strong performance of the logistics chain including the expanded capacity at Teck’s Neptune Terminals on the British Columbia coast, contributed to maximizing sales in the quarter. Additionally, consistent and strong performance was delivered by port and rail service providers.

Coal pricing down sharply from last year

Coal prices have been agreed with the majority of the quarterly contract customers for the fourth quarter of 2013 based on pricing of US$152 per tonne for the highest quality products, which is consistent with prices reportedly achieved by competitors. As of Oct. 24, Teck has reached agreements with coal customers to sell 5.6 million tonnes of coal in the fourth quarter of 2013 at an average price of US$145 per tonne and expects total sales in the fourth quarter, including spot sales, to be at or above 6.3 million tonnes.

“We are continuing contract discussions with our customers and are anticipating selling additional tonnage on the spot market, including to customers who have traditionally purchased the majority of their coal requirements on a quarterly pricing basis,” Teck reported. “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. In addition, fourth quarter sales levels can be affected by weather conditions on the west coast that affect the loading of vessels, and the lower number of operating days in the quarter.”

Teck reported realized average coal prices of US$139/tonne in the third quarter, against US$193/tonne in the same quarter last year. It reported average realized prices of US$151/tonne in the first nine months of this year, against US$206/tonne in the first nine months of last year.

Teck expects its 2013 annual cost of product sold near the bottom of its C$51 to C$58 per tonne guidance range, based on current production plans.

Transportation costs in the quarter were C$38 per tonne, C$1 per tonne or 3% higher compared with the same quarter a year ago, primarily as a result of slightly higher rail transportation costs.

Depreciation and amortization increased by C$4 per tonne to C$27 per tonne primarily due to the accumulation of capital assets to be depreciated under the new capitalized stripping accounting standard. Also contributing to the increase were investments in capital equipment made over the course of 2012 and the first nine months of 2013, which are now commissioned and operating. Teck expects depreciation and amortization expense to be in the range of C$26 to C$30 per tonne in 2013 as it continues to defer and amortize overburden removal costs.

As a result of the strong performance in the first nine months of 2013 and strong sales outlook for the rest of the year, Teck expects coal production to be near the top end of its 24.5 million to 25.5 million tonne guidance range.

The company said it is proceeding with detailed engineering work at the Quintette project so that if market conditions are favorable, it will be in a position in early 2014 to decide to proceed with the reopening, that could result in commercial production in mid-2015. It is also going to execute a bulk sample program at the site over the next nine months to produce saleable coal for trial by potential customers.

Neptune Bulk Terminals rail-to-ship facility achieved in the third quarter substantial completion on commissioning of its new stacker reclaimer. The new stacker reclaimer increases Neptune’s operating capacity from 8.5 million to 12.5 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.