Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK), Canada’s largest met coal producer, reported overall second quarter adjusted profit attributable to shareholders of C$72m, compared with C$197m in 2013.
“We are pleased with the performance of our operations this quarter and with our efforts to reduce our costs and capital spending to ensure we emerge stronger from the current challenging price environment, particularly the substantially lower steelmaking coal price that was prevalent in the second quarter of 2014 compared with last year,” said Don Lindsay, President and CEO.
Gross profit before depreciation and amortization from Teck’s coal business unit declined by C$244m in the second quarter compared with a year ago primarily due to sharply lower coal prices and higher unit costs. These items were partly offset by the favorable effect of a stronger U.S. dollar and higher sales volumes.
Coal production in the second quarter, at 6.4 million tonnes, rose by 7% compared with the same period a year ago largely as a result of higher capacity utilization within the business unit and record first half production in 2014 at both the Elkview and Greenhills mines in western Canada. After a challenging first few months of 2014, rail performance improved significantly in the second quarter.
Coal sales of 6.8 million tonnes in the second quarter were 8% higher than the same period last year. The average coal price of US$111 per tonne was 29% lower than the same period a year ago and reflects the oversupplied steelmaking coal market conditions, Teck said.
Although production cuts continued to be announced, increased coal production and exports from Australia combined with lower imports into China maintained the seaborne market in an oversupplied position, resulting in downward pricing pressure in the second quarter.
Coal prices for the third quarter of 2014 have been worked out with the majority of Teck’s quarterly contract customers based on US$120 per tonne for the highest quality products, which is consistent with prices reportedly achieved by competitors. Additional sales priced on a spot basis will reflect market conditions when sales are concluded.
Mining and coal processing performance in the second quarter was very strong, with record production rates achieved in the first half of the year at both the Elkview and Greenhills mines.
Site cost of sales in the second quarter of 2014, before depreciation and transportation, were C$53 per tonne, or C$3 per tonne higher than the same period a year ago. Unit production costs at the mines increased as a result of higher diesel and natural gas prices, partially as a result of the strengthening of the U.S. dollar against the Canadian dollar, combined with additional maintenance costs.
Transportation costs in the second quarter were C$37 per tonne, C$2 per tonne lower than they were in the same quarter a year ago. Costs in the second quarter of 2013 were negatively impacted by higher loading costs at alternate terminals while the stacker reclaimer at the Neptune export terminal in British Columbia was installed and the port was unavailable for use.
Teck awaits British Columbia decision on costly water treatment plan
Teck’s Elk Valley water management program to date has focused on two main areas: development of the Elk Valley Water Quality Plan under an Area Based Management Plan Order from the government of British Columbia, and construction of the West Line Creek water treatment plant at the Line Creek mining operations.
The Elk Valley Water Quality Plan is intended to address the management of selenium as well as other substances released by mining activities throughout the watershed in the short, medium and long term. The plan has been completed and submitted to the B.C. Ministry of Environment. The ministry is expected to review the plan and to approve it, with or without amendments, in the second half of 2014.
A previous draft action plan for valley-wide selenium management contemplated total capital spending of up to C$600m over a five year period. This C$600m included the C$120m spent on the West Line Creek Treatment Facility which, in addition to the treatment facility itself, consists of water intake, outtake and residuals management structures. The estimated capital and operating costs of implementing the new Elk Valley Water Quality Plan will depend on the terms of the British Columbia government’s approval of the plan, but are expected to vary from those outlined in the previous draft. The initial cost estimate in the previous plan assumed the application of biological treatment technology, which is currently being installed in the West Line Creek Treatment Facility. This facility is expected to be fully operational before the end of 2014.
“We expect that, in order to maintain water quality, water treatment will need to continue for an indefinite period after mining operations end,” Teck noted. “Our ongoing work could reveal technical issues or advances associated with potential treatment technologies which could substantially increase or decrease both capital and operating costs associated with water quality management. Delays in obtaining approval of the plan could result in consequential delays in permitting new mining areas, which would limit our ability to maintain or increase coal production in accordance with our long term plans. If this were to occur, the potential shortfall in future production could be material.”
Teck holds the line on expected 2014 production
Teck is expecting coal sales in the third quarter of 2014 to be at, or above, 6 million tonnes. Vessel nominations for quarterly contract shipments are determined by customers and final sales and average prices for the quarter will depend on product mix, market direction for spot priced sales, timely arrival of vessels, as well as the performance of the rail transportation network and coal-loading facilities.
Teck said it continues to expect its 2014 coal production to be in the range of 26 million to 27 million tonnes.
As a result of continued cost reduction initiatives, it now expects 2014 annual cost of product sold, before transportation and depreciation charges, to be in the range of C$52 to C$57 per tonne (US$48 to US$53) based on current exchange rates and production plans. This is lower than the previous guidance of C$55 to C$60 per tonne.
Teck’s 2014 annual transportation costs are now expected to be in the range of C$37 to C$41 per tonne, down from previous guidance of C$38 to C$42 per tonne.