Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK), Canada’s largest producer of metallurgical coal, reported on Feb. 12 that gross profit before depreciation and amortization from the coal business unit declined by C$118 million in the fourth quarter compared with a year ago primarily due to lower coal prices.
The average realized coal price of US$110 per tonne was 23% lower than the fourth quarter of 2013 and reflects oversupplied steelmaking coal market conditions. The favorable effect of a stronger U.S. dollar in the fourth quarter partly offset the lower coal price, which weakened by 17% in Canadian dollar equivalent terms compared with the same period a year ago.
Production in the fourth quarter of 6.8 million tonnes rose by 2% compared with the same period a year ago and set a new fourth quarter record. There was potential for higher production rates to have been achieved, however, rail movement of coal to Vancouver ports on the Pacific Coast has been underperforming and limiting production rates since late November. This led to temporary shutdowns at a number of the mines due to high site inventory levels in December.
Overall coal production was 1.1 million tonnes higher in 2014 than in the previous year. In addition, numerous individual site production records were surpassed in 2014. The Elkview mine set a new annual production record and set new records for each quarter in the year. Greenhills set a new annual production record and set new records in the first, second and third quarters. In addition, Cardinal River set a new annual production record and Fording River set a new fourth quarter production record.
Coal sales of 6.5 million tonnes in the fourth quarter represent a new high for this period as demand for Teck’s products remains strong. In addition, some 2014 sales slipped into 2015 as extended ship loader maintenance followed by a conveyer failure resulted in a large vessel queue in Vancouver at year end.
Oversupply in the internationakl coal markets continues to keep prices at an unsustainable level, Teck noted. Approximately 30 million tonnes of cutbacks and closures have been announced since January 2014, but there has been a lag to implementation. Teck estimates that slightly less than half of these cuts had been implemented by year end. With additional production coming on in Australia and elsewhere, Teck said it expects the market to remain oversupplied unless further cuts are announced and implemented. If cuts and closures continue to be announced at the same rate Teck has seen in the last few months, there is potential for the coal market to be back in balance as early as the second half of 2015.
Coal prices for the first quarter of 2015 have been agreed with the majority of customers based on US$117 per tonne for the highest quality products. This is consistent with prices reportedly achieved by competitors. Additional sales priced on a spot basis will reflect market conditions when sales are concluded.
Teck’s cost reduction initiatives continue to produce significant results and are focused on improvements in equipment and labor productivities, reduced use of contractors, reduced consumable usage and limiting the use of higher cost equipment. However, a number of factors have partially offset the strong performance of the cost reduction program. These included the effect of the strengthening U.S. dollar, additional parts and supplies, as well as increased use of explosives as strip ratios have increased compared to a year ago.
In the fourth quarter, Teck began to experience the positive effects of lower energy prices as commodity prices dropped. Benchmark West Texas Intermediate prices averaged US$73 per barrel in the quarter compared with US$98 per barrel last year. Combined with reduced usage from a number of cost reduction initiatives, this resulted in energy costs that were lower than in the fourth quarter of 2013.
Teck is expecting coal sales in the first quarter of 2015 to be at or above 6.5 million tonnes. Vessel nominations for quarterly contract shipments are determined by customers and final sales depend on the timely arrival of vessels, as well as the performance of the rail transportation network and coal-loading facilities. The average realized prices for the quarter will depend on product mix, proportion of quarterly contract versus short-term priced sales and the market price trend.
The company’s 2015 coal production is expected to be in the range of 26.5 to 27.5 million tonnes of coal. Actual production will depend primarily on customer demand for deliveries of steelmaking coal and performance of the logistics chain. Depending on market conditions and the sales outlook, Teck may adjust its production plans. It expects 2015 annual cost of product sold, before transportation and depreciation charges, to be in the range of C$49 to C$53 per tonne (US$39 to US$42) based on current exchange rates and production plans. Transportation costs in 2015 are expected to be approximately C$37 to C$40 per tonne.
The coal operations are particularly affected by the changes in oil and diesel costs and account for approximately 65% of fuel usage and sensitivities. For each US$1 change in the price of a barrel of oil, operating costs at the coal operations are affected by approximately C$3 million.