Teck takes big writedown; sees continued low met coal prices ahead

Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK), Canada’s largest producer of metallurgical coal, on Oct. 22 reported non-cash after-tax impairment charges of C$2.2 billion resulting in a third quarter loss attributable to shareholders of C$2.1 billion.

The impairment charges are non-cash revaluations of assets to reflect lower market expectations of commodity prices. The company, besides coal, produces other commodities like copper.

“We are taking significant steps to meet the challenge of low commodity prices,” said Don Lindsay, President and CEO. “We have reduced costs throughout the company and we’ve raised nearly [C]$1 billion in two streaming transactions. We used a portion of those proceeds to reduce debt by [C]$400 million and our current cash balance of [C]$1.8 billion exceeds our remaining [C]$1.5 billion share of capital required for Fort Hills.”

In response to steelmaking coal market conditions, Teck’s mines took three-week shutdowns during the third quarter to reduce production and product inventory. In the fourth quarter, the company said it expects that production rates will be aligned with sales volumes. Teck has reached agreements with the majority of its coal customers for the fourth quarter of 2015, based on a quarterly benchmark of US$89 per tonne for the highest quality product, and it expect total sales in the fourth quarter, including spot sales, to be at least 6 million tonnes of steelmaking coal.

Gross profit before depreciation and amortization from the met coal business unit increased from year ago levels as the benefits of a cost reduction program and lower diesel prices more than offset lower sales volumes and realized steelmaking coal prices.

The average realized steelmaking coal price of US$88 per tonne in the third quarter was 20% lower than the third quarter of 2014, reflecting oversupplied steelmaking coal market conditions and a decline in spot price assessments. The favorable effect of a stronger U.S. dollar in the third quarter partly offset the lower price, which weakened by 3% in Canadian dollar terms compared with the same period a year ago.

Third quarter production of 5.5 million tonnes was 19% lower than the same period a year ago matching guidance for the period as all sites completed the three-week shutdown. Unit production costs at the mines were 10% lower this quarter than in the comparative period, despite the lower production rates as a result of the ongoing effects of existing and new initiatives undertaken through the cost reduction program, and lower diesel prices.

“Steelmaking coal prices declined further during the quarter,” Teck noted. “Although Chinese imports have declined substantially compared to the prior year, demand in the rest of the world continues to be strong for our products. However, given oversupply in the market, we do not expect a substantial recovery in price until additional supply cuts occur or demand increases. Steelmaking coal prices for the fourth quarter of 2015 have been agreed with the majority of our quarterly priced customers based on US$89 per tonne for the highest quality products. This is consistent with prices reportedly achieved by our competitors. Additional sales priced on a spot basis will reflect market conditions when sales are concluded.”

Site cost of sales in the third quarter of 2015, before depreciation and inventory write-downs, was C$45 per tonne, C$5 per tonne or 10% lower than a year ago. The total cost of sales for the quarter also included a C$10 per tonne charge for the amortization of capitalized stripping costs and C$18 per tonne for other depreciation. In U.S. dollar terms, unit costs have fallen by $20 per tonne from $84 per tonne to $64 per tonne due to reductions in the site costs as shown in the Canadian dollar unit cost table and the change in exchange rates.

Teck said it continues to expect its 2015 steelmaking coal production to be in the range of 25 million to 26 million tonnes and now expects unit costs to be in the range of C$83 to C$86 per tonne (US$64 to US$66 per tonne).

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.