Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK), a major Canadian producer of commodities like metallurgical coal, on Feb. 11 reported unaudited annual adjusted profit attributable to shareholders for 2015 of C$188 million, compared with C$452 million in 2014.
Fourth quarter adjusted profit attributable to shareholders was C$16 million, compared with C$116 million in the fourth quarter of 2014. Total non-cash after-tax impairment charges for 2015 amounted to C$2.7 billion, of which C$536 million was taken in the fourth quarter.
“We were pleased with our operating performance in 2015, meeting our guidance, reducing our costs and raising nearly $1 billion through two streaming transactions to strengthen our balance sheet,” said Don Lindsay, President and CEO. “However, the commodity cycle continues to provide us with a very challenging environment such that our near-term priorities are to keep all of our operations cash flow positive, meet our commitment to Fort Hills with internal sources of funds, evaluate options to further strengthen our liquidity and maintain a strong financial position by ending the year without drawing on our lines of credit.”
Fort Hills is an oil sands project in Alberta.
The average realized met coal price of US$81 per tonne was 26% lower than the fourth quarter of 2014, reflecting the oversupplied steelmaking coal market conditions and a decline in spot price assessments. The favorable effect of a stronger U.S. dollar in the fourth quarter partly offset the lower price, which resulted in Canadian dollar realized price declining by 12% compared with a year ago.
Fourth quarter met coal production of 6.4 million tonnes was 6% lower than the same period a year ago as Teck reduced production volumes to match sales volumes which were equal to the previous year. Even with the lower production volumes, unit production costs at the mines were 6% lower this quarter than a year ago as a result of continued cost reductions, productivity improvements and lower diesel prices. Met coal production in 2015 came in at 25.3 million tonnes, down from 26.7 million tonnes in 2014.
Steelmaking coal prices declined further during the fourth quarter. Although Chinese imports have declined substantially compared to 2014, demand in the rest of the world continues to be strong for Teck’s products. However, given oversupply in the market, it does not expect a substantial recovery in price until additional supply cuts occur or demand increases.
Steelmaking coal prices for the first quarter of 2016 have been agreed with the majority of the company’s quarterly priced customers based on US$81 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 as sales are concluded.
Teck’s cost reduction initiatives continue to produce significant results and remain focused on improvements in equipment and labor productivity, 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 our cost reduction program. These included the effects of the strengthening U.S. dollar on some inputs and higher electricity costs.
In the fourth quarter of 2015, Teck continued to experience the positive effects of lower diesel prices. Combined with reduced usage from a number of cost reduction initiatives and slightly shorter haul distances, diesel costs per tonne produced have decreased by 31% compared to the fourth quarter of 2014.
Cost of Sales
Site cost of sales in the fourth quarter of 2015, before transportation, depreciation and inventory write-downs, was C$41 per tonne, C$7 per tonne or 15% lower than a year ago.
Teck’s total cost of sales for the quarter also included an C$11 per tonne charge for the amortization of capitalized stripping costs and C$15 per tonne for other depreciation. In U.S. dollar terms, unit costs have fallen by $11 per tonne from $42 per tonne to $31 per tonne due to reductions in the site costs and the positive effect of the stronger U.S. dollar when translating Canadian costs.
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 port-loading facilities.
Met coal production in 2016 is expected to be between 25 million and 26 million tonnes, compared to the actual 25.3 million tonnes produced in all of 2015. Production in the first half of 2016 is expected to be lower than the second half due to scheduled plant maintenance shutdowns and raw coal release timing. As in prior years, annual volumes produced will be adjusted if necessary to reflect market demand for Teck’s products. Production in 2017 is expected to remain similar to 2016, assuming current market conditions persist. Teck said it is currently exploring options to maintain production at similar levels in 2018 and beyond after the closure of the Coal Mountain mining operation in late 2017.
Excluding transportation costs, Teck expects annual cost of product sold to be in the range of C$45 to C$49 per tonne (US$32 to US$35) based on current production plans. This range is slightly higher than in 2015. Normal variability between higher and lower strip ratio areas exists in the mine plan sequence. In 2016, Teck expects to reduce overall mining costs from 2015 levels, but a higher proportion of these costs are expected to relate to current production and less to capitalized stripping. This results in a reduction in capitalized stripping from C$396 million in 2015 to an expected C$288 million in 2016 and an increase of C$4 per tonne in operating costs.
Transportation costs in 2016 are expected to be approximately C$35 to C$37 per tonne (US$25 to US$26).
Capital spending planned for 2016 also includes C$50 million for sustaining capital and C$38 million for major enhancement projects focused on extending mine life at a number of the Elk Valley operations.