Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK), Canada’s largest producer of metallurgical coal, on April 26 reported that gross profit before depreciation and amortization from its coal business unit decreased in the first quarter by C$136 million from a year ago, as the benefits of a cost reduction program and lower diesel prices were more than offset by lower realized coal prices.
The average realized steelmaking coal price of US$75 per tonne was 29% lower than the first quarter of 2015, reflecting oversupplied steelmaking coal market conditions and a decline in spot price assessments. The favorable effect of a stronger U.S. dollar in the first quarter compared with a year ago partly offset the lower U.S. dollar coal price, reducing the Canadian dollar realized price by 20%. As the quarter progressed, demand from most market areas strengthened and production curtailments continued to be implemented, leading to higher sales volumes than originally expected, Teck noted.
First quarter production of 6.6 million tonnes was 3% lower than the same period a year ago despite record quarterly production at the Line Creek mine and new first quarter production records at Elkview and Greenhills. While steelmaking coal production in the first quarter was lower than the comparative period, this was consistent with Teck’s 2016 production plans which are weighted more heavily to the second half of the year. Despite slightly lower production volumes, unit production costs were 10% lower this quarter than a year ago as a result of continued cost reductions, productivity improvements and lower diesel prices.
While benchmark steelmaking coal prices declined in the first quarter of 2016, spot price assessments for this met coal increased from the second half of February, which ultimately led to an increase in the second quarter benchmark price. Additionally, demand for Teck’s products, both in China and the rest of the world, strengthened during the quarter. While a better balance between demand and supply seems to be forming, pricing remains low and Teck said it expects supply curtailments to continue to be implemented.
Steelmaking coal prices for the second quarter of 2016 have been agreed with the majority of Teck’s quarterly priced customers based on US$84 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.
Cost reduction initiatives continue to produce significant results and a primary focus in 2016 is to reduce both the costs of maintenance and supplies. In addition to these key areas, Teck also remains 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 the cost reduction program, including the effect of the stronger U.S. dollar on some inputs.
In the first quarter of 2016, 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 36% compared to the first quarter of 2015.
Cost of Sales
Site cost of sales in the first quarter of 2016, before transportation, depreciation and inventory write-downs, was C$43 per tonne, C$6 per tonne or 12% lower than a year ago.
Total cost of sales for the quarter also included a C$10 per tonne charge for the amortization of capitalized stripping costs and C$13 per tonne for other depreciation. In U.S. dollar terms, unit costs have fallen by $8 per tonne from $39 per tonne to $31 per tonne due to reductions in the site costs as discussed above and the positive effect of the stronger U.S. dollar when translating Canadian costs.
Site unit costs in the first quarter were better than expected as previously described and lower than the full year guidance range of C$45 to C$49 per tonne.
Teck is expecting coal sales in the second quarter of 2016 to exceed 6.5 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 port-loading facilities.