Teck rides big met coal price surge in Q3 2016

Teck Resources Ltd. (TSX: TCK.A and TCK.B, NYSE: TCK), Canada’s largest producer of metallurgical coal, said Oct. 27 that its gross profit from the steelmaking coal business unit before depreciation and amortization increased by C$108 million in the third quarter compared with a year ago.

Higher realized steelmaking coal prices and sales volumes in combination with lower unit costs and diesel prices all contributed to improved performance.

Third quarter production of 7 million tonnes of steelmaking coal is a quarterly record for the business unit. Year-to-date production of 20.3 million tonnes also represents an all-time record for the first nine months of a calendar year, beating the previous nine-month record by more than 400,000 tonnes. Third quarter production was also 27% higher than the same period a year ago, however, production last year was affected by adecision to shut down each operation for three weeks due to weak market conditions at the time.

Third quarter sales volumes of 7.3 million tonnes were 18% higher than the same period a year ago and represent the second highest quarterly sales in company history. This strong performance resulted from a combination of tightness in supply, robust demand in all market areas and excellent performance in the logistics chain.

Capitalized stripping costs were C$43 million in the third quarter compared with C$84 million a year ago. Teck is continuing to strip at all operations based on their respective mine plans, however, as a result of the sequencing at Fording River and Elkview this quarter, it mined in lower strip ratio areas at both sites and therefore capitalized a lower amount of costs. The effect of concurrent lower strip ratio sequences at the two largest mines, in combination with lower mining costs compared with a year ago at all sites, resulted in the reduction.

The realized price of US$92 per tonne was very close to the benchmark price of US$92.50 per tonne for the quarter as the increase in spot price assessments was reflected in spot priced sales.

Quarterly sales and pricing reflect a mix of quarterly contract sales, current quarter spot sales, and previous quarter spot sales, across the company’s steelmaking coal product mix. With the increase in price in the third quarter substantially commencing in mid-August and spot prices exceeding US$200 in mid-September, third quarter realized pricing was not significantly different from the quarterly contract price. The higher spot and contract prices will be reflected gradually in fourth quarter pricing.

Steelmaking coal prices for the fourth quarter of 2016 have been agreed with the majority of Teck’s quarterly priced customers based on US$200 per tonne for the highest quality products. This is consistent with prices reportedly achieved by competitors. This price has increased by US$107.50 per tonne from the reported third quarter settlement of US$92.50 per tonne and spot price assessments currently exceed the benchmark level by more than 20%. Additional sales priced on a spot basis will reflect market conditions at the time sales are concluded.

Teck noted that tightness in supply has driven prices up rapidly. This situation is the result of numerous factors including:

  • the implementation of production curtailments since 2014, which have depleted global production capacity and inventories,
  • a reduction in Chinese domestic production resulting from the implementation of their 276 day operating policy for steelmaking coal mines in combination with a number of weather related production impacts,
  • production disruptions at key Australian mines resulting in force majeure declarations, and
  • increased seaborne demand from China and the rest of the world.

“While we cannot predict how long supply tightness will last, additional supply, beyond what we expect to materialize when Australian mines work through their disruptions, will take some time to come online,” Teck added. “Mines will need to find people, equipment and capital before production enters the market. Our operations are well positioned to respond to this market opportunity. We continue to drive productivity and cost discipline across our business and we are well prepared for various market scenarios in the future.”

Site cost of sales in the third quarter of 2016, before transportation and depreciation, was C$43 per tonne, C$2 per tonne or 5% lower than a year ago. Total cost of sales for the quarter also included an C$11 per tonne charge for the amortization of capitalized stripping costs and C$12 per tonne for other depreciation. In U.S. dollar terms, unit costs have been reduced to $33 per tonne, $1 per tonne lower than a year ago.

Teck cuts costs for new area at Baldy Ridge mine

During the third quarter, the Elkview Operation was granted an environmental assessment certificate by British Columbia regulators for the Baldy Ridge Extension project. The original capital estimate for this project as submitted in the environmental assessment application was C$600 million over five years. Since the submission late last year, additional optimization work has resulted in a significantly less capital intensive plan and the spending over the next five years is currently estimated to be approximately C$60 million versus the original capital estimate included in the submission filed late last year.

The reduction in the estimated five year capital requirement for the Baldy Ridge Extension project relates primarily to resequencing the mine plan to defer the movement of critical site infrastructure including the maintenance shop, warehouse and offices to a point later in the mine life. Additionally, while new raw steelmaking coal conveyance infrastructure was contemplated in the original submission, detailed engineering work completed post submission has determined that the existing infrastructure will be adequate after a relatively low cost refurbishment program is completed.

First steelmaking coal production from the mining areas at Elkview, which are included within the environmental assessment certificate area, is planned for early 2018.

Also during the third quarter, Neptune Bulk Terminals received the final permit required for execution of the project to expand steelmaking coal throughput capacity. Work is now underway to update engineering, which was previously put on hold in 2013, to determine potential throughput capacity and inform a development decision. If sanctioned, the project is currently scheduled to be completed by early 2020.

Outlook

Said the company: “We are expecting sales volumes in the fourth 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.

“As a result of record third quarter and year-to-date production performance from the business unit, we now expect our production for the year to be between 27 and 27.5 million tonnes.

“With margins at current levels, we expect unit costs to increase in the fourth quarter as we focus on maximizing production and profitability, which will include increasing our use of contractors and higher cost equipment. We may also incur some one-time costs if we settle collective bargaining agreements. If these collective agreements are settled in the fourth quarter as a result of one-time costs, we would expect our annual cost of sales to be at the top end of the guidance range of $42 to $46 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.