Teck chugs along, amid plunging coal prices

Teck Resources (TSX: TCK.B and NYSE: TCK) has posted decent second quarter results. But analysts remain cautious about the diversified miner’s path forward, amid weakening coal markets.

The senior producer of metallurgical coal, copper and zinc reported a $63-million profit on revenue of $2 billion. While revenue was flat year-over-year, earnings dropped 21%. However, adjusted earnings were $79 million, or 14¢ per share, up from last year’s $72 million, or 13¢ per share. Analysts on averaged had expected adjusted earnings of 11¢ per share.

The beat came on the back of higher production and declining costs, mainly in its coal and copper divisions, coupled with lower energy prices and a weaker Canadian dollar. 

“Production was up for all of our major products,” Teck CEO Donald Lindsay said on a conference call. “We also reduced unit cost in both copper and coal by 9% and 10%.”

Quarterly coal production was 6.6 million tonnes, rising 3% from a year ago, while sales dipped nearly 5% to 6.5 million tonnes. Unit costs were $83 per tonne, down from $92 per tonne. This helped offset the 5% drop in the average realized price of $116 per tonne. (In U.S. dollars, the realized coal price fell 14% to US$95 per tonne.)

The company’s total gross profit, before depreciation and amortization, was $676 million, climbing 6% from the second quarter last year. The coal division delivered $215 million in gross profit, while copper and zinc added $317 million and $143 million.   

While applauding the decent quarterly results, Raymond James’ analyst Alex Terentiew notes that “commodity headwinds, the lack of company-specific catalysts and growing questions over potential future impairments have taken some steam out of the [second quarter] beat.”

Met coal spot prices are plunging, driven by an oversupplied market and lower Chinese demand. 

“The significant market oversupply [which Teck still estimates at 10 to 15 million tonnes] stands in the way of a meaningful price recovery,” Salman Partners’ analyst Mike Plaster says. “By our estimate, Teck’s realized pricing is running virtually at its all-in cash cost threshold at current rates.” 

In response to the bleak short-term outlook for coal, Teck has scaled back its third-quarter production by 22% to 5.7 million tonnes. 

In June, it began rotating temporary shutdowns at its six Canadian steel-making coal operations. During these staggered, three-week-long shutdowns, Teck aims to reduce inventories while keeping its annual cost guidance between $86 and $93 per tonne.  

For the third quarter, the miner anticipates quarterly sales of at least 6 million tonnes, including spot sales. Its annual coal guidance is 25 million to 26 million tonnes, which it reduced in May from 26.5 million to 27.5 million tonnes.

If market conditions don’t improve, Lindsay says the company will lower coal production in the fourth quarter.

This could impair its coal division, Raymond James’ Terentiew says, adding that management said it was  “Teck’s decision — not its auditors.” He estimates that a long-term $130-per-tonne metallurgical coal price could avoid a writedown.

For copper, Teck has trimmed its second-half guidance by 5,000 to 10,000 tonnes, after ground movement at its Quebrada Blanca mine in Chile. Annual copper guidance is 340,000 to 350,000 tonnes, compared to 340,000 to 360,000 tonnes previously.

Desjardins analyst Jackie Przybylowski says Teck could “struggle in the near-term,” and management notes Teck’s investment-grade credit rating would be hard to keep in the current low commodity price environment.

“We will not issue equity to buy back debt to defend the rating,” CEO Lindsay said on the call. 

The executive also dispelled any merger or acquisition rumours. “The odds of us being sort of involved at a point where we would actually make an acquisition are quite slim at the best of times,” he explained.

With no upcoming “acquisition or significant improvement to the balance sheet, we see few catalysts that are likely to boost the share price in the near-term,” Przybylowski says. She cut her $18 target to $17 after the company’s reduced copper guidance, but recommends a “buy” on the stock. Terentiew has a $14 target and a “market perform” rating, while Plaster has lowered his $18 target to $14, and has a “hold” on the stock. 

Teck’s total liquidity is over $6.5 billion, including two undrawn revolving-credit facilities totalling $4.2 billion. But the firm still needs $1.8 billion to fund its share of development at the Fort Hills oilsands project, Plaster notes, adding that a “further dividend cut in November remains a possibility” if commodity prices don’t pick up.