Teck hit by lower commodity prices

The global economic downturn is hitting Teck Resources (TCK-T, TCK-N), with Canada’s biggest diversified miner suffering from weaker coal and copper prices as the Chinese growth story loses steam.

While Teck turned out more coal and copper during the second quarter than it did last year, that increase couldn’t compensate for the weaker commodity prices.

Teck’s second-quarter profits dropped 65% to $268 million, or 46¢ per share, down from $756 million, or $1.28 per share, while revenues fell to $2.6 billion, compared with $2.8 billion a year ago.

The fall comes despite record copper production of 90,000 tonnes for the quarter. That production growth is expected to continue over the next two quarters, so the company will have to hope that the 14% drop in copper prices and increased costs don’t continue along with the production ramp-up. Copper production represents one third of Teck’s business.

Coal production was also higher, nearing its target of 28 million tonnes, but coal prices were down 26% from last year to an average US$202 per tonne over the quarter.

And while coal production was impressive, there was a labour disruption at Canadian Pacific Railway (CP-T, CP-N) that shut down rail operations from Teck’s Elk Valley mines. The nine-day incident cut production by 700,000 tonnes.

Teck says it will deliver 5 million tonnes of coal in the third quarter at an average price of US$198 per tonne. The company kept its cost guidance for 2012 between $72 and $78 per tonne, with transportation costs estimated to be $34 to $38 per tonne.

The drop in coal prices and profits is largely due to reduced Chinese steelmaking. Steel production in China drives an estimated 40% of global demand for coal, and impacts prices.

Teck says it believes the medium- to long-term fundamentals for steelmaking coal, copper and zinc are strong, but it admits that weakness in the market could persist in the short-term.

In light of this sober, near-term outlook, Teck plans to rein in capital spending. It previously said it would spend $2.3 billion on capex this year, but now says this number may drop to $2.1 billion.

The company emphasizes that it remains in strong financial shape, and is well-positioned to ride out the rough economic times.
On July 25 — the day the results were released —Teck shares were off 7%, or $2.14 to $27.27, on 6.45 million shares traded.