Teck seeks more cuts despite ‘cost reduction fatigue’

Teck Resources’ (TSX: TCK.B; NYSE: TCK) chief financial officer Ron Millos said the company intends to lower debt and improve operating costs, despite the fact that it is getting harder to find ways to save money.

Beginning in earnest in 2012, the diversified miner cut costs amid the decline in commodity prices. Most savings have come from “productivity improvements” and labour reductions, Millos said at the Mines and Money Americas conference in Toronto. “We have taken $800 million out and targeted $200 million or so this year. We think we will be successful.”

Productivity improvements include shrinking cycle times on trucks to save on labour, fuel and maintenance costs, as well as changing maintenance practices to increase equipment productivity equipment, the executive said.

The senior producer of metallurgical coal, copper and zinc is working on 400 initiatives, where potential savings range from thousands to millions of dollars, Millos said, adding that they would have to be sustainable to count.

Teck has also hired consultants to offset “cost-reduction fatigue” by providing fresh ideas.

“We got the low-hanging fruit. We will continue to work at it. And maybe there is another $100 million or $200 million … it’s getting down to where it is going to be challenging to continue cutting,” Millos admitted.

The executive noted Teck has over $5 billion in liquidity, brushing off concerns that it operated at a negative cash flow last year.

If investors exclude Teck’s capital spending on the 20%-held Fort Hills oilsands project in Alberta, it would have been “cash-flow neutral or positive,” and “continue to be so in 2016,” Millos said. (The company invested $966 million in Fort Hills last year.)

To ensure the firm has enough funds to finance the remaining costs at Fort Hills, it extended the maturity on US$1 billion of its US$1.2-billion revolving credit facility from June 2017 to June 2019. It also closed a $1.3-billion offering of senior unsecured notes, where it used the proceeds to repay its near-term maturities.

Meanwhile, the miner seeks to regain its investment-grade credit rating. Teck would have to lower its debt by $1.5 billion to $2 billion to achieve that goal, Millos said.

Moody’s Investors Service cut Teck’s credit rating to “Ba1” last September, citing a decline in commodity prices and the company’s large capital spending plans. It further lowered that to “B3” this February. Market observers consider both ratings as non-investment grade, or “junk.” (Lower ratings generally increase a company’s borrowing costs.)

Teck’s total debt was $9 billion on June 30, 2016, down from $9.6 billion at the end of 2015. Net debt remained at $7.7 billion.

Teck aims to lower its debt as commodity prices improve by using excess cash and proceeds from its asset sales, Millos noted.

It is open to selling its two-thirds of interest in the Waneta Dam and its interest in the Neptune coal terminal in British Columbia. “If we get a price that makes sense to us, we will consider acting on it,” Millos said, adding that these potential deals would take time to close.

In addition, it has several non-core exploration assets that could generate “hundreds of millions of dollars” in sales.