Teck wobbles in the third quarter

Teck Resources (TCK.B-T, TCK-N) produced a record 99,000 tonnes of copper in the third quarter, up 29%-year-on-year, but lower commodity prices and sales volumes for its steelmaking coal sent the miner’s adjusted net earnings down to $349 million or 60¢ a share from the $742 million or $1.26 per share the company posted in the same quarter a year ago.

Teck cut coal production in the third quarter to better align with demand, while management says it expects 2012 coal production will come in at the lower end of its guidance of 24.5 million tonnes.  

Looking ahead, the company plans to trim about $200 million from its annual operating costs and expects deferrals in capital expenditure this year and next to total $1.5 billion, in part due to permitting delays at its Quebrada Blanca and Relincho projects.

Don Lindsay, the company’s chief executive, also ruled out rumors of investments in the iron ore sector, stating on a conference call Wednesday that Teck is “not spending any more time on [iron ore].”

That should be welcome news to investors. “Speculation that Teck may make a large iron ore acquisition has been an overhang on the stock, but has perhaps been put to bed,” mining analyst Meredith Bandy of BMO Capital Markets penned in a research note.   

Despite Teck’s disappointing third-quarter results, Bandy is maintaining her outperform rating on the stock with a target price of $40 per share. (In Toronto at presstime Teck was trading at $31.74 within a 52-week range of $26.02-44.00 per share.)

“Teck is expected to trade at a premium to peers based on preferred commodity mix (met coal and copper), liquidity and as one of the few large-cap Canadian miners,” Bandy continued. “BMO Research’s estimates assume a rebound in met coal pricing due to a combination of production cuts and modestly stronger Chinese demand.”

She also points out that additional stimulus spending could be forthcoming in China next year after a leadership change that is widely expected in November.   

Kerry Smith of Haywood Securities argues that the company is well positioned for recovery because it has been issuing low-yield debt this year and has used some of the proceeds to redeem all of its outstanding yield notes.  That leaves the diversified miner with about US$7.0 billion of outstanding debt, he calculates, with an average term to maturity of 16.5 years and an average annual interest coupon rate of 4.8%, down significantly from the earlier 7.6% rate.

“Teck’s more conservative balance sheet should allow the company to comfortably pursue its strategy of moderately increasing the dividend, executing share buybacks, and funding its organic growth projects,” he asserted in a research note.

Based on Smith’s model, Teck’s revenues this year will be divided between coal sales (47%), copper sales (28%), and from zinc and others (23%). He believes that despite the recent softening of demand in China for high-quality coal products, “rising steel demand in China and an increasing number of large blast furnaces along the coast requiring high-quality coking coal will continue to drive Teck’s growth in the medium term.”

“Teck plans on expanding coal production by more than 50% over the next five years to accommodate this demand,” he adds. “In the medium to long term, Teck also has a lengthy list of copper and energy projects that will continue to add value and growth to the company.”

Smith forecasts that Teck will be producing 32 million tonnes of coal a year by 2015 “and as much as 150% more copper over the longer term through expanding and developing the company’s existing projects,” including Quebrada Blanca Phase 2 sulphides and Relincho. Last year, Teck produced 321,000 tonnes of copper.

Teck’s cash balance as of Oct. 23 was $4.3 billion.

Daniel Scott of Dahlman Rose & Co. in New York argues that while Teck “is successfully navigating challenging markets,” he expects its shares to “remain range-bound over the near term.”

“Management conveyed a conservative outlook in the face of global uncertainty, but expects to stay the course on the company’s significant growth projects,” Scott wrote. “We expect steady performance, but maintain our Hold rating.”