Teck wobbles in third quarter

Teck Resources (TCK-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 sale volumes for its steelmaking coal sent the miner’s adjusted net earnings down to $349 million, or 60¢ a share, from $742 million, or $1.26 per share, 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 at the lower end of its guidance of 24.5 million tonnes.  

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

Donald Lindsay, the company’s CEO, also ruled out rumours of investments in the iron ore sector, stating on an October conference call that Teck is “not spending any more time on [iron ore].”

This should be welcome news to investors. “Speculation that Teck may make a large iron ore acquisition has been an overhang on the stock, but this has perhaps been put to bed,” mining analyst Meredith Bandy of BMO Capital Markets pens 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 press time, Teck was trading at $31.74 within a 52-week range of $26.02 to $44 per share.

“Teck is expected to trade at a premium to peers, based on preferred [metallurgical coal and copper] commodity mix, liquidity and as one of the few large-cap Canadian miners,” Bandy continues. “BMO Research 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 US$7 billion in 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 asserts 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 fifty percent 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 one hundred fifty percent more copper in the long-term by expanding and developing the company’s existing projects,” including Quebrada Blanca’s phase-two sulphides and the Relincho mine. Last year, Teck produced 321,000 tonnes of copper.

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

Daniel Scott of Dahlman Rose in New York argues that while Teck “navigates challenging markets,” he expects its shares will “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 writes. “We expect steady performance, but maintain our ‘hold’ rating.”