Cheap coal hits Teck’s bottom line

Teck Resources’ (TCK-T, TCK-N) first-quarter performance beat analyst expectations but came in lower compared to a year ago, owing to global economic uncertainty and weaker commodity prices.

Canada’s largest diversified miner reported an adjusted profit of $328 million, or 56¢ per share, which was 40% below last year’s $544 million in the first quarter, or 93¢ per share.   

Teck says that declining coal prices hurt profits despite higher coal-sale volumes over the same period, adding that the prices of its other major products also fell, affecting profit and cash flows.

But Teck — a senior producer of coal, copper and zinc — did better than the consensus of 38¢ per share.

Haywood Securities analyst Kerry Smith says that Teck benefited from adopting International Financial Reporting Standards for deferred stripping, allowing it to capitalize on $223 million of stripping costs during the quarter. This increased profits attributable to shareholders by $53 million, or 9¢ per share, bringing the total to $319 million, or 55¢ per share. In the corresponding period last year the amount was $258 million, or 44¢ per share, after being impacted by a $329-million after-tax charge.

Revenue from operations was $2.3 billion, which is down 9% from the same period in 2012. Teck says revenues from its copper and coal divisions dropped $69 million and $138 million, pointing to soft prices as the main culprit.

Compared to a year ago, the average copper price fell 5% to US$3.60 per lb. while coal declined 28% to US$161 per tonne. But zinc remained at US92¢ per lb., with revenue from zinc dipping slightly.

Gross profit before depreciation and amortization was $994 million compared to $1.2 billion a year ago, while cash flow from operations before working capital fell to $776 million from $1.1 billion.

Smith notes that 52% of Teck’s gross profit came from coal sales, while 35% came from copper and 13% from zinc and other products.

Teck produced 6.2 million tonnes of coal and sold a record 6.6 million tonnes — a 24% improvement over the same period in 2012 — despite damage to Westshore’s Berth 1 coal-loading terminal, Smith says.

For the second quarter, the miner says it has sales agreements in place to sell 5.4 million tonnes of coal at an average price of US$154 per tonne, and forecasts total quarterly sales in excess of 6 million tonnes.

For copper, the miner produced 83,000 tonnes and sold 82,000 tonnes, noting that output was 19% lower than the previous quarter but slightly higher than a year ago, with sales remaining relatively flat.

Teck says that greater output from its Highland Valley Copper complex in south-central B.C. was offset by fewer pounds from the Antamina copper-zinc mine in Peru and the Quebrada Blanca copper mine in northern Chile.

Total cash costs for copper after by-product credits were US$1.61 per lb., up 6% from a year ago, as by-product production for molybdenum and silver dropped.

For zinc, Teck says production volumes were similar to the same period last year, with sales dipping.

For the full year, the miner expects to produce 340,000 to 360,000 tonnes copper and 24 million to 25 million tonnes coal, along with zinc.

Teck has budgeted $2.3 billion in capital spending this year, adding that it plans to spend up to $600 million over the next five years to manage selenium in B.C.’s Elk Valley by installing water-treatment and diversion facilities. The company operates five coal mines in B.C. and one in Alberta, and is the second-largest exporter of seaborne steelmaking coal.

This year Teck has identified costs savings and expenditure deferrals of $275 million, and ended March 31 with $2.95 billion in cash. Despite its strong cash position, it says it isn’t looking at any major acquisitions, dampening speculation that it would buy Rio Tinto’s (RIO-N, RIO-L) iron ore assets in eastern Canada.

Teck gained $1.20 to close April 24 at $26.80 per share. Smith has reduced his price target by $2.50 to $32.50, and maintains a “hold” on the stock.

“In the headwinds of volatile markets for its products, we believe that Teck is doing all the right things to increase value for shareholders at corporate and operational levels,” he says.