Teck stays course amid commodity volatility
Plenty of companies across the resource sector are panicking, but not Teck Resources Ltd.
As its rivals slash outputs, cancel projects and suspend dividends, Vancouver-based Teck is maintaining the same steady course that it has throughout the recent bout of commodity price volatility.
As a result, there were no radical changes to be found in the miner’s fourth-quarter earnings on Thursday. Teck did not reduce its $518-million dividend payout, it did not announce any job reductions or sweeping production cuts, and it maintained a commitment to the costly Fort Hills oil sands project.
“We have continued to execute well by controlling the controllable,” chief executive Don Lindsay said on a conference call on Thursday.
Specifically, that means chipping away at operating costs while preserving liquidity. The company has achieved $640 million of savings under its current cost-reduction plan, and has reduced unit costs at 10 of its 13 operations. The balance sheet is in good shape with $1.7 billion of cash and an untapped US$3-billion credit facility.
All the same, the stock has been pummelled. Despite a recent rally, it is down more than 30% since the start of 2014 because of weak commodity prices and investor concerns about Fort Hills. The stock closed Thursday at $18.73, up $1.12, or 6.4%,
Teck, which owns 20% of the Fort Hills project, has committed to spending $2.9 billion on it to reach first production in 2017. Only $1.1 billion has been spent to date, so there is a long way to go.
Many shareholders have been opposed to the Fort Hills investment for years. Even its supporters would acknow- ledge that the project will not generate much of a return if current weak oil prices hold.
Mr. Lindsay tried to shrug off those concerns on Thursday. He said higher oil prices are inevitable in the long run due to reduced drilling activity and the high decline rates of shale oil wells.
“I would like to emphatically state that short-term oil price weakness does not affect our decision to proceed with a 50-year project,” he said.
For the fourth quarter, Teck reported an adjusted profit of US$116 million, or 20¢ a share.
Those results were slightly below average analyst expectations, but analysts gave the company credit for its solid production figures and cost reductions.
All the same, Teck’s profit is in decline because of weak coal and copper prices. The biggest problem is the steelmaking (or coking) coal market, which is heavily oversupplied. Teck’s average selling price for its coal was US$115 a tonne in 2014, compared to US$149 in 2013 and a whopping US$257 in 2011.
Mr. Lindsay said coking coal producers have announced plans to cut production by a cumulative 30 million tonnes since the start of 2014. But less than half those cuts were implemented by the end of the year, and more reductions are needed to bring the market into balance.
“There is potential for the coal market to be back in balance as early as the second half of 2015. But we need those cuts,” he said.
One big positive for Teck is the dropping Canadian dollar. The company said a 1¢ drop in the exchange rate boosts its pre-tax earnings by $52 million.
Short-term oil price weakness does not affect our decision