Teck stays course despite huge loss

$2.1B due to non-cash charges, but stock rises

Underneath the noise, Teck

continues to perform pretty well.

The Vancouver-based miner has been under immense scrutiny from investors in recent weeks, as three rating agencies have cut its credit rating to junk status. It is grappling with poor commodity prices and huge spending requirements in the oilsands. And on Thursday, it reported a massive third-quarter loss of $2.1 billion due to non-cash impairment charges.

Despite those overhanging issues, investors are giving the company credit for continuing to deliver solid operating results. The stock rose 43 cents or five per cent to $8.79 on Thursday as Teck reported an adjusted profit of $29 million, or five cents a share, which was well above expectations.

“The commodities cycle continues to provide a very challenging environment, but we are responding,” chief executive Don Lindsay said on a conference call.

Teck has maintained decent margins in its coal and base metals businesses by continuing to cut costs. It has also benefited from low oil prices and a weaker Canadian dollar.

Regardless, weak commodity prices (particularly for steelmaking coal) are having a devastating impact on the company’s profitability. Teck’s realized coal price was just US$88 a tonne in the third quarter, compared with US$285 in the same period in 2011, when the market was peaking. Teck’s adjusted profit in that quarter four years ago was US$742 million, a number that seems inconceivable today.

Until this week, Teck was using a long-term coal price of US$185 a tonne to value its assets. That was obviously out of line with current market realities. The company cut that price to US$130 on Thursday, which triggered a $1.5-billion writedown on its coal business.

Teck also recorded noncash impairments on its copper unit ($300 million) and the Fort Hills oil sands project ($400 million). Put together, those writedowns led to the big quarterly loss.

The big concern with Teck remains the balance sheet, which is burdened with $9.7 billion in debt. There is no immediate crisis, as the company does not have to make any debt repayments until 2017 (when it only needs to repay $600 million). But its finances have come under pressure because commodity prices are weakening just as the company spends $2.9 billion on Fort Hills.

Teck addressed the balance sheet concerns this year by reducing its dividend and raising almost $1 billion from two streaming transactions. The miner has $1.8 billion of cash on hand, which it said is more than enough to cover the remaining $1.5 billion of

The commodities cycle continues

to provide a very challenging

environment

spending on Fort Hills. Teck also indicated there are more opportunities to strengthen its liquidity.

“We’re taking many steps to ensure our financial strength and will continue to do so,” chief financial officer Ron Milos said on the call.

The biggest potential catalyst for Teck would be a rebound in steelmaking coal prices, which are suffering because of global oversupply and uncertain demand from China. Teck noted that it does not expect a substantial recovery in price “until additional supply cuts occur or demand increases.” It is uncertain when either of those things could happen.

“Teck is managing costs and production, but low commodity prices remain a major headwind,” Citi analyst Brian Yu said in a note.