Teck posts adjusted Q4 profit despite plunging metal prices
Mining company benefiting from aggressive cost-cutting measures
Teck Resources Ltd. eked out a profit in the fourth quarter, but the company is still looking to raise more capital as commodity prices weaken and a massive oilsands investment drains its cash.
Vancouver-based Teck, Canada’s largest diversified miner, reported a small adjusted profit on Thursday of $16 million, or three cents a share. The very fact that Teck was in the black surprised many sell-side analysts — on average, they expected a loss of one cent. The results show that Teck is operating well despite plummeting prices for all three of its key products: steelmaking coal, copper and zinc. The company is generating positive margins thanks in part to an aggressive cost reduction program.
“This is a cyclic business and down cycles are expected. But this cycle is exceptional in terms of both length and depth,” chief executive Don Lindsay said.
Teck has strong liquidity right now, with $1.8 billion of cash on its balance sheet and US$3 billion available in a credit facility.
However, the company’s coffers are being drained because of a massive $2.9-billion investment into Fort Hills, an oilsands project that is expected to reach production late next year. At current oil prices, Fort Hills would not generate the cash flow Teck expected when it committed to the spending. Additionally, the company has more than US$3.5 billion of debt coming due between 2017 and 2023.
These factors have raised concerns about the company’s balance sheet, and Teck lost its investmentgrade credit rating last year.
The company is looking at ways to obtain more capital. Teck raised nearly $1 billion last year by selling metal streams on two of its mines, and Lindsay said more stream sales are a possibility. He also noted the company may sell infrastructure assets. It owns stakes in Neptune Bulk Terminals and the Waneta Dam.
However, Lindsay reiterated that Teck has no plans to issue equity and dilute shareholders while the market is so weak. And he maintained that the balance sheet is healthy even with the Fort Hills spending. If the company meets its guidance and commodity prices and exchange rates remain where they are, Teck expects to exit 2016 with more than $500 million of cash and no material change to its debt level.
There is one major factor working in Teck’s favour: the Canada-U. S. dollar exchange rate. Since Teck produces much of its output in Canada and sells it in U.S. dollars, it benefits whenever the loonie weakens. The company said that every onecent move in the Canadian dollar versus the U.S. dollar is worth $34 million in pre-tax earnings.
While Teck posted a profit in the fourth quarter on an adjusted basis, it had an overall net loss of $469 million as it reported writedowns due to falling commodity prices.
This is a cyclic business and down cycles are expected. But this cycle is exceptional in ... both length and depth.