Teck slashes dividend on oilsands, coal
Firm faces spending commitments for Alberta project, slump in China steel plant demand
Teck Resources Ltd. has finally done the inevitable.
Faced with awful coal prices and a huge spending commitment at the Fort Hills oilsands project in Alberta, the company slashed its dividend by twothirds on Tuesday to shore up its balance sheet.
Analysts and investors predicted this day was coming for a long time. Teck’s dividend yield has been very high in recent months, even climbing above seven per cent in December. By cutting the semi-annual payout to 15 cents a share from 45 cents, the Vancouver-based miner will save about $340 million.
Chief executive Don Lindsay said most of the shareholders he spoke with supported this move. He noted the company wasn’t getting any value in its share price for the prior dividend.
“(The dividend reduction) preserves flexibility and the funding of our capital program. And importantly, it helps maintain the strength of our balance sheet,” he said on a conference call to discuss first quarter earnings.
Teck has plenty of liquidity, with $1.4 billion of cash on its balance sheet and a $3-billion US line of credit. But its financial position should weaken over the next couple of years because of Fort Hills. Teck has committed $2.9 billion to the project, but spent only $900 million to date, meaning it expects to spend another $2 billion to reach first production in late 2017.
The timing for that spending couldn’t be worse, because the steelmaking (or coking) coal market is in miserable shape.
On Tuesday, Teck said demand for coal in China is weakening. This was a major shift in outlook for the company — just three months ago, Teck said demand for its products was strong, “particularly coal.”
Lindsay said China imported 48 million tonnes of seaborne coking coal last year. Based on its imports in the first couple of months of 2015, it would be on pace for only 36 million tonnes in 2015. However, Lindsay did note that two large Chinese steelmakers told him the first couple of months were an anomaly and the pace of imports should improve through the rest of the year.
“We’ll have to see how the year unfolds. But certainly it has been weak so far,” he said.
Coking coal prices have slumped over the past couple of years because of slowing demand and rising supply, especially from Australia. That has taken a major toll on Teck, which generates more than 40 per cent of its revenue from coal.
The company’s realized price on its coal sales was just $106 US a tonne in the first quarter. That compares to $131 in same quarter a year ago. In 2011, Teck’s average realized price was a staggering $257 a tonne.
Lower coal and copper prices resulted in lower first-quarter earnings. Teck’s adjusted profit dropped 39 per cent year-overyear to $64 million, or 11 cents a share. That missed the consensus analyst estimate of 15 cents.
“(Teck’s) financial position will continue to deteriorate as long as commodity prices for coal and copper remain depressed,” Dundee Capital Markets analyst David Charles said in a note.
The dividend reduction could help Teck maintain its investment-grade credit rating, which is a priority for the company. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings all have Teck at the lowest investment-grade rating, but each of them has a stable outlook.