While it looks like 2016 will not shape up as “happy” for Teck Resources (TSX:TCK.B), the miner is hoping the year will be “new.”
Teck is facing far tougher times than in 2008. While the great global recession was intensely painful and spared no one, it was relatively short. Teck bottomed out with a sub-$4 share price in early 2009 but shot up to record highs of $60-plus in under two years. This time around it’s been a marathon of hurt for the company as it tries to survive a soft commodity market finishing it’s fourth depressing year. Teck reported a loss of $2.1 billion in the third quarter.
Greg Waller, Teck’s vice-president of investor relations and strategic analysis, might have felt like he was in Groundhog Day when asked to provide outlook on coal prices for the near term at a recent Goldman Sachs metals and mining conference in New York.
“We’re pretty cautious about speculating on when this might turn because [we’re] now into four or five years of this [and] we’ve been disappointed a lot along the way,” Waller said.
The diversified miner is facing uniform gloom for its metallurgical coal, copper, zinc and future energy assets. While commodity prices may have finally found their bottom, there remains the question of how long this basement living will last.
Spot prices for coal have dived from US$300-plus per tonne in 2011 to the low end of US$70 per tonne. Teck, which benefits from a weak Canadian dollar, is generating thin margins in this climate, Waller said.
He said the challenge is that there’s too much coal on the market, some piled on by companies now bankrupt.
“We really can’t rely on demand growth to solve the problem in the near term; it’s got to come from the supply side,” he said, adding that a number of analysts estimate more than half of coal companies are operating at negative cash margins. Several U.S. coal companies have filed for bankruptcy in the past year.
“I think there’s still some more closures to come [but not enough yet has happened] to bring the market into balance.”
Copper is not sustainable in its current US$2 per pound range from the 2011 highs of $4.60 per pound, Waller said. Teck’s net cost per pound as of the third quarter was $1.42, attributable to the low loonie, cheaper oil prices, higher copper grades and operating efficiencies. However, Teck is in rare company.
“At $2 per pound, roughly half the industry would be negative cash margin. You can certainly exist at this level for a while, but you can’ t exist at that level for very long,” he said.
Waller is optimistic about zinc, which has seen some growth in demand. And Teck expects its 20% interest in Fort Hills oilsands to produce oil by 2018. Waller said Fort Hills would be at break-even level if oil were trading at $40 per barrel. However, oversupply has U.S. benchmark West Texas Intermediate oil below $38 a barrel.
Teck has gotten leaner and meaner during this downturn. It recently chopped $650 million in capital and operating costs, mostly through mothballing its Coal Mountain expansion plans in B.C. and chopping 1,000 people from payroll. It’s also raised nearly $1 billion in two streaming transactions.
Teck’s cash balance of $1.8 billion exceeds the company’s remaining $1.5 billion cost obligation for Fort Hills. The company has no debt due in the next year and US$300 million up for payment in the first quarter of 2017, prior to the expected completion of Fort Hill.
If tough times persist, Teck is also open to selling development-stage assets, entering into more precious metals streaming deals and potentially selling infrastructure, including its 46% ownership of North Vancouver’s Neptune Bulk Terminals and two-thirds interest in the Waneta Dam, which helps power the company’s Trail operations. In 2010, previous 100%-owner Teck sold a one-third interest in the dam to BC Hydro for $825 million to help repay debt.
The company stresses that there is no formal process in place for these options and that it is not pursuing these opportunities.
Teck is formidable in the near term owing to its experience in 2008, said Teck spokesman Chris Stannell.
“Teck has been through challenging conditions before,” Stannell said in an email to Business in Vancouver. “During the 2008-2009 global financial crisis, we faced a particularly challenging period and came through that successfully, with largely the same experienced team that we still have in place now. And our financial situation is much stronger today than it was back then.” •
