Teck remains focused on driving down the proportion of EBITDA/cash flow contributed by the coal segment in favour of "green metals", Canaccord Genuity said yesterday in a note, adding Teck said this would occur organically as its QB2 copper expansion in Chile came online in 2023.
Meanwhile Teck said it was prepared to wear increased costs due to ‘unprecedented' current metallurgical coal prices.
Annual production at steelmaking coal operations in the Elk Valley was expected to be at the lower end of guidance range due to wildfire impacts and increased absenteeism associated with COVID-19 exposure isolation protocols, Teck said.
It had reduced metallurgical coal sales guidance earlier this quarter due to wildfires damaging a rail line.
However it had decided to maintain available production by operating higher cost equipment and relying on overtime to offset the increased absenteeism, which had also contributed to higher unit costs.
Third quarter adjusted cost of sales were expected at C$66-$68/t, above guidance, but Teck said this was an increase of only $3/t based on the mid-point of quarterly guidance, versus an increase of US$192/t in the steelmaking coal price on an FOB basis since June 30.
Metallurgical coal prices have risen from US$111 per tonne FOB DBCT or $226/t FOB CFR China on May 1, to $399/t and $566/t respectively this week, Canaccord noted.
Given the tight market, it's raised its FOB benchmark price estimate to $250/t for Q4 and US$150/t for H1 2022, up from US$150/t and US$135/t.
Teck continued to view its coal business favourably long-term, analyst Dalton Baretto said, as blast furnaces are expected to remain the preferred steel-production method in Asia over the next 20 years and the high coking strength for Teck's products allowed for a relatively lower carbon footprint in the steel-making process.
"That said, we believe management and the board are well aware of the overhang the business has on the share price multiples," he said.
"With regard to recent speculation in the press around the sale of the coal business, Teck would not comment other than to reiterate that they continue to evaluate potential divestment options.
"For what it's worth, the mentioned US$8 billion price tag is in line with our C$10.5 billion valuation, and we believe the timing makes sense given the recent run-up in coal prices."
Teck reduced 2021 annual refined zinc production guidance to 285,000-290,000 tonnes, from 290,000t-300,000t due to wildfires impacting its Trail operations in British Columbia.
It did not alter its production outlook for its Highland Valley Copper operations which were briefly suspended last month due to wildfire activity.
However "the latest start to the shipping season since 2010 due to weather and ice conditions, combined with record weather-related shipping delays in July and August" reduced forecast third quarter sales of zinc concentrate from Red Dog in Alaska from 180,000-200,000t to 145,000-155,000t.
Canaccord increased its target price from C$28 to $31 a share, given the increase in its met coal price forecast and expected cash flow generation.
"Despite the increase in our target price, given the limited implied return and the downside risk in met coal pricing, we maintain our hold rating on Teck," Baretto said.
Teck shares (TSX: TECK.B) closed down 3.16% to $29.73 but are up 28.7% year-to-date.
The company is capitalised at $15.9 billion (US$12.4 billion).
