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Teck on top as Q1 headline profit beats forecasts

Despite a 24% year-on-year drop in headline profit for the March quarter, Canada’s largest diversified miner Teck Resources still comfortably beat Bay Street analysts' earnings forecasts for the period, translating into equity gains in Toronto on Tuesday.
Teck on top as Q1 headline profit beats forecasts Teck on top as Q1 headline profit beats forecasts Teck on top as Q1 headline profit beats forecasts Teck on top as Q1 headline profit beats forecasts Teck on top as Q1 headline profit beats forecasts

Teck reported lower profit in the first quarter of 2019 because of lower commodity prices and partly due to higher operating costs

The Vancouver-headquartered company that produces coking coal, zinc, copper and bitumen, reported adjusted quarterly income attributable to shareholders of C$568 million or $1.00 per share, down from $753 million or $1.31 per share a year ago.

Analysts had on average forecast headline earnings per share of 96c.

Revenues for the latest quarter grew marginally to $3.1 billion compared with analyst forecasts for $2.99 billion.

Net profit for the March 2019 quarter fell 17% year-on-year to $630 million or $1.11 per share, with the most significant one-time item being a $51 million after-tax gain on a revaluation of the company's debt prepayment option, mainly owing to higher market prices for the company's outstanding notes because of Teck receiving investment grade credit ratings from four agencies during the quarter. The company also cancelled $1.1 billion in letter of credit requirements.

The company reported EBITDA of $1.39 billion for the March 2019 quarter, compared with $1.56 billion a year earlier.

As at March 31, Teck had $8.7 billion cash available after it repurchased $180 million of Class B shares and paid $28 million in base dividends.

The company currently carries $5.75 billion debt on the balance sheet, down from $6.5 billion a year earlier.

Teck said production of its main products in the first quarter was lower year-on-year due to issues including severe winter weather conditions that affected Red Dog in Alaska, and the steelmaking coal operations and supply chain at Trail in British Columbia, as well as anticipated lower ore grades at several operations and maintenance issues at Trail.

Despite these challenges CEO Don Lindsay reaffirmed the company's guidance for the year.

Winter weather woes

The company blamed lower prices for copper and zinc and slightly lower realised coal prices for the weaker performance, while Lindsay fingered adverse winter weather conditions at certain of its far-flung mines for impacting production during the three-month period. This also caused higher operating costs accross most of the portfolio.

Lindsay said on an analyst call the coking coal business segment continued to drive significant cash flow for the company. Coal production was slightly lower in the quarter at 6.1 million tonnes.

The company expected higher unit costs, which reflected decisions to capture additional margin. A positive was a marked decline in coal price volatility, Lindsay said.

Teck expects sales of between 6.4-6.6Mt in the June quarter.

The copper business was impacted by expected lower ore grades at Andacollo and Highland Valley, which contributed to total output of 70,000t in the quarter, compared with 74,000t in the March quarter of 2018.

Lindsay said the company expected Highland Valley copper grades to gradually improve through the rest of 2019, which in tandem with the new ball mill at Highland Valley which is expected to start up ahead of schedule this quarter, bodes well for the operation in 2019.

The company's core capital expansion focus this year is the Quebrada Blanca Phase 2 project that started in December. Teck last month closed a US$1.2 billion partnership transaction with Sumitomo Metal Mining that accounted for a substantial part of the project capex component. The company still needs to finalise about $700 million in funding for the build.

"We're evaluating strategic alternatives for the project. But, we're in no rush because of our strong financial position," Lindsay said.

"We've had approaches regarding an optimisation of our copper portfolio. The NPVs on these projects add up to pretty decent numbers."

Teck also said the Red Dog zinc mine suffered weather-related disruptions but still recorded sales of zinc in concentrate totalling 131,000t, marginally above guidance of 125,000-130,000t.

Red Dog is expected to return to a "normalised production pattern", with contained zinc sales of 80,000-85,000t expected this quarter.

Zinc net cash costs also came in lower for the quarter at 44c/lb from 55c/lb a year ago.

Lindsay commented Teck saw above-ground zinc stocks remaining "very tight" at only 4.1 days of global consumption, which tracked well below the global 25-year average of 22.3 days.

Bitumen production from the Fort Hills oilsands operation in Alberta in the first quarter was lower than design capacity at 2.8 million barrels, but within the overall guidance range, the company said. The operation was impacted by Alberta provincial curtailments that came into effect on January 1, and which were subsequently extended to June in response to export bottlenecks to market.

The Alberta government has estimated the provincial production glut drove down the price of Western Canadian Selectoil in late 2018, costing Canadians $80 million a day.

However, Lindsay noted WCS prices rose substantially from the December quarter on the back of a significant narrowing of Canadian heavy blend differentials and increasing global benchmark oil prices.

Teck's averaged realised blended bitumen price was US$42.12/bl in the first quarter. It expects bitumen production of 30,000-32,000bl/d this quarter.

Teck's (TSX:TECK-B) Class B shares have gained more than 17% in Toronto since the start of the year, adding another 4% on Tuesday to C$33.75. The company is capitalised at $19 billion.