Commodities have been on a rough ride, as the global economy can’t seem to get traction in any region, but this diversified miner is still finding a way to grow and profit from it all, writes Elliott Gue in Global Investment Strategist.
Vancouver-based Teck Resources (TCK) is a diversified miner with exposure to three main markets: metallurgical (or “met”) coal, copper, and zinc.
Met coal is Teck’s largest single market, accounting for 47% of revenue and nearly 57% of gross profits in first-quarter 2012. Teck is North America’s largest exporter of met coal and the second-largest exporter in the world, with six met coal mines located in Canada.
Given the importance of its met coal business to overall results, the stock tends to track met coal pricing and steel demand more than conditions in the copper or zinc markets.
In first-quarter 2012, the company produced 6.3 million metric tons of met coal, an annualized pace of roughly 25 million metric tons and in the middle of management’s prior production guidance range. If the company produces 25 million metric tons this year, it would represent year-over-year met coal production growth of 10% compared to 2011.
This year, the company’s production increase has been driven largely by the modernization of its processing plant and growth in its fleet of mining equipment. These improvements have allowed the company to increase the total quantity of material moved and processed by 15% in the first quarter of 2012, compared to the same period one year earlier.
Teck plans to grow its output to around 28 million tons per year by the end of 2013, mainly by re-opening its Quintette mine that was idled in 2000. This project appears to be on schedule; Teck has finalized the feasibility study and filed the appropriate permits. Total capital spending in 2012 is expected to reach $340 million; full production at Quintette is expected to produce around 3 million metric tons per year.
Teck has maintained a solid cost discipline, despite efforts to grow production. In first-quarter 2012, mining costs totaled C$70 per ton, down from $76 in the same quarter one year ago and at the low end of management’s prior guidance range. Transportation costs came in at $34 per ton for a total all-in production cash cost of about $104.
With average realized coal prices around $223 per ton in the first quarter and roughly $205 in the second quarter, Teck is solidly profitable even with coal prices falling from their early 2011 highs. The company’s low production costs coupled with strong volume growth will give Teck upside leverage to rising met coal demand and pricing over the next few years.
Copper accounts for roughly one-third of profits and is the firm’s second most important market. Just as with met coal, iron ore and a host of other basic commodities, the main driver of demand for copper is consumption from emerging markets including China and India. China alone now accounts for around 40% of global copper consumption, and saw record imports in late 2011 and early 2012.
In the first quarter, the company’s copper production fell by around 8.7% compared to the fourth quarter of 2011, because of a combination of weaker-than-expected ore grades at its Highland Valley Copper mine in Canada and adverse weather conditions at one of its mines in Chile. That said, management has a goal of doubling copper production over the next five to seven years.
Much of Teck’s near-term copper production growth will come from lower-cost brownfield projects, including the expansion of its Antamina mine in Peru, the installation of a copper concentrator at its Carmen de Andacallo mine in Chile, and expansions at its Highland Valley mine in western Canada.
Teck recently released a favorable result of a feasibility study on its Quebrada Blanca Phase 2 project in northern Chile. The company’s existing mine at Quebrada Blanca is expected to reach exhaustion within about four years; the Phase 2 project would target a new ore body in the same region, increasing the mine life by about 30 years.
With solid exposure to upside in met coal prices coupled with long-term production growth potential in copper, Teck Resources rates a buy under $60.
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