Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

Summary

  • Weak met coal prices have put pressure on Teck Resources' earnings.
  • However, copper and zinc segments provide support for the company's earnings.
  • Thus, Teck Resources remains a rather safe bet on the met coal revival.

Weak met coal pricing has already imposed a tremendous burden on business and the stock price of miners like Alpha Natural Resources (NYSE: ANR) and Walter Energy (NYSE: WLT). Yet, another met coal producer, Teck Resources (NYSE: TCK), has held on well despite significant headwinds. Teck Resources has recently reported its second quarter earnings, posting a profit of $0.13 per share and beating analysts' expectations.

Met coal may have bottomed but could stay depressed for a long time

The third quarter met coal benchmark price settled at $120 per ton, in line with second quarter pricing. This price makes met coal production uneconomic for many miners, and multiple production cuts have been already announced this year. Teck Resources estimates that announced cutbacks constitute roughly 20 million tons. However, the company warned that most cuts will not take effect on the market until early 2015.

There are several reasons for that. First, it takes time to idle mines and prepare them for care and maintenance. Second, those mines will surely have inventories that need to be unloaded. For example, Walter Energy, announced the idling of its entire Canadian operations in April, targets to sell more than 1 million tons of met coal more than it produces this year thanks to inventory sales.

Teck Resources believes that the market needs around 10 million tons of additional production cuts to reach balance. Meanwhile, Australian producers continue to ramp up production and pressure prices. In the first half of this year, Australian seaborne exports were up 8 million tons, according to Teck Resources estimates. Ultimately, the market will reach balance despite growth of exports from Australia. However, it will take time, which is not good news for Alpha Natural Resources and Walter Energy which need improvements as soon as possible.

In turn, Teck Resources could wait as lower costs protect it from coal's downside. One cannot say that Teck Resources' met coal segment is flourishing with $23 million of gross profit in the second quarter, but it's certainly better than nothing.

Copper and zinc perform well

Interestingly, copper prices did not drop following the agreement between Freeport-McMoRan (NYSE: FCX) and the Indonesian government on copper concentrate exports. Freeport-McMoRan copper exports were halted since early January, and this fact provided some support for the copper market. The probes arranged by Chinese officials in June on the use of copper for financing deals also did not put pressure on copper prices. Thus, the demand for copper looks robust enough to support current pricing, which is certainly good for Teck Resources, which got 32% of its revenue and 54% of gross profit in the second quarter from its copper segment.

Zinc also was a meaningful contributor, as average realized price rose from $0.91 per pound in the first quarter to $0.96 in the second quarter. Zinc accounted for 26% of Teck Resources' total revenue in the second quarter, and provided stability to the company's earnings. Going forward, it looks like copper and zinc will continue to support Teck Resources' bottom line.

Bottom line

Despite pricing headwinds on the met coal side, Teck Resources remains a solid performer. The company continues to generate significant amounts of cash and pays a good-yielding dividend. I would not count on the fast improvement in Teck Resources' performance, as met coal prices are likely to stay depressed in the next several quarters. However, the company remains one of the safest bets on a met coal revival.

Source: Teck Resources: Strong Despite Headwinds