Teck Resources: Overcoming Obstacles for a Strong First Quarter

Apr.25.11 | About: Teck Resources (TCK)

Note: C$’s stand for Canadian dollars, which is the reporting currency by Teck (NYSE:TCK) and this is the first quarter where earnings are reported using IFRS rather than Canadian GAAP.

Teck Resources had a difficult first quarter of 2011 to say the least. Strikes and Mother Nature caused production and sales delays but through it all Teck delivered solid numbers.

Workers at Teck’s Elkview mine in British Columbia walked out on January 30 after failing to reach an agreement on a new contract. The strike was settled in early April with Elkview returning to full operations shortly thereafter.

Coal production lost due to the strike at Elkview totaled almost one million tonnes.

Coal operations were further hampered by avalanches along the rail route and port disruptions.

Through it all, Teck delivered first quarter revenues of C$2.366 billion dollars while adjusted earnings per share rose to C$0.76 from C$0.34 a year ago.

While coal production was down more than 20% from a year ago, contract prices rose by almost 50% offsetting a rise in fixed costs.

Coal revenues in the first quarter of 2011 rose to C$1.019 billion from $790 million a year earlier while gross profit jumped from C$316 million in the first quarter of 2010 to C$477 million in the first quarter of 2011.

Mine expansions continue with Elkview expected to be completed in the fourth quarter while the Greenhills should be finished in the third quarter.

It should be noted that the union contract covering the Fording mine expires on April 30.

A prefeasibility study is underway to review the potential for reopening the Quintette coal mine in northeastern British Columbia. If the results are positive, Quintette could be back in production by 2013 at an annual rate of 3 million tonnes per year.

Increasing production from the new copper concentrator at Carmen de Andacollo pushed copper concentrate production up by 20% from year ago. Production was down sequentially due to stronger than expected ore bodies being encountered.

Higher copper prices allowed revenues in the copper division to grow to C$773 million dollars from C$594 million dollars a year ago.

Zinc production rose during the first quarter due to higher throughput at the Red Dog mine in Alaska.

Gross profit was lower as customers accelerated some deliveries into last year’s fourth quarter reducing first quarter 2011 sales volumes.

It should be noted that the Red Dog mine is only accessible by air except for a 100 day shipping season due to its location in a remote corner of northwest Alaska which explains the quarterly zinc sales variability.

The Red Dog mine is an underappreciated asset within Teck’s portfolio. Zinc prices are in an interesting technical position ready for a potential upside breakout just in time for shipping season.

The first quarter of 2011 was the first quarter Teck reported earnings under IFRS rather than Canadian GAAP which served to lower profit by C$86 million dollars. The bulk of the decrease was related to IFRS requiring all vested past service costs to be immediately recognized into earnings rather than amortized over the remaining expected service life of the employee.

My only concern surrounding Teck are the upcoming feasibility studies for Relincho, Quintette, and Galore Creek.

The market is likely to wait for the feasibility studies and guidance regarding future capex.

Teck’s stock is down 8.7% YTD on the Elkview strike and weather related problems which hurt Teck’s ability to take advantage of flooded coal mines in Australia.

This should be looked at as a buying opportunity for investors as Teck’s two main divisions, metallurgical coal and copper expect strong demand well into the future.

Source material: Teck's earnings presentation and conference call.

Disclosure: I am long TCK.