Teck's Q1: Investing In The Future
Summary
- Teck produced 158.7 million lb copper, 485 million lb zinc, 5.9 million tonnes of steelmaking coal, and 1.8 million barrels of bitumen in Q1 2021.
- In all the four cases, production volumes declined and production costs increased compared to Q4.
- Due to higher metals prices, revenues and operating cash flow remained flat.
- The Quebrada Blanca Phase 2 construction is more than 50% complete.
- In 2021, Teck should produce 606-640 million lb copper, 1.29-1.34 billion lb zinc, 25.5-26.5 million tonnes of steelmaking coal, and 8.6-12.1 million barrels of bitumen.
Teck Resources (NYSE:TECK) released its Q1 2021 financial results. As expected, the company found significant support in strong copper and coal prices. On the other hand, copper and zinc production declined rapidly, and bitumen production keeps on losing money. As a result, Teck didn't experience as large improvement in financial results, as many of its peers did.
In Q1, Teck experienced a notable decline in copper production. The company produced only 158.7 million lb copper, which is 7.7% less than in Q4. On the other hand, it is 1.4% more than in Q1 2020. Compared to Q4 2020, copper production declined at all Teck's copper mines (Highland Valley, Antamina, Carmen de Andacollo, Quebrada Blanca), but the biggest decline was experienced at its 22.5%-owned Antamina mine, where copper production decreased from 261.25 million lb to 235.23 million lb, or by 10%. As the production declined, the net cash costs increased. Compared to the previous quarter, they grew by 8.7%, to $1.38/lb. However, they remain relatively stable from the long-term perspective. What is positive, the average realized copper prices that grew by 18.8%, to $3.86/lb, were able to compensate for the production decline and costs growth.
Source: Own processing, using data of Teck
The zinc production decreased too. Teck produced 485 million lb zinc (321.9 million lb - zinc in concentrate, 163.1 million lb - refined zinc), which is 15% less than in Q4 and 5.6% less than in Q1 2020. The main problem was lower zinc grades at the Red Dog mine that produced more than 322 million lb zinc in Q4, but only 264 million lb zinc in Q1. The net cash costs increased to $0.6/lb zinc, which is the highest level in more than two years. On the other hand, the average realized zinc price increased too, although not so much. It grew by 5%, to $1.25/lb.
Source: Own processing, using data of Teck
The steelmaking coal unit did very well in Q1. The production remained almost flat, at 5.9 million tonnes. The unit costs increased from $77/t to $80/t. The main part of the costs, $49/t, represented site cash costs. The transportation costs amounted to $33/t (and there were also inventory reversals of -$2/t). But the average realized coal price grew much more than the costs. It increased by more than 22%, to $131/t.
Source: Own processing, using data of Teck
The bad news is that the energy unit is still losing money. In Q1, Teck produced 1.8 million bbl of bitumen. But although the average realized price increased by more than 38%, to $47.58, the operating netback remains negative. In Q1, it equaled -$5.12/bbl.
Source: Own processing, using data of Teck
Compared to the previous quarter, the copper sales declined by 16%, zinc sales declined by 24%, bitumen sales declined by 23%. Only the steelmaking coal sales increased by 1.6%. Fortunately, especially copper and steelmaking coal prices increased notably, which compensated for the decline in sales volumes. As a result, Teck's revenues amounted to $2.027 billion in Q1. It is in line with Q4. Also operating cash flow of $466 million is in line with Q4. On the other hand, the net income improved rapidly, from -$364.7 million in Q4 to $242.7 million in Q1. The reason for the Q4 loss was a $345 million impairment charge related to Teck's 21.3% interest in the Fort Hills oil sand mines. The Q1 EPS climbed up to $0.46.
Source: Own processing, using data of Seeking Alpha and Teck
Teck's cash position worsened slightly. The company held cash, cash equivalents, and short-term investments worth $294 million as of the end of Q1. On the other hand, the volume of total debt increased from $6.194 billion as of the end of Q4, to $6.61 billion, as of the end of Q1. As a result, the net debt increased too. It amounted to $6.316 billion as of the end of Q1. Compared to the same period of last year, it increased by 42%. The growing debt is attributable to Teck's extensive investment activities (the expenses on Quebarada Blanca 2 alone amounted to more than $400 million in Q1). But there are no major debt maturities before 2030, moreover, a large portion of the debt matures only in 2040 and later. Therefore, Teck has more than enough time to complete its current projects and generate cash flow to reduce the debt. Also, the rating agencies seem to be comfortable with Teck's indebtedness, as they maintain its investment grade rating.
Source: Own processing, using data of Seeking Alpha and Teck
Compared to the end of Q4, Teck's valuation metrics didn't experience any major changes. The price-to-operating cash flow ratio declined from 8.18 to 7.78, the price-to-revenues ratio increased from 1.44 to 1.6, and the net debt-to-operating cash flow ratio decreased from 4.95 to 4.37. All the values are significantly above the heavily depressed levels recorded one year ago, but they are not too high. The company seems to be reasonably valued, moreover, if the copper prices remain above $4/lb also next year, further upside should be expected, as Quebrada Blanca 2 will provide a significant production boost.
Source: Own processing
According to the 2021 guidance, Teck should produce 606-640 million lb copper, 1.29-1.34 billion lb zinc, 25.5-26.5 million tonnes of steelmaking coal, and 8.6-12.1 million barrels of bitumen. The cash unit costs are estimated at $1.3-1.4/lb for copper, and at $0.4-0.45/lb for zinc. The total steelmaking costs (cash costs + transportation costs) should be around $77-84, and the bitumen adjusted operating costs should be $23-26.
Source: Teck
The Quebrada Blanca Phase 2 construction progressed well in Q1. In April, more than 50% of the expansion was completed. The CAPEX is still estimated at $5.2 billion, however, there are also some additional COVID-19-related costs estimated at $450-500 million. Teck owns 60% of this project that should be able to produce almost 700 million lb of copper equivalent per year (more than Teck's current annual copper production). After it gets into production (start-up expected in late 2022), Teck's copper production will experience a significant boost. Moreover, according to the Q&A session following the earnings release, Teck's management is pretty sure that Quebrada Blanca will be further expanded in the future.
The ramp-up of the recently upgraded Neptune port is underway. According to Teck, 18 ships have been already loaded. Also, the Elkview saturated rock fill expansion was completed successfully. It will improve the water quality at Teck's 95%-owned steelmaking coal Elkview mine.
Similar to other copper producers, Teck experienced a very nice share price growth over the last 12 months. However, since late February, the share price has been moving in a sideways trend. The support is situated around $17.5 and resistance around $22.5. The resistance was unsuccessfully tested only last week. Right now, the share price stands at the 50-day moving average, where it could find some support. If a copper market correction starts, Teck's shares will head downwards as well. If the 50-day moving average doesn't hold, the next support should be found at the long-term bullish trend line. If even this one doesn't hold, the next stop could be in the $17.5 area.
What I like about Teck's Q1:
- Despite lower production and sales volumes, revenues and operating cash flow remained almost unchanged.
- The net income improved significantly.
- Quebrada Blanca 2 construction progresses well (the mine construction is more than 50% completed).
- Quebrada Blanca 3 is highly probable.
What I don't like about Teck's Q1:
- The copper, zinc, and steelmaking coal production declined.
- The copper, zinc, and steelmaking coal production costs increased.
- The bitumen production keeps on losing money.
- The debt keeps on growing (although the investments should pay off in the future).
This article was written by
I am an associate professor at the University of Economics in Bratislava, Department of Banking and International Finance. My dissertation was focused on commodity markets and my habilitation was focused on the calendar anomalies. I have more than 15 years of investing experience. My investments mostly focus on small- and mid-cap companies in the resource sector. Since May 2019, I have been preparing regular monthly reports focused on the precious metals royalty & streaming industry. Based on positive feedbacks and numerous inquiries, I decided to launch a Marketplace Service named "Royalty & Streaming Corner", which provides an in-depth analysis of this exciting market segment, as well as investment ideas from the mining industry.
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