Coal cushions Teck’s third quarter (October 27, 2008)

Vancouver – For Teck (TCK.B-T, TCK-N) coal continues to be its saving grace this quarter.

With demand for zinc and copper softening in China and recent and substantial decreases in those commodity prices, Teck suffered $126 million in after-tax negative pricing adjustments.

In the third quarter net earnings were down $72 million from the second quarter to $432 million. A year ago net earnings came in at $495 million. Between quarters copper prices dropped from US$3.98 to US$1.94 and zinc from US85 to US51. Those declines were largely to blame for slowing profits.

But it could have been worse without the cushion of coal.

“Our coal business has mitigated the weakness we saw this quarter in our base metal businesses,” said Teck president and CEO Don Lindsay in a conference call.

That marks a significant change from a year ago. In the third quarter of 2007 coal accounted for but 4% of Teck’s operating profits. Zinc drove 53% of those profits and copper 44%.

Last year’s backseat passenger, however, is now behind the wheel. In the third quarter of 2008 coal accounted for 51% of Teck’s operating profits, zinc 19%, copper 29% and gold 1%.

Lindsay does not expect that seating arrangement to change in the near future. “This will continue to be the story for coming quarters,” he said.

Looking to the future and focusing on Chinese demand Teck vice president of base metals marketing Andrew Stonkus said zinc and copper demand is softening, but expects there to be a growth rate for both in the 8% to 9% range through the coming year.

Teck’s sales of copper concentrate came in at 52,000 tonnes in the third quarter, down 1,000 tonnes from the previous one. Copper cathode was up more than double, to 27,000 tonnes. Teck sold 224,000 tonnes of zinc concentrate, up from 214,000 tonnes the quarter previous, and 64,000 tonnes of zinc metal.

But as Lindsay emphasized, much of Teck’s hopes for the moment lie in coal.

While Boyd Payne, Teck’s senior vice president of coal, agreed that softening steel production will impact demand for coal, the bite of falling production will be felt most by lower quality coal producers, not those selling high-quality coking coal. Of Teck’s 23- to 25-million tonnes yearly coal production from Elk Valley Coal, a group of six mines in B.C. and Alberta, he noted that about 90% of it was high quality.

And in the coming quarters Teck’s take from coal should increase. Teck recently upped its stake from 60% to 100% in Elk Valley Coal by acquiring all the assets of Fording Canadian Coal Trust for US$12.4 billion in cash and issuance of about 36.9 million Class B subordinate voting shares. To finance the deal Teck arranged US$9.8 billion in debt, US$4 billion of which is a 3-year amortizing term loan due in 11 equal quarterly installments beginning in April 2009 and US$5.8 billion of which is a 364-day bridge loan.

Down the road Lindsay says Teck’s first priority will be reducing that debt.

As for how metal prices will affect pending projects such as Petaquilla copper in Panama, Lindsay said, “we won’t make decisions until 2010 to 2011. If the decline (in metal prices) carries on for that length of time it, of course, could very well affect those projects.”

But Lindsay said there has been no change on its Andacollo concentrate project at its Andacollo copper cathode mine, 350 km north of Santiago, Chile. Now 60% complete, when Teck finishes construction of the 55,000-tonnes per day concentrator and tailings facility the company estimates yearly production of 76,000 tonnes of copper and 53,000 ounces of gold in the first ten years. Production of the concentrator project is slated for 2010.

The other question looming on the horizon for Teck is how much the capital costs at Fort Hills will be. Teck has a 20% stake in the Alberta tar-sands project about 90 km north of Fort McMurray that, if fully realized as planned, could cost 50% more than the 18.8$ billion forecast from just over a year ago.

Lindsay said Teck and its partners are reviewing their options. Up in the air is the scale of the project and whether to go with a potential upgrade to its first phase. The first phase would extract about 160,000 barrels of bitumen a day, but upgraded it would deliver 140,000 barrels of synthetic crude (the far more refined product).

Lindsay is conservative on that issue saying the “upgrader will likely be differed.”

Lindsay also made pains to warn his audience of analysts that the coming fourth quarter will be “relatively confusing” given that the full benefits of its deal with Fording will not have taken effect. He said to expect the first quarter in 2009 to be more representative of Teck’s business.

Lindsay also reiterated that about 73% of its revenues, including coal, have price protection through March 2009.

On news of the third quarter results Teck’s share price dropped $2.84 to close at $14.32.