Teck cuts jobs and coal production

Vancouver – Another day, another announcement of job and production cuts: Teck Cominco (TCK.B-T, TCK-N) is letting go of 1,400 employees and reducing its 2009 coal production target to 20 million tonnes.

Teck is eliminating about 1,000 employee and 400 contractor positions by the end of 2009, though most of the cuts will take place in over the next few months. The company says each business unit is “adjusting personnel levels to protect operating margins given difficult commodity markets.” The bigger cuts will be to the staff and contractors associated with exploration activities and research and development. And Teck also plans to eliminate corporate level redundancies created by the company’s recent acquisition of Fording Canadian Coal Trust.

Teck expects to take a charge of roughly $35 million in the first quarter due to severance payout and other costs related to the staffing cuts.

On the production front, Teck says has reduced its 2009 target to 20 million tonnes due to declining global demand for steel. That is 3 to 5 million tonnes less than its 2008 coal target; the company has not yet released its final 2008 production numbers.

The job and coal production cuts are but the latest in a series of moves by the major to deal with its massive debt load. The major owes US$10 billion to various lenders and more than half of that is due within a year.

The debt stems from the US$14-billion takeover of Fording Canadian. The move gave Teck 100% ownership of Elk Valley Coal, the world’s second-largest producer of hard coking coal, and Teck made that move in the midst of record-breaking, US$300-per-tonne prices for metallurgical coal.

The global economic downturn changed all that. Coal prices are set by negotiation each March so the 2009 price is still unknown but analysts are expecting the price to fall considerably; estimates range as low as US$180 per tonne. The result is that Teck’s ability to repay or refinance its debt is in question, and the major has taken significant steps to address that concern.

In November the company cancelled its annual, $1-per-share dividend to save $486 million annually and slashed its budgeted capital spending by $730 million, cutting $330 million from sustaining capital and $400 million from its development budget. Growth projects, including large-scale ventures like the Galore Creek copper-gold project in northwest British Columbia and the Relincho copper-molybdenum property in Chile, will sit largely untouched in coming months. The company also reduced zinc production at its Trail metallurgical complex by 4,000 to 5,000 tonnes per month.

And Teck walked away from its 26% interest in the massive Petaquilla copper projest in Panama, in exchange for freedom from its financial obligations for the development-stage property, and sold its 60% interest in the Lobo-Marte gold project in northern Chile to Kinross Gold (K-T, KGC-N) for US$40 million and 5.6 million Kinross shares.

Then in mid-December the company announced that its Pend Oreille mine in northeastern Washington will close in February. The mine has been operating at a loss for two years: in 2007 Teck recorded a $6-million operating loss related to Pend Oreille and for the nine month ending Sept. 30, 2008, Pend Oreille had lost $10 million. As recently as 2006, however, the mine was a money-maker, bringing in record profits of $38 million. Pend Oreille accounted for roughly 1% of Teck’s 292 million tonnes of zinc production and 0.5% of its 76 million tonnes of lead in 2007.

On news of the latest cuts Teck’s share price lost as much as 80¢ in mid-day trading but recovered in the afternoon to close down only 18¢ at $7.42. The major’s debt woes had pushed its share price to an all-time low of $3.35 in late November, from a high of $52.90 in May. The company has 478 million shares outstanding.