Teck falls with lower commodity prices

The global economic downturn is hitting Teck Resources (TCK.B-T, TCK-N). Canada’s biggest diversified miner is suffering from weaker coal and copper prices as the Chinese growth story loses steam.

While the senior producer did manage to turn out more coal and copper over the second quarter than it did last year, that increase couldn’t compensate for the weaker prices.

Teck said second quarter profits dropped 65% to $268 million or 46¢ per share, down from $756 million or $1.28 per share, while revenues for the quarter fell to $2.6 billion, compared with $2.8 billion a year ago.

The fall comes despite record copper production of 90,000 tonnes for the quarter. That production growth is expected to continue over the next two quarters so the company will have to hope that the 14% drop in copper prices and increased costs don’t continue along with the production ramp-up. Copper production represents roughly one third of Teck’s business.

Coal production was also higher, nearing its target of 28 million tonnes but coal prices were down 26% from last year to an average of US$202 per tonne over the quarter.

And while such coal production was impressive, it was still effected labour issues at Canadian Pacific Railway (CP-T) that shutdown rail operations from Teck’s Elk Valley mines. The nine day incident cut production by 700,000 tonnes.

Teck says it will deliver five million tonnes of coal in the third quarter at an average price of US$198 per tonne. The company kept its cost guidance for 2012 in the $72-$78 per tonne range with transportation costs estimated to be $34-$38 per tonne.

The chief culprit behind the drop in coal prices and profits is a reduction in Chinese steelmaking. Steel production in China makes up an estimated 40% of global demand for coal and consequently has a big impact on prices.

Teck says it still believes the medium to long term fundamentals for steelmaking coal, copper and zinc, are strong but it admitted that the recent weakness in the market could persist in the short term.

In light of that grim near-term outlook Teck will rein in capital spending somewhat. It previously said it would spend $2.3 billion on capex this year, but now says the number will be reduced to roughly $2.1 billion.

The company emphasized that it is still in strong financial shape and is well positioned to ride out the current rough economic times.

In Toronto on July 25, Teck shares were off 7% or $2.14 to $27.27 on 6.45 million shares traded.