Teck posts lower Q1 earnings, slashes dividend

Teck Resources (TSX: TCK.B; NYSE:TCK) cut its semiannual dividend and posted lower-than-expected first-quarter earnings, as the slump in commodity prices continued.

Canada’s largest diversified miner reduced its semiannual dividend to 15¢ a share — down 67% from 45¢ a share — to focus on cash preservation.

“We believe this is an appropriate level in light of the current market condition, as it preserves flexibility and the funding of our capital program, and helps maintain the strength of our balance sheet,” Don Lindsay, Teck’s president and CEO, said on a conference call.

CIBC analyst Tom Meyer estimates the dividend cut would save the firm $345 million a year, and applauds the move. 

BMO analyst Aleksandra Bukacheva writes that the revised annual dividend of 30¢ per share “represents a yield of 1.8%, closer in line with the copper miners’ average compared to 5.3% previously, which was more in line with the diversified miners’ average.”

 Both analysts note Teck’s quarterly financials were below their expectations. The senior producer of coal, copper and zinc reported a 39% year-over-year drop in adjusted profit of $64 million, or 11¢ per share. Meyer had expected adjusted earnings per share of 16¢, slightly above Bukacheva’s, and the 15¢ consensus.

Adjusted profit declined $41 million from the same period last year. “This was driven, of course, by lower coal and lower copper prices, partly offset by higher zinc prices and the benefits of a stronger U.S. dollar,” Lindsay says.

Average realized prices for coal and copper fell 10% and 18% to $128 per tonne and US$2.67 per lb. from the year earlier, as concerns of oversupply remained. The average zinc price increased 7% to US97¢ per lb.

To offset the weaker coal and copper prices, Teck lowered its unit costs, noting the weak Canadian dollar and lower oil price helped with its efforts.

 The company posted record first-quarter coal output and sales of 6.8 million tonnes at unit costs of $85 per tonne, an 11% improvement from a year ago.

Due to the oversupply in the coal market, Teck expects second-quarter sales of 6 million tonnes, noting demand within China remains tight, but “good” outside of the world’s largest steelmaking country.

Quarterly copper output fell 5% to 81,000 tonnes and sales dropped 14% to 71,000 tonnes, owing to lower planned grades. Copper unit costs improved 6% to US$1.53 per lb., after by-product credits.

Total zinc production and sales jumped 6% to 227,000 tonnes and 213,000 tonnes. (The amounts include zinc concentrate and refined zinc.)

Total gross profit before depreciation and amortization was $685 million, including $295 million for coal, $210 million for copper and $179 million for zinc. Compared to last year’s $734-million gross profit, the margin stayed flat for coal, tumbled 34% for copper and surged 48% for zinc. Quarterly revenue dropped 3% to $2 billion.

Teck has reiterated its 2015 production and cost guidance of 26.5 to 27.5 million tonnes coal at cash costs of $86 to $93 per tonne; 340,000 to 360,000 tonnes copper at a cash cost before by-product credits of US$1.75 to US$1.85 per lb.; and 635,000 to 665,000 tonnes zinc. 

Its annual capital budget is $2.3 billion, of which $850 million will fund its 20% share of the Fort Hills oilsands development project in Alberta. Engineering at Fort Hills is three-quarters finished. Suncor Energy (TSX: SU; NYSE: SU) and Total E&P Canada Ltd., a subsidiary of Paris-based Total (NYSE: TOT), hold 40.8% and 39.2% of the project.

Fort Hills could start production as early as in late 2017. Once in full swing, Teck’s estimated production will be 13 million barrels of bitumen a year.

The company ended the quarter with a $1.6-billion cash balance and an undrawn US$3-billion line of credit. It expects to exit 2015 with a $1-billion cash balance.

The stock closed April 21 down 6% at $15.83.

BMO’s Bukacheva has an $18 target and “market perform” rating on Teck. “The remaining oversupply overhang in the coking coal market is expected to put pressure on the coal price and, in turn, Teck’s share price in the near term,” she cautions.

However, CIBC’s Meyer points out Teck “is more about the improving zinc, copper and energy outlook, and less about met coal,  given the ongoing weakness. At current valuation, a value story is developing. That said, it is hard to see outperformance in the near term.” Meyer has a $22 target and a “sector performer” rating.