UPDATE 3-Teck warns of soft coal market, shares tumble

Thu Feb 7, 2013 2:33pm EST

Related Topics

* Adjusted profit C$0.61 vs Street view C$0.48

* Teck sees weak coal market through first half 2013

* Copper production expected to fall in 2013

* Company eyes potential iron ore, copper deals

* Shares down 5.95 percent at C$34.46 on TSX (Adds analyst comment, CEO comment)

By Julie Gordon

TORONTO, Feb 7 (Reuters) - Teck Resources Ltd warned on Thursday that global economic uncertainty would weigh on demand for coal through the first half of 2013, sending shares of the diversified Canadian miner down more than 5 percent.

The company plans to produce just 24 million to 25 million tonnes in 2013 - or at least 2 million tonnes shy of capacity - because demand for the steelmaking ingredient remains soft. It also sees a drop in copper output this year.

Teck issued the weak forecast as it reported a sharp drop in fourth-quarter earnings and blamed it in part on sagging coal prices, though production cost cuts and strong copper sales softened the blow. Adjusted earnings beat analyst expectations.

Even so, the coal outlook - which calls for about the same output as in 2012 - deflated investor sentiment.

Shares were down 5.95 percent at C$34.46 on Thursday afternoon on the Toronto Stock Exchange.

While the Vancouver-based company believes the long-term fundamentals for steelmaking coal are favorable, it said recent weakness should persist through the first half of 2013 at least.

"They're guiding to basically flat coal shipments, which is maybe to be expected," said BMO Capital Markets mining analyst Meredith Bandy. "But that was below our estimate."

Bandy, who does not expect to change her valuation of the company after the results, said the stock has had a good run. Teck's shares are up more than 30 percent since hitting a 52-week low at C$26.02 in early September.

"There's not as much upside left to the name as there was a few months ago," she said.

COST CUTTING

While the 2013 outlook was not as strong as the market hoped, Teck managed to carry through on its promise to slash operating costs in the coal unit in the latest quarter.

"Sales of all three of their major products - coal, copper and zinc - exceeded expectations, and they benefited from a huge sequential drop in coal production costs," said Garrett Nelson, a mining analyst with BB&T Capital Markets.

Operating costs for Teck's coal unit fell 17 percent in the fourth quarter compared with the average over the first three quarters of 2012, as the company implemented a hiring freeze, shut down some equipment and cut down on its use of outside contractors.

"It's very rare that you see this kind of sequential drop in production costs," said Nelson. "It was very, very positive."

Escalating operating and capital costs have weighed heavily on the mining industry in recent years, eroding profits and prompting miners to promise cost-cutting measures and improved returns to shareholders.

Earnings attributable to shareholders plunged to C$145 million, or 25 Canadian cents a share, from C$637 million, or C$1.08, a year earlier.

Adjusted to remove one-time items, profit dropped to C$354 million, or 61 Canadian cents, from C$613 million, or C$1.04, a year earlier.

On that basis, analysts on average had expected earnings of 48 Canadian cents per share, according to Thomson Reuters I/B/E/S.

Revenue fell 10 percent to C$2.7 billion, while analysts, on average, had forecast C$2.55 billion.

CAPITAL SPENDING

In October, Teck deferred some C$1.5 billion in capital spending planned through 2013 and said it would spend C$1.8 billion on capital projects in 2012.

The company has now forecast some C$2 billion of capital spending in 2013, with the bulk of spending on its copper unit.

Copper production, which hit 373,000 tonnes in 2012, is expected to fall to 340,000 to 360,000 tonnes this year. With output falling due to aging assets and lower grades, the company is eyeing its advanced development projects.

Teck plans to file a revised environmental assessment for its major Quebrada Blanca phase 2 expansion in Chile in the second quarter and a feasibility study for its delayed Relincho project, also in Chile, is expected by year end.

Fourth-quarter copper production rose to 103,000 tonnes from 89,000 tonnes, while coal production shrank to 6.4 million tonnes from 6.7 million tonnes.

The average price of copper rose 6 percent to $3.59 per pound from $3.40, while the average coal price fell 37 percent to $159 per tonne from $253.

Teck, which also owns zinc and energy assets, continues to look at acquisition opportunities and has a renewed interest in iron ore opportunities after signaling in October that valuations in the sector were simply too high.

"I enjoyed a good holiday from iron ore for quite a few weeks there, but values have come down," said Chief Executive Don Lindsay on a conference call. "There's a few new assets that have come available, so we still think that's a good fit in our portfolio."

Lindsay said copper remains a priority. With production declining over the next few years, Tech might consider an asset to fill that gap if the price was right.

(Reporting by Julie Gordon. Editing by Jane Merriman, Lisa Von Ahn, Chizu Nomiyama and Andrew Hay)

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