Teck Resources (TECK) Issues Q4 Steelmaking Coal Market Update

Teck Resources Ltd. TECK recently announced that it has augmented sales of steelmaking coal sales to China in the ongoing quarter to capitalize on higher demand in the country. These sales were made at premium prices compared to other markets. The company affirmed fourth-quarter sales volume guidance at 5.8-6.2 million tons for the Steelmaking Coal segment. Notably, management stated that 20% of these sales will now stem from Chinese customers. Banking on demand and higher prices in China, the company anticipates to make higher sales to China in 2021.

The company noted that since the middle of the ongoing quarter, pricing in China for steelmaking coal was trending upwards. The company had already concluded a major portion of its sales by then. However, the company made additional spot sales to China and achieved an average premium more than $35 per ton above Australian Free on Board (“FOB”) spot pricing at the time each sale was concluded.

The company’s contract sales to Chinese customers are priced on the basis of Cost and freight (“CFR”) China price assessments and its three recent cargos were sold at prices between $160/ton and $165/ton CFR China. Despite drop in coal prices in markets outside China where the majority of Teck Resources’ steelmaking coal is sold, the company anticipates realized coal price in the fourth quarter relative to benchmark to be in line with the long-term average of approximately 92%.

Following its discussion with customers, the company is restructuring sales book and is targeting sales to China of approximately 7.5 million tons in 2021. However, the company cautioned this is subject to a range of risks including general market and economic conditions, general and specific port restrictions, Chinese regulation and policies, and normal production and operating risks. These sales will be made at CFR China pricing, which is currently at a premium of approximately $50/ton to Australian FOB spot pricing.

Teck Resources’ adjusted earnings per share was 18 cents in third-quarter 2020, reflecting a decline of 67% year over year as a result of significant decreases in steelmaking coal and blended bitumen prices compared with the same period last year, partially offset by an increase in copper prices. Third-quarter steelmaking coal sales were 5.1 million tons, which was within its guidance range and slightly higher on a sequential basis. The Steelmaking Coal segment reported sales of C$699 million ($526) million in the third quarter, reflecting a year-over-year plunge of 45.7%. The segment reported an operating loss of C$98 million ($74 million) against the operating profit of C$402 million ($305 million) in the prior-year quarter.

Amid the COVID-19 related uncertainty, the company has intensified its focus on cost-reduction program. Since the commencement of the program in fourth-quarter 2019, it has so far achieved approximately $270 million in operating-cost reductions and $550 million in capital-cost reductions. It also continues to implement its innovation-driven efficiency program RACE21 that is expected to improve proficiency and productivity across business. The company targeted annualized EBITDA improvements totaling $1 billion by the end of 2021. Teck Resources has a portfolio of world-class assets in stable jurisdictions and a solid pipeline of projects, which will aid growth.

Price Performance

The company’s shares have declined 11.6% year-to-date compared to the  industry’s growth of 6.9%.

Zacks Rank & Stocks to Consider

Teck Resources currently sports a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space are Agnico Eagle Mines Limited AEM, Clearwater Paper Company CLW and Silvercorp Metals Inc. SVM. While Agnico Eagle sports a Zacks Rank #1 (Strong Buy), Clearwater Paper and Silvercorp Metals carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Agnico Eagle has an expected earnings growth rate of 103.1% for 2020. Its shares have returned 5% year to date.

Clearwater Paper has an expected earnings growth rate of 1961% for 2020. The company’s shares have gained 66% so far this year.

Silvercorp has an expected earnings growth rate of 40% for 2020. The company’s shares have surged 17% year to date.

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