Teck Resources Ltd., after fighting through production and shipping problems early this year, is set to capitalize on the surging price of coal as global demand from steel makers stays strong amid constrained supply.
The Vancouver-based miner booked a profit of $450-million in the first quarter, but as the price of coal pushes toward record levels, analysts predict Teck's profit in subsequent quarters this year will be roughly double that.
The price of metallurgical coal - a key factor in steel making - is rising because of the extended impact of the severe floods this year in Australia, the world's top exporter. Major producers such as Rio Tinto PLC have pushed through price increases of roughly 50 per cent for the second quarter compared with the first.
"We anticipate improved earnings from coal in the second quarter," Teck chief executive officer Don Lindsay said in a statement as the company released its quarterly results late Monday.
The prospect of booming profits comes as some analysts worry about a peak in the mining cycle, with the possibility that China's efforts to cool its economy and tame domestic inflation will hurt companies such as Teck. Steel makers in China are driving demand for commodities like coal, as well as iron ore, another ingredient used to produce steel.
Still, analyst John Hughes of Desjardins Securities said global demand from steel makers has pumped coal prices, not just demand from China. Teck's recovery from its struggles in the first quarter is well-timed, he said.
"Teck is entering one of the most positive coal markets they've ever seen," Mr. Hughes said. "The problems we've been hearing about largely are being left behind in the first quarter."
As January floods ravaged Australia, Teck battled winter weather in Canada, which hurt coal production. Major avalanches in the Rogers Pass region in January hampered rail shipments of coal through British Columbia to the coast for export. A mechanical failure at the coal-export terminal south of Vancouver, also in January, constrained shipping capacity.
Output was further cut by a 10-week strike at one of Teck's mines in southeastern B.C., a dispute that began in late January and was settled in April.
Stock of Teck hit an all-time high of $64.62 on Jan. 12. The shares have drifted lower since early February and the stock on Monday closed at $48.77, down $1.06. Coal accounts for about half of Teck's business.
Teck produced 5 million tonnes of coal in the first quarter.
Teck has said it will produce about 24 million tonnes of coal this year. Average production in each of the coming quarters will be more than 6 million tonnes, about 20-per-cent higher than in the first quarter.
The price of coal has surged to record territory, according to research from Macquarie Bank. Rio Tinto has contracts to sell metallurgical coal for $330 (U.S.) a tonne in the second quarter, higher than its previous best, which was reached in 2008.
Mr. Lindsay on Monday said Teck has deals for $330 per tonne and higher for its "highest-quality products."
Because of delayed sales from the first quarter, Teck expects its average price in the second quarter will be about $275 per tonne. The first-quarter average was $207.
Adjusted quarterly profit in the first quarter was $450-million (Canadian), or 76 cents a share. Even though Teck struggled in the quarter, the result is more than double the $198-million profit for the first quarter of 2010, because of steadily rising coal prices.
A move to go big in coal has been the defining theme of Don Lindsay's tenure as chief executive officer. In 2008 Teck paid $14-billion for Fording Canadian Coal Trust, largely financed by debt, and was nearly pushed over the brink during the financial crisis. The company's stock fell to about $3.
Teck's second key commodity, copper, also has better prospects later this year. Copper has traded at more than $4 (U.S.) a pound this year, record territory for the commodity, but weather issues also hit this segment in Teck's first quarter, with heavy rainfall at the Quebrada Blanca mine in Chile hurting production.
David Ebner