Canadian National Railway Co. said on Wednesday it will begin hauling steelmaking coal for Teck Resources Ltd. to West Coast ports from Kamloops, B.C., in April, 2021, winning part of a contract long held by rival Canadian Pacific Railway Ltd.
The announcement is a bit of good news for CN, which has slashed its 2019 profit outlook as it recovers from an eight-day train conductor strike that came amid a freight slump that has spurred Canada’s biggest railway to lay off about 1,600 employees.
The Teck contract to haul coal to Vancouver and Prince Rupert is worth $160-million to $250-million in yearly revenue to CN, up from the less-than $25-million Teck currently spends on CN’s services, JJ Ruest, chief executive officer of CN, said at an investors conference in Palm Beach, Fla., on Wednesday.
The agreement requires CN to spend $125-million in railway improvements to ensure Teck can export higher volumes of coal and take advantage of the expansion under way at Neptune Terminals’ coal port on Vancouver’s north shore. Mr. Ruest said this amount will be shared with the port authorities and the federal government.
“We expect this will lower our total transportation costs and improve overall rail and terminal performance,” Don Lindsay, Teck’s CEO, said in a statement.
CP said the loss of the Teck contract will reduce its profit by 1 per cent.
CP owns the tracks to Kamloops from the four Teck coal mines in B.C., and so it will retain that shipping contract, which accounts for two-thirds of the distance on routes to the West Coast.
Keith Creel, CEO of CP, played down the significance of the lost business at the conference in Palm Beach. He said the loss of the Teck deal, which he described as low margin, will free up space on CP’s premium-priced railroad to the Port of Vancouver. “I’m not losing sleep over it,” Mr. Creel said. “I’ll probably let Don [Lindsay] explain Teck’s strategy because I sometimes scratch my head thinking about it.”
Christian Wetherbee, a stock analyst at Citigroup Global Markets in New York, called the announcement “a big win” for CN. Mr. Wetherbee said Teck was likely driven by a desire for greater export access at the Neptune terminal on Vancouver’s North Shore and the port of Prince Rupert, rather than a vote on rail service or pricing. Both export gateways are served by CN.
Walter Spracklin, an analyst at Royal Bank of Canada, agreed the move was positive for CN, but said the overall effect on either company is minor. In a note to clients, Mr. Spracklin said the switch makes a lot of sense for Teck, reducing its reliance on one rail company while likely securing a lower price from CN.
Sam Crittenden, analyst with RBC Dominion Securities Inc., said in a note to clients the contract gives Teck extra capacity and flexibility for its coal shipments.
Teck is in the midst of building an expansion of the Neptune terminal that is expected to bring down costs and improve efficiencies.
The miner recently jacked up the construction estimate for the project to about $775-million, from an earlier $400-million estimate. Teck hopes to finish construction in early 2021.
Mr. Creel said CN and Teck will have to make a “significant investment” in track at the Kamloops interchange in order for it to be able to handle the swap of the coal trains without harming the traffic on CP’s main line.
“I reminded Don [Lindsay] of this and I’ll remind CN of this. That interchange is not designed to handle that kind of tonnage. It’s going to require significant investment,” he said. “And we’re going to require that Teck in partnership with CN makes that investment to make sure we protect the fluidity of that network because that is our main line. We have to.”
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