Teck Resources Ltd. expects to ship less coal than forecast this year due to shrinking demand for steel. But the diversified miner is still counting on China to drive long-term growth.
Vancouver-based Teck signalled its confidence in the commodities sector by hiking its dividend, hours before reporting its third-quarter profit more than doubled on strong prices for metallurgical coal, its largest commodity used in steelmaking.
Steel makers have turned cautious on the global economy and cut production, causing Teck to trim its annual coal sales for the second time since July to a range of between 22.2 million and 23 million tonnes, down from low end of a range of between 23.5 million to 24.5 million tonnes.
Still, Teck chief executive officer Don Lindsay remains confident that demand from China, the world's largest steelmaker, will remain robust.
"The steel companies may have been quite conservative about purchasing coal, but they haven't shut production down that much," Mr. Lindsay told investors on Thursday.
It's a sign that steel makers are drawing down inventories as coal prices fall, hoping to buy it at a lower price later, he said.
Coal prices have fallen sharply since reaching a high of around $330 (U.S.) per tonne in the second quarter. Prices now are about $285 per tonne and some analysts expect them to fall to about $240 by year end.
Once prices appear to have stabilized, Mr. Lindsay believes customers will begin to restock, particularly if supply is constrained.
"With more confidence in the markets as we are seeing today, maybe the customers will decide 'Well, that's enough holding back, maybe we'd better buy some just for insurance purposes.'"
Teck's bullish coal outlook is in line with other big-name producers, including Anglo American PLC which said on Thursday it may spend up to $15-billion on expanding its coal operations in Australia over the next eight years.
That expansion, along with plans set out by other major coal miners, comes amid reports that China's Guangdong province may increase coal imports by about 15 per cent, to 44 million tonnes, this year. China's National Development and Reform Commission made the statement on its website on Thursday, according to Bloomberg News.
Teck's belief in future Chinese demand for commodities is backed by its relationship with 20-per-cent shareholder, China Investment Corp. "They have a lot of confidence in the Chinese economy," Mr. Lindsay said of CIC.
"There will always be volatility, there will always be periods of time when people have less confidence, but the macro trend seems firmly in place for copper consumption, steel production and thereby coking coal demand," he said. "We don't see anything has really changed very much."
Investors, buoyed by a surge in global markets on Thursday, also shrugged off Teck's lower coal sales guidance, as well as a cut in copper production from its Quebrada Blanca mine in Chile. Teck shares jumped 8 per cent to close at $40.35 on the Toronto Stock Exchange.
BMO Nesbitt Burns analyst Meredith Bandy said Teck and other coal stocks have been hit hard in recent weeks because of market worries about another global economic slowdown. "Teck's more cautious outlook may be priced into the stock," she said in a note.
Teck's 33-per-cent dividend hike, to 40 cents per share, likely helped lift the share price. The move is a way to "signal confidence and financial strength to the market," Ms. Bandy said.
On Thursday, Teck reported a 40-per-cent jump in third-quarter revenues, to $3.38-billion, compared with the same period last year. Its profit was $839 or $1.37 per share, compared with $340-million or 54 cents per share a year earlier.