Call it a sign of how low expectations have fallen for commodity producers: On Thursday, Teck Resources Ltd. wrote down the value of its assets by $2.2-billion, announced a multibillion-dollar quarterly loss – and saw its share price go up.
Stock in Canada's largest diversified miner gained 5 per cent as the company's quarterly revenue and adjusted earnings beat modest forecasts.
The company, which lost its investment-grade status last month, also provided reassuring news about its cash position. It ended the quarter with $1.8-billion in cash, which is more than the $1.5-billion it estimates is required to fund its share of a major oil-sands project.
However, the big writedown serves as a reminder of the brutal market conditions that confront commodity producers as China's slowing economy depresses demand for raw materials. The Bloomberg Commodity Index, which tracks prices for a basket of metals, energy products and agricultural goods, recently hit a 15-year low.
"The best and most effective cure for low commodity prices has been and always will be low commodity prices," Teck CEO Don Lindsay told analysts in a conference call.
So far, though, there is little sign that producers are shutting down enough output to raise prices.
Teck's writedown reflects lower assumptions for what its core products will fetch in coming years. Two commodities – copper and steel-making coal – typically account for more than two-thirds of the miner's operating profit. Prices for both have been in freefall since the global commodity boom crested in 2011.
The company's diminishing income coincides with a cash-gobbling expansion into petroleum production. It owns 20 per cent of the oil-sands development that Suncor Energy Inc. is constructing at Fort Hills in Alberta. Teck expects to pour $850-million into the project this year, but production isn't expected to start flowing until late 2017.
The size of the Fort Hills expenditures makes it imperative for Teck to conserve money in other areas. In April, it slashed its dividend by two-thirds. It also ordered temporary shutdowns at some of its Canadian coal mines, and combined a Chilean mining project with a nearby venture controlled by Goldcorp Inc. to reduce infrastructure costs.
To raise cash, Teck has been striking so-called streaming deals in which the company sells future production in exchange for money now. In July, it bulked up its cash position by $162-million (U.S.) after striking a deal with Royal Gold Inc. for a stream of gold production from a Chilean mine. Earlier this month, it agreed to sell a silver stream from a Peruvian mine to Franco-Nevada Corp. for $610-million.
So far the moves have failed to placate credit rating agencies. Moody's, Fitch and Standard & Poor's reduced Teck's debt to junk status in September, citing the miner's financial leverage, as well as its vulnerability to further falls in commodity prices.
The writedown this quarter doesn't affect Teck's cash but adjusts the paper value of its assets to reflect lower expectations for future prices. As a result of the writedown, Teck's loss for the quarter came to $2.1-billion (Canadian), or $3.73 a share. Excluding the writedown, it earned 5 cents a share, well above the 1 cent that analysts had predicted.
The company says it has made significant progress in cutting costs. For instance, it has trimmed coal unit costs over the past year by roughly $20 (U.S.) a tonne to $64 a tonne.
That positions it well for an upturn in commodity prices – if and when it comes. The problem is that despite large cuts to worldwide production of steel-making coal, demand from China has been falling at a similar pace, the company said.
It remains confident, however, that the commodity cycle will eventually turn to a more positive phase.
"When we deal with large institutions such as banks and other large companies involved in long-term financing … they don't believe the cycle has disappeared," Mr. Lindsay said. "They fully recognize there are down cycles and up cycles."