Teck provides sales, production and guidance update

Strong steelmaking coal pricing and increased sales should result in strong cash flow in 1H22

Demand for the company’s steelmaking coal remains strong and the FOB price has risen from US$356/t at the end of December to US$445/t. At the same time, record high clean coal inventories at its mines is expected to result in sales exceeding production by 1.2 – 1.5 million t in 2022. The strong pricing environment and increased sales volumes should result in strong cash flow in 1H22.

Weather conditions have affected logistics

Since the last guidance update on 5 December 2021, weather conditions have continued to negatively affect infrastructure recovery efforts in B.C. Interruptions and substantial reductions to rail service and port activities persisted from mid-November into the first two weeks of January as extreme cold-weather conditions followed heavy rains and mudslides, which affected critical transportation corridors. The provincial state of emergency declared on 17 November 2021 was lifted on 18 January 2022.

Steelmaking coal

As a result, the realised 4Q21 steelmaking coal sales were 5.1 million t, slightly below the low end of the company’s previously revised guidance of 5.2 – 5.7 million t. Its 2021 steelmaking coal production was 24.6 million t, within Teck’s previously revised guidance of 24.5 – 25 million t. Strong logistics chain performance leading up to the heavy rain events, including at its expanded Neptune port facility, resulted in historically low clean steelmaking coal inventories at its operations, mitigating impacts on production volumes. However, due to ongoing weather-related logistical challenges which have continued through January, clean steelmaking coal inventories at the company’s mine sites are currently near record-high levels. Further transportation disruptions have the potential to require production cutbacks to manage inventory levels. CN and CP reported meaningful progress on recovery in mid-January, with demonstrable improvements to train fluidity last week. The company expects to substantially recover delayed 4Q21 sales in 1H22.

Despite 4Q21 impacts of rail and port disruptions on sales, 2021 unaudited adjusted site cash cost of sales and transportation costs are CAN$65 and CAN$44t, within the company’s previous guidance ranges of CAN$64 – CAN$66 and CAN$44 – CAN$46/t, respectively. Logistics challenges and inflationary pressures drove higher fourth quarter adjusted site cash cost of sales and transportation costs of CAN$72 and CAN$49/t, respectively, above the upper range of the company’s annual guidance.

Increased costs in the fourth quarter were more than offset by continued strong prices. Realised steelmaking coal prices in 4Q21 averaged US$351/t. The increase in steelmaking coal prices from the third quarter further resulted in positive pricing adjustments of approximately CAN$70 million.

Copper

The logistics chain disruptions had minimal impact to production at Highland Valley Copper, though the disruptions did result in sales of copper in concentrate from the operation being 5600 t lower than production in 4Q21. The shortfall in sales vs production volumes at Highland Valley Copper was partially offset by strong sales at our other operations, and total copper in concentrate sales were only 1500 t lower than production in 4Q21.

Overall, inflationary pressures and workers’ participation related to strong copper prices resulted in fourth quarter net cash unit costs of US$1.52/lb for the copper business unit.

COVID-19

The recent surge in COVID-19 cases has the potential to have a negative impact on Teck’s operations. An increase in cases in southeastern British Columbia has resulted in rising absenteeism at its steelmaking coal operations in the Elk Valley. While the absenteeism has so far not had a major impact on production, the situation poses a risk to 1Q22 production. However, in recent days, the company has seen some improvement, with the number of employees returning from COVID-19 isolation exceeding the number of new cases.

At Teck’s QB2 project in Chile, it achieved its best quarter to date in 4Q21 with some of its strongest rates of progress in December. However, during January, a significant rise in COVID-19 cases in Chile has resulted in an increase in absenteeism.

Outlook

Like others in the industry, and as previously disclosed, the company is are seeing inflationary cost pressures, notably in diesel prices, supplies and labour costs. Increases experienced in 4Q21 operating results across the business are expected to continue into 2022.

Sustaining capital spending is expected to increase in 2022 over 2021 levels due to one-time projects, including the relocation of the maintenance and office facilities at the Elkview mine to allow access to the next phase of mining, a major smelter turnaround at Trail to replace the Kivcet furnace hearth at the end of its 20-year useful life, and the haulage truck rebuild programme, inflationary pressures, and the inclusion of sustaining capital for QB2 for the first time. In total, the company expects these factors to increase 2022 sustaining capital by approximately CAN$500 million over 2021 levels.

Construction on QB2 continues to progress as Teck positions for start-up in 2H22. COVID-19 related capital costs have experienced ongoing cost pressures as a result of continued absenteeism and labour inefficiencies related to COVID-19 and contractual concessions have been required to manage these impacts on contractors. Given its experience with the sudden onset of Omicron, the company has modified its prior assumptions and now assume that the impacts of COVID-19 will not end prior to the completion of construction. Teck is continuing to manage these costs and, to counter the adverse effects associated with construction in this environment, have put in place a variety of mitigation measures and incentives, many of which are aimed at attracting talent, employee retention and minimising absenteeism. Based on its current assumptions, including with respect to exchange rates, the company is updating its COVID-19 capital cost guidance to US$900 – US$1100 million from its previous estimate of US$600 million. As noted previously, certain non-COVID-19 cost pressures related to weather and subsurface conditions, are currently estimated to require additional contingency of up to 5% of the capital estimate of US$5.26 billion, unchanged from 3Q21 guidance. Teck expects to spend approximately CAN$2.2 – CAN$2.5 billion of QB2 development capital on a consolidated basis in 2022, inclusive of COVID-19 capital.

4Q21 and full year 2021 financial results are scheduled for release on 24 February 2022.

Read the article online at: https://www.globalminingreview.com/mining/01022022/teck-provides-sales-production-and-guidance-update/