Teck resurrects plans to expand coal output

Andy Hoffman
Globe and Mail
Friday, Jul. 24, 2009

Mining company scrambling to fill dramatic increase in orders from Asian buyers

Teck Resources Ltd. (TCK.B-T26.450.451.73%) is dusting off plans to expand its coal operations and meet a sudden increase in demand, marking yet another milestone in the dramatic resurrection of Canada's largest base metals miner.

Less than six months ago, a debt-laden Teck was forced to reduce coking coal production by 20 per cent as steel makers shuttered mills in response to the global recession.

But an abrupt upswing in buying from China and other Asian customers in recent weeks now has the Vancouver company scrambling to fill orders.

“There is no question demand has picked up strongly. The issue, actually, is trying to fill that demand. We're finding it is more and more difficult to increase production,” Teck chief executive officer Don Lindsay said on a conference call to discuss the company's second-quarter profit report.

Teck's desire to augment coal production offers fresh evidence of a stunning turnaround for both the company and the commodity itself.

While it is maintaining its previous coal production guidance of between 18 million and 20 million tonnes in 2009, Mr. Lindsay has asked executives to revive once-shelved expansion plans that would boost Teck's production to 28 million tonnes by 2012 and 30 million by 2014.

The cost of increasing output at the company's coal mines in British Columbia and northern Alberta was previously pegged at between $400-million (U.S.) and $500-million.

“We don't think it is a temporary phenomenon and I have asked our coal management team to get those plans out again and refreshed,” Mr. Lindsay said.

The ill-timed $14-billion (Canadian) acquisition of Fording Canadian Coal Trust in 2008 that was consummated just weeks before the market crash last fall saddled Teck with nearly $10-billion (U.S.) in debt. It left the miner, which also produces copper, zinc and lead, heavily exposed to coal as demand for the key ingredient in steel making fell off a cliff.

While coal prices had surged to a record $300 a tonne in 2008, many analysts feared they would plunge to about $100 a tonne for the 2009 coal year contract, which is negotiated annually with customers.

Teck was forced to sell assets, issue debt securities and sell a 17-per-cent interest in its class B shares to China's sovereign wealth fund China Investment Corp. to get its balance sheet in order.

But the company has also benefited from a better-than-expected recovery in the coking coal sector.

Teck has settled the bulk of its 2009 coal sales for $128 a tonne, a far better price than most experts had been forecasting.

While coal demand in North America and Europe has remained weak as steel production has dropped by about 40 per cent, a spate of buying by China and more recently, Brazil, has left coal producers struggling to fill orders and pushed spot market prices to about $140 a tonne.

Teck's rationalization for the costly Fording deal, which gave it full control of the Elk Valley coal operations, was a belief that the consolidation of China's steel industry and a shift in production to supersized mills on the coast would boost demand for its seaborne coking coal.

The bet appears to be paying off. While China bought just 3.2 million tonnes of seaborne coking or metallurgical coal in 2008, it is on track to purchase about 20 million tonnes this year.

“We do believe the demand will be there. There is no doubt the plans for building very large steel plants on the coast of China are continuing and that will have a significant effect on long-term demand for seaborne met coal,” Mr. Lindsay said.