Teck Resources Earnings: Driven Down by Lower Metallurgical Coal Sale Volumes and Prices

No-moat Teck Resources’ TECK.B third-quarter 2023 result was lower than our expectations. Adjusted EBITDA of CAD 1.2 billion fell 36% on third-quarter 2022. Teck’s metallurgical coal business accounted for about two-thirds of EBITDA, with copper and zinc roughly splitting the remainder. Adjusted net profit after tax of CAD 400 million, or CAD 0.76/USD 0.55 per share, declined 57% on last year, driven by lower metallurgical coal prices and sales volumes along with higher unit cash costs. Lower earnings and temporary increases in working capital drove negative free cash flow of about CAD 650 million, but net debt remains reasonable at about 1.1 times trailing 12 months EBITDA.

We incorporate updated guidance and modestly reduce our fair value estimate for Teck to USD 39 per share, down from USD 40. This is driven by lower near-term earnings after Teck guided to lower metallurgical coal and copper sales in 2023, with the latter partly due to delays in ramping up production at its new 60%-owned Quebrada Blanca 2 mine in Chile. The cost of finishing construction at QB2 has also risen again. While Teck also encountered delays in its early attempts to expand QB2, we think these are minor issues. Though, we think they likely drove the 9% fall in Teck shares in response to its result, with Teck shares now trading at about a 10% discount to our fair value estimate. We now forecast 2023 EPS of CAD 5.99/USD 4.37, down 7%.

Metallurgical coal sales of 5.2 million metric tons were 15% below our estimate and we reduce our forecast 2023 sales to 23.5 million metric tons, down from 24.5 million metric tons. Realized coal prices of about USD 230 per metric ton fell 25% on 2022. However, as futures have risen recently we forecast realized coal prices of about USD 270 per metric ton for 2023, compared with the average of USD 260 so far in 2023. Lower forecast sales are hitting unit cash costs, but our assumed unit cash cost of about CAD 147 per metric ton was already modestly above guidance.