Shares of Teck Resources Limited (NYSE:TECK) fell 14.4% in May. The price gyrations seen over the year-to-date period through May, however, are more telling of what's going on. For example, Teck started the year heading lower, the shares picked up again in March, and then resumed their decline in April and May. That roughly tracks the moves of the metallurgical coal market.
Late last year, metallurgical coal started to rise because of government moves in China to limit production. When China reversed course, prices started to fall. More recently there was a major weather event in Australia that pushed prices higher again, only to see them fall as the logjam that Cyclone Debbie created started to subside. Sadly, there's nothing Teck can do about any of that...it just has to ride out the volatility.
This is where the company's first-quarter earnings come in. In late April, Teck reported that cash flow from operations had increased to 1.3 billion Canadian dollars, compared to just CA$373 million in the year-ago period. That huge increase was partly driven by the late-2016 price spike in met coal, as well as price gains in copper and zinc, the two other metals Teck mines. The miner used that cash to buy back roughly CA$1 billion in long-term debt in March. At this point, the company only has around CA$160 million in debt due before 2021.
That's plenty of time for the company's investment in the Fort Hills Oil Sands project, a joint venture with Suncor Energy and Total, to start contributing to the top and bottom lines. At roughly 83% complete, Fort Hills is expected to see first oil in late 2017, with nearly full production reached over the following 12 months. Teck, at this point, should have no problems affording its share of the costs for what's left of this project. And it will add a fourth major commodity to its portfolio to help smooth the volatility of the met-coal market.
Despite the ups and downs of the share price, there are good things going on at Teck. Management is taking a prudent course to create a solid foundation, and a notable new business (oil) is nearly up and running. That said, there's no way around the fact that volatile met-coal prices are going to result in sizable price swings for shareholders. However, with first oil from the Fort Hills project on the horizon, Teck might be worth the ride.