Teck Resources (TECK -1.24%) is Canada's largest diversified resources company and currently mines steelmaking coal, copper, and zinc. It will add a fourth major business segment later this year when Suncor Energy's (SU 1.29%) Fort Hills oil sands mine comes on line. That said, despite all that diversity, the company's largest moneymaker is steelmaking coal by a wide margin. Last year, that commodity contributed 53% of its gross profit and it supplied nearly 75% of the total during the first quarter of 2017 due to a spike in steelmaking coal prices. Here's a closer look at why this type of coal is so important to Teck and whether there is any likelihood that another commodity might one day unseat it as its profit driver.
Digging up the right kind of coal
Teck Resources is the world's second-largest exporter of seaborne metallurgical coal, or steelmaking coal, producing it from six sites in Western Canada. It's a higher-grade coal, then the thermal coal burned to generate electricity, making it a crucial component along with iron ore in making steel, which is an essential material for constructing buildings, bridges, pipelines, and a whole host of other products.
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Last year, Teck Resources sold 27 million tons of steelmaking coal, realizing an average of $115 per ton. That price per ton is worth noting because it was well above what thermal coal producers collected for their production last year. For example, U.S. coal-producing master limited partnership Alliance Resources Partners (ARLP 0.19%) only realized $50.76 per ton last year on the 36.7 million tons it sold. Those price differences have widened in recent months due to supply disruptions that pushed the price of steelmaking coal up over $300 per ton even as thermal coal prices where Alliance produces have remained around $50 per ton.
Because of robust steelmaking coal prices, Teck Resources pulled in more than 4.1 billion Canadian dollars ($3.1 billion) in revenue from the product last year. Meanwhile, its gross profit before depreciation and amortization (D&A) was CA$2 billion ($1.5 billion). That represented about 53% of its total gross profit last year, followed by zinc at 26% and copper at 21%. Also, surging steelmaking coal prices last quarter, when coupled with record output, pushed Teck's profits from the segment up to CA$1.1 billion ($830 million), or 75% of total gross earnings before D&A. Contrast that with Alliance Resources Partners, which sold nearly 9 million more tons of coal than Teck on an equivalent basis last year, but only pulled in $1.9 billion in revenue and generated $692.7 million of adjusted EBITDA.
What does the future hold for Teck Resources?
While steelmaking coal is Teck Resources' biggest moneymaker, the company doesn't currently have any plans to grow the business. Instead, it intends to sustain its current production of 27 million tons for the next five years by transitioning away from its Coal Mountain and Cardinal River mines and replacing that production by bringing on additional output from the Elk Valley region. That said, it does plan to evaluate extending the mine life of Cardinal River, and it will maintain the optionality to move forward with Quintette and Coal Mountain 2. However, as things currently stand, Teck's steelmaking coal business will be a cash cow and not a growth vehicle.
Instead, its largest growth project in the near term is its stake in the Suncor Energy-operated Fort Hills oil sand mine, which should deliver first oil by the end of this year. The company owns a 20% interest in the nearly CA$17 billion ($12.8 billion) project that will produce 194,000 barrels per day once it reaches full capacity, which is a level it should maintain for the next 50 years. That said, Teck's new energy business won't unseat steelmaking coal as its biggest moneymaker unless crude shoots through the roof. Furthermore, while the company does have another potentially significant growth opportunity on the horizon in its CA$20 billion ($15 billion) Frontier oil sands mining project, it appears to be a long shot of moving forward considering where crude is these days.
Another potential needle-moving project from Teck Resources is the Quebrada Blanca Phase 2 copper mine in Chile. The proposed $4.7 billion project could produce 300,000 tons of low-cost copper equivalent per year, which is meaningful since the company produced 324,000 tons of copper last year. If Teck does sanction that project, and copper prices improve, then it's possible that copper could rival steelmaking coal as its biggest moneymaker in the future.
Investor takeaway
While Teck Resources is a diversified miner, its steelmaking coal business is its profit center thanks to the high price that type of coal fetches in the global marketplace. It can get that price because it is crucial to making steel. That focus on a highly valued variety of coal is why investors shouldn't lump Teck Resources in with other coal producers.
