A dramatic rebound in coal prices is giving Teck Resources Ltd. extra breathing room, reducing concerns about its cumbersome debt.
Over six months, the price of premium hard coking coal – one of the key ingredients for steel-making – has more than doubled, and Teck's share price has jumped a stunning 350 per cent since the start of the year. The miner is one of the commodity's top producers, along with global giants such as Anglo American PLC and BHP Billiton Ltd.
The recovery hasn't received much attention. For much of 2016, gold miners have been in focus, with behemoths such as Barrick Gold Corp. dominating headlines because rising bullion prices have made fears about their leverage seem much less pressing.
But the same is true for coking coal producers – especially Teck, which was one of the worst-hit companies when coal prices plunged in the commodity crash. It shares peaked at $62 apiece in early 2011 and fell all the way to $3.65 in January – lower even than during the Great Recession. The miner lost $2.5-billion last year, driven largely by impairment charges.
Debt woes have long troubled the company, dating back to an ill-timed blockbuster acquisition. In July, 2008, right before the financial crisis brought down Lehman Brothers, Teck bought Fording Canadian Coal Trust for $14-billion. The company needed a lifeline from a Chinese firm to survive the crisis, in the form of a $1.74-billion investment. The mining supercycle then helped mask the problems for a while, but then that ended, and Teck has constantly had to answer questions about its $9-billion debt ever since.
The miner is also spending heavily to help develop the massive Fort Hills oil sands project, in which it holds a 20-per-cent stake. The project is now 60 per cent complete, but the cash outlays needed to get it up and running by 2018, coupled with interest payments and lower revenues from depressed commodity prices, had starved Teck of funds.
The recent rebound in coking coal prices is changing the narrative. Relief was first felt when heavy rains in China hampered that country's coal production; soon after, the government announced rules that reduced the number of days its coal mines could operate, to 276 from 330 annually. Chinese coal miners are heavily indebted to the country's banks, and the commodity's supply glut had decimated the producers' margins.
Teck prides itself on being a diversified miner that also produces copper and zinc – and soon, heavy oil – but its share price has long tracked coking coal and now sits at $23.65 in Toronto. Its earnings before interest, taxes, depreciation and amortization are also highly sensitive to the commodity, with a $1 (U.S.) a tonne move in the coal price adding or subtracting $35-million (Canadian) in EBITDA.
However, Teck warns investors not to get too comfortable. "Do we believe this is the new normal? No," Greg Waller, the miner's vice-president of investor relations, said at a conference last week. Teck believes higher coal prices will persuade non-Chinese miners to start producing more, and the extra supply will hurt prices.
But that may not happen immediately. "Given the inability of the industry to respond to the tightness in the market, we could be looking at these very good prices for a number of quarters, we believe," he added.
A Teck spokesperson said the company is currently negotiating its fourth-quarter contract price and expects to reach an agreement that is "reflective of current market conditions."
Even if coal prices retreat a bit, Teck remains in much better shape relative to where it started the year. Because debt was such a concern – which led to a ratings downgrade in May by Moody's Investor Service – the company refinanced two series of notes that matured in 2017 and 2019, extending them to five-year and eight-year offerings. Because less debt is coming due, the miner has more free cash at its disposal.
"Although we think much of the balance sheet concerns have already been priced out of the stock, it goes without saying Teck's cash and leverage position improves at higher coal prices," CIBC World Markets analyst Alex Kodatsky wrote in mid-September. "We think this is particularly important for the next leg of the story."