Teck surges on strong earnings from metallurgical coal

Teck's Fording River coal mine produces 8.7 million tonnes of metallurgical coal annually.

After the market closed yesterday, Teck Resources (TSX:TCK.B) released its Q1 2011 financial results. The rosy report included earnings of $461-million, or 78 cents per share.  Adjusted quarterly profit was $450-million, which was more than double the $198-million reported in the first quarter of last year.

Don Lindsay, President and CEO of the Vancouver based company noted that, “The increase was due mainly to significant increases in the prices of coal and copper, notwithstanding lower sales volumes of coal.” Teck is the world’s second largest exporter of metallurgical (aka steelmaking or coking) coal, with five mines in British Columbia and one in Alberta.

Because January floods ravaged Australia, the world’s number one exporter of coal, some expect steelmaking coal contract prices may rise to more than $300 a metric tonne. According to Daiwa Capital Markets, the floods, which have been described as the worst in a half-century, disrupted output from producers including BHP Billiton and Rio Tinto Group in Australia’s Queensland state. In a recent interview, Arun Kumar Jagatramka, Managing Director of India’s Gujarat NRE Coke noted, “Coking (steelmaking) coal price has been seeing a steady climb upwards for last six months. Coking coal benchmark price for the quarter April to June has been set at $200 compared to last year’s benchmark at $128 per tonne.”

Steelmakers in China are driving demand for coal. But analyst John Hughes of Desjardins Securities pointed out that it’s not just this predictable narrative that has pumped up prices, it’s overall global demand from steelmakers. Although China and India are by far the world’s largest importers, several other countries have emerged as substantial buyers, including South Korea, Taiwan and Malaysia. Demand from these emerging markets is expected to increase and absorb production from long-haul coal that originates in South Africa and Columbia.

“Once again we rely on Asian demand to be the driver for coal prices but if there were no issues on the supply side, demand from Asia would produce only a slower, steady rise in prices,” said Emmanuel Fages, an analyst with Societe Generale, in Paris. There are, however, issues on the supply side that could be a net-positive for Teck’s metallurgical coal interests. Teck CEO Don Lindsay recently told the Globe and Mail “We anticipate improved earnings from coal in the second quarter.” Investors, it seems, like the sound of that. Shares of Teck are currently up $2.77, or nearly 6% today.

Mike Luft

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