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Teck ratchets up cuts, targeting C$500M in costs

Facing uncertainty in global markets and falling commodities prices in some sectors such as coking coal, Teck Resources Ltd. outlined plans to slash about C$500 million from previously planned spending in 2019 and 2020 without reducing production volumes.

On an Oct. 24 third-quarter earnings call, Teck CFO Ronald Millos said about C$170 million in cuts would come this year and C$330 million in 2020, with plans to trim about 500 full-time jobs through attrition and freezing some job hires and contract renewals. About 30% of the C$500 million savings target would come from deferred capital projects, Millos said.

The planned cuts come as lower commodity prices put pressure on miners to defend margins. Teck management noted it expanded coking coal production while the price of the commodity, used in steelmaking, was strong. But coking coal prices have retreated this year, pinching profits in the sector.

"The decline in commodity prices in the second quarter of 2019, and particularly in steelmaking coal, had a significant negative impact on third-quarter profitability," Teck President and CEO Donald Lindsay said on the earnings call. "Benchmark steelmaking coal prices declined from about US$210/t in the first quarter of the year to US$178/t in the third quarter and ... current spot market prices are just under US$150/t, having been as low as US$128/t in the third quarter."

With a weaker coal market in sight, Lindsay also said Teck would make planned outages at its coal operations in early 2020 that will initially raise costs but ultimately deliver savings in 2020 with Teck expecting lower operating costs year over year in its coal division. The downtime will enable it to shift production to lower-cost operations such as Elkview in British Columbia, away from higher-cost operations such as Cardinal River in Alberta.

"We're moving the maintenance shutdowns to the first part of the year while coal prices are reasonably weak," Lindsay said. "But it also accelerates our ability to increase production at Elkview by 2 million tonnes."

With recent unrest in South America, Lindsay addressed its operations on the continent, where its assets include the Quebrada Blanca copper mine in Chile. In recent days, protests linked to social inequality have rocked the country, surprising some mining CEOs who have noted Chile is generally considered a stable jurisdiction for investment.

Lindsay said the protests raised concerns, but he expected Chile to remain a good place to invest. "This is clearly a very difficult time for the Chilean people," the CEO said.

In the third quarter, Teck's attributable net income dropped to C$369 million from C$1.28 billion in the prior-year period. In the second quarter, its attributable profits were C$231 million. As Teck looks to find cost savings, it has also outlined plans to boost shareholder distributions.

Analysts noted that Teck beat consensus earnings forecasts with adjusted EBITDA of C$1.08 billion compared to consensus of about C$1.03 billion. "We expect that Teck should trade well on the results and guidance of increased capital discipline," said Lucas Pipes, an analyst with B. Riley FBR, in an Oct. 24 note.