June 3, 2011
Written By Chloe Lutts Jensen
From Global Investment Strategist: “Metallurgical ‘met’ coal is used in blast furnaces to produce steel and bears little resemblance to thermal coal, a form of coal with a lower energy content that’s burned in power plants to produce electricity. As emerging markets such as China and India build out their basic infrastructure, demand for steel continues to rise and global steel output has recovered sharply from the 2007–2009 recessionary nadir. “In developed countries such as the U.S., a significant portion of steel is produced in electric arc furnaces. But producing steel in this manner requires scrap metal, which is in short supply in emerging markets. Heavy use of blast furnaces means that rising demand for steel results in booming demand for coal and China and India rely upon imports to meet a significant portion of their domestic demand.
“Met coal, particularly the highest premium grades, is in short supply globally. Australia is the world’s largest exporter of met coal, but the worst flooding in a generation earlier this year interrupted mine output and damaged key rail links and export terminals. The loss of Australian supplies exacerbated an already tight market and pushed prices for premium met coal to a recent record high of about $330 per metric ton, up from about $200 per metric ton at the end of 2010. Producers are scrambling to secure supplies of met coal either by expanding mines or, increasingly, buying up smaller producers of this resource. In fact, securing met coal supplies was the motivation behind U.S. mining giant Arch Coal’s (ACI) decision to purchase former Metals and Mining Portfolio holding International Coal Group (ICO) in early May. We instructed subscribers to sell off International Coal Group for a 65% gain since our original recommendation. More such acquisitions are likely over the next few months.
“Canada’s Teck Resources Ltd. (TCK) is the largest producer of met coal in North America and is well-positioned to benefit from strong growth in demand and prices over the next few years. The firm’s coal production from mines in Western Canada is roughly 90% high-grade met coal and 10% lower grade met and thermal coals. That’s one of the richest mixes of met coal you’ll find in the world. Production in the first quarter of 2011 fell to 4.4 million metric tons of met coal from about 6 million metric tons in the fourth quarter. But the first quarter is often weak for Teck because extreme weather and heavy snowfalls can delay output in Western Canada. This year’s weather events were particularly severe, but output is expected to bounce back strongly in the second quarter.
“Furthermore, higher coal prices should continue to boost the bottom line; management projects realized coal prices in the second quarter of $280 to $290 per metric ton, up from $207 in the first quarter of the year. Of more importance to investors is the long-term outlook for coal production growth. Teck currently produces at a normal rate of about 24 million metric tons per annum, but has plans to expand production from existing mines to 28 million metric tons by 2013–2014. To meet that goal, the firm has ordered 37 new mining trucks, has secured a new four-year export port agreement at Westshore Terminals and is upgrading two of its processing facilities. And there’s more room for growth beyond its existing six mines. Teck is completing a feasibility study on its Quintette mine in Western Canada. If approved, the firm could add another 3 million metric tons to its output by 2013, taking total annual production well over 30 million tonnes.
“We also like Teck’s copper mining business. While copper prices have pulled back from their highs earlier this year, the longer-term supply-demand balance remains tight and the decline in prices looks temporary. The company plans to release the results from feasibility studies for two new potential copper mines in Chile over the next six months. If approved, Teck’s total copper output could jump from around 310,000 tonnes in 2010 to 700,000 tonnes by the end of the decade. Buy Teck Resources under $60.”
Yiannis G. Mostrous, Global Investment Strategist, 5/25/11
“Teck Resources rose 8% this week after the company reported better-than-expected first-quarter earnings. In the three months ended March 31, 2011, Teck’s earnings jumped 123.5%, to $0.76 a share from $0.34 a year earlier. These figures exclude several unusual items, such as gains on asset sales. On this basis, the latest earnings beat the consensus forecast of $0.75 a share. Revenue rose 24.9%, to $2.4 billion from $1.9 billion. Metallurgical coal prices rose 47.9% to $207 U.S. a ton from $140 U.S. a year earlier. That was the main reason for the higher results. … Teck Resources is a buy.”
Patrick McKeough, The Successful Investor, 5/21/11