Don Lindsay, CEO of Teck ResourcesLouie Palu/The Globe and Mail
Canada's largest diversified miner is cutting back in the face of a global economic slowdown.
Buffeted by volatile markets for the commodities it produces, Teck Resources Ltd. is deferring some $1.5-billion in capital spending over the next year or so, the latest in a string of Canadian resource companies to rewrite its plans in response to rising costs and an unpredictable outlook for the economy.
Among the casualties announced was Fort Hills, an oil sands joint venture in which Teck is a 20-per-cent partner along with Suncor Energy Inc. and Total SA. The project is not scheduled to begin producing oil until after 2017, but now some of the pre-production work will occur at a slower pace.
Canadian mining companies are increasingly joining the ranks of resource businesses that are being forced to rethink capital spending as the demand drops for key industrial commodities. The commodities cycle is sputtering along with the economies of the United States and Europe and as growth slows in China.
Suncor said in July that it was reevaluating tens of billions of dollars of planned spending, and pledged to apply "rigorous scrutiny" to the cost of three projects, including Fort Hills. A Total spokesperson referred questions back to Suncor, the project operator, but said there hadn't been a formal announcement on any delays. A Suncor spokesperson declined to provide specifics.
Teck is one of the world's largest exporters of coking coal used in steel production and a key supplier to China, where falling demand for commodities helped slash the company's third-quarter profit by more than half. Teck earned $349-million in the third quarter or 60 cents a share, compared with $742-million or $1.26 in the same quarter a year ago. The result was in line with the average forecast of analysts polled by Bloomberg of 59 cents a share.
Beside Fort Hills, other projects affected by the deferral include two copper projects in Chile – Quebrada Blanca (phase two) and Relincho – and the Quintette steel-making coal project in British Columbia. And at the Trail zinc operations, also in B.C., Teck has shelved construction of a new slag fuming furnace.
"We would really like to do it, but we looked at the overall economic scene and we want to make sure that we're living within our means, if you like, and margins have compressed in coal and zinc and we're just being careful with our spending," Teck chief executive officer Don Lindsay said on a conference call with analysts.
Teck said some of the deferrals, including Quebrada Blanca and Quintette, were due to delays in getting permits – but the company admitted those projects may have still been delayed on economic grounds alone.
It said it was considering delays at a number of other projects as well.
"Notwithstanding our strong financial position, some of our planned capital spending has been deferred for a variety of reasons and we have also implemented a cost reduction program," Mr. Lindsay said.
The third-quarter results did not seem to bother investors, who drove the stock up nearly 3 per cent on the day.
Greg Barnes, an analyst with Toronto-Dominion Bank, said in a research note that the deferrals, $1.2-billion of which will come in 2013, were in line with global peers.
"Some investors were expecting very ugly results this quarter from [Teck] and bad guidance – and while the results are weaker than we forecast they aren't as bad as some feared," he said in the note.
Teck said it reduced coal production in the quarter to align with declining market demand, but still expects annual production to come in at the lower end of its guidance of 24.5 million tonnes for 2012.
The question being posed by many analysts and investors is what Teck plans to do with its large and building cash position, currently at around $4.2-billion, and some speculate the company might turn to acquisitions. But Teck executives emphasized that they will eventually need the cash when those deferred projects resume.