Crashing crude prices and the impact of the COVID-19 pandemic swung Teck Resources (TECK-B.TO)(TECK) to a loss in its first quarter. The Vancouver-based miner also booked a $474 million after-tax writedown on its stake in the Fort Hills oil sands project as a result of the dual headwinds for the resource sector.
Teck said its loss attributable to shareholders was $312 million, or $0.57 per share, in the three months ended March 31, compared to a profit of $630 million a year earlier.
“Global crude markets are in a period of unprecedented volatility,” chief executive Don Lindsay told analysts on a conference call on Tuesday. “That, of course, is an understatement.”
He said the company's energy business suffered a gross loss of $90 million in the quarter. As a result of COVID-19 and its hit to commodities, the miner has suspended all previously issued 2020 guidance, reduced work crews at some sites resulting in lower production, and halted construction at its Quebrada Blanca Phase 2 (QB2) copper project in northern Chile.
Teck’s $474 million impairment on its 21.3 per cent stake in Fort Hills follows a $910 million after-tax impairment the company disclosed in February, warning of low expectations for future oil prices.
March was a brutal month for global crude prices as limited travel and business activity due to COVID-19, and oversupply concerns, weighed on benchmark prices. The company was forced to reduce Fort Hills to a single-train facility, reducing bitumen production. Lindsay said the leaner operation will significantly reduce operating costs and help mitigate losses in the near-term.
In February, Lindsay floated the idea that a spin-off or sale of Fort Hills could be in the cards. Suncor Energy (SU.TO)(SU) and Total Canada (TOT) own 54.1 and 24.6 per cent of the project located 90 kilometers from Fort McMurray, respectively.
“We are having an ongoing dialogue with the partners, Suncor, the operator of course, and Total, in looking at different options,” Lindsay said.
“There are a lot of factors to consider, and it’s a complicated decision. The starting point is you have to take a view on what you think oil prices and WCS prices are likely to be, and when. Reducing production further, or going to shut down, you’d have to look at winterization costs, which are quite substantial.”
The global health crisis and historically negative environment for crude comes on the heels of another geopolitical challenge for Teck. The recent trade tensions between the United States and China have weighed on base metal and coal prices. Production of steelmaking coal is Teck’s largest business.
The company said its steelmaking coal operations were a bright spot in the quarter, with sales of 5.7 million tonnes, exceeding previous guidance of 4.8 to 5.2 million tonnes.
“Our steelmaking coal operations had a strong finish to the quarter, exceeding our sales guidance with site costs well below expectations,” Lindsay said.
However, he warned of slower coal deliveries in the coming quarter as customers put off orders.
“It does feel similar to one of the quarters we had during 2008-2009. It lasted for a while, with the customers going through a dip in demand for their own products,” Lindsay said. “We’re not talking about cancellation really. It’s deferral to the next quarter.”
While COVID-19 was behind Teck’s decision to suspend construction at its QB2 long-life copper project, Lindsay said the pandemic highlights the value of the bronze metal due to its antimicrobial properties.
“The COVID-19 virus dies within four hours on a copper surface, but lives for days and days on stainless steel or other surfaces,” he said. “We would hope that in the long-term the various public transit infrastructure and healthcare facilities will be using more copper.”
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.