February 13, 2014 / 11:14 AM / 4 years ago

UPDATE 4-Teck shares drop on cost, copper output forecast

(Recasts after conference call, adds new analyst comment)

By Euan Rocha and Nicole Mordant

TORONTO/VANCOUVER, Feb 13 (Reuters) - Shares in Teck Resources Ltd slumped nearly 7 percent on Thursday after earnings from Canada's biggest diversified miner fell below market expectations and its cost outlook for producing coal this year was steeper than expected.

Teck also said that its copper production would continue to fall for the next couple of years. As a result, it is interested in buying either a copper project or mine although asset prices remained high, its chief executive said.

"Yes, we would be interested in adding to our copper portfolio," Teck CEO Don Lindsay said on a conference call to discuss the company's fourth-quarter results.

However, he added that as Teck was a producer of several commodities, it could also buy assets other than copper. The Vancouver-based company is in a strong cash position to make an acquisition, with some C$2.5 billion ($2.28 billion) on hand.

Hurt by lower commodity prices, Teck's earnings excluding one-off items fell 44 percent to C$227 million, or 40 Canadian cents a share, in the fourth quarter. Analysts, on average, had expected Teck to earn 44 Canadian cents a share, according to Thomson Reuters I/B/E/S.

While Teck achieved a number of milestones during the quarter, including more than C$500 million of cost reductions, JP Morgan's team of mining analysts said they expected investors "will largely look through these achievements and focus on the significant drop in expected 2014 copper production combined with rising coal costs".

Shares in Teck, which have fallen roughly 18 percent in the past year, were down 6.6 percent at C$26.01 on the Toronto Stock Exchange.

OUTLOOK

Teck cautioned that it continues to experience volatile markets for its commodities and said prices for some of its products have declined significantly.

But Lindsay said this was temporary and that by 2017 the market for zinc, another of the commodities Teck produces, would show a significant deficit, pushing prices higher. At the same time, the copper market surplus should also have cleared and prices headed higher.

"As miserable as the next quarter or two is, the three-year outlook is equally and oppositely exciting," Lindsay said.

The company noted that recent declines in the value of the Canadian dollar have increased the profitability of its Canadian operations so far this year.

Teck said its copper production for 2014 is expected to be in the range of 320,000 to 340,000 tonnes, compared with 364,000 tonnes in 2013.

Coal production in 2014 is expected to be 26 million to 27 million tonnes, but actual output will depend primarily on customer demand for deliveries of coking coal.

Teck's operating and transportation costs in the coal unit are expected to be between C$93 and C$102 per tonne, up from C$89 a tonne in 2013. Teck said the cost increase was due to higher trucking, maintenance and labor costs.

Teck said its zinc-in-concentrate production this year will be between 555,000 and 585,000 tonnes, down from 623,000 tonnes in 2013.

The company has earmarked C$2.6 billion for capital spending this year, higher than what analysts expected. Nearly $1 billion of will go to Teck's energy unit as the company and its partners, Suncor Energy and Total SA, start development of their Fort Hills oil sands project in northern Alberta.

Teck also said it has completed a feasibility study for the US$4.5 billion Relincho copper project in Chile. But the company signaled it has no major work planned for Relincho in 2014, as it explores ways to enhance the value of the project.

"We view the feasibility study results for Relincho as disappointing, which suggests that the project is unlikely to be sanctioned for development anytime soon," Scotiabank analyst Orest Wowkodaw said in a note to clients.

WEAKER PROFIT

The company said its fourth-quarter operating profit fell to C$407 million from C$716 million a year earlier.

Teck said copper revenue fell 15 percent to C$762 million, mainly due to weaker prices and lower volumes caused by delayed shipments.

Coal revenue fell 5 percent to C$963 million. Most of Teck's coal production is made up of metallurgical, or steelmaking, coal, which is typically more profitable than thermal coal used to generate electricity.

Total revenue fell 11 percent to C$2.38 billion. Teck also produces zinc.

Net income in the quarter rose to C$243 million from C$217 million a year earlier, when the company's profit was affected by a charge related to refinancing its high-yield notes.

$1=$1.10 Canadian $1 = 1.0986 Canadian dollars Additional reporting by Allison Martell in Toronto and Sneha Banerjee in Bangalore; Editing by Savio D'Souza, Peter Galloway and Chizu Nomiyama

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