With us today is Frank C. Smeenk President & Chief Executive Officer of KWG Resources Inc. Mr. Smeenk discusses recent conversation with Noront Resources after proposed acquisition of Cliffs Chromite was announced.
I've already pledged to hold my share position in Teck Resources (NYSE: TCK) until at least the year 2032, but that doesn't mean I have to stand still the entire time.
Although my investment style is decidedly long-term oriented, I certainly do take an opportunistic approach to the broad peaks and valleys that may emerge along the way. Particular within the hard-knock world of hard-rock mining -- where it seems another unforeseen challenge lies around most every corner -- I've learned (the hard way) to book some gains along the way in hopes that another attractive entry point will soon emerge. After tumbling more than 10% since the company released fourth-quarter and year-end earnings this week, the shares of Teck Resources have this Fool on the lookout once more for an opportunistic entry point.
While some have attributed the decline to the company's tepid near-term outlook for metallurgical coal demand, I beg to differ. I saw nothing novel in Teck's expectation that "recent weakness in the seaborne steelmaking coal market is expected to persist for at least the first half of 2013." Several months ago, when Cliffs Natural Resources (NYSE: CLF) suffered its inglorious fall, I discussed "the prospect of some sustained weakness in iron ore and met-coal prices that could persist well into 2013". And just this week, competitor Arch Coal (NYSE: ACI) cited "signs that a coal market rebound is possible in the second half of 2013" while touting the anticipated start-up of the Leer met-coal mine in Appalachia during the second half.
Importantly, Teck shares the industry's consensus view that met-coal market fundamentals look "quite favorable" over the medium-term and long-term time horizons. Teck continues to confirm that bullish long-term view by expanding met-coal production capacity to 28 million tonnes this year, restarting the Quintette mine (at a cost of $858 million) for annual capacity of 3 million tonnes by the end of 2014, and by investing $50 million to expand annual capacity at the Neptune Bulk Terminals (of which Teck owns 46%) from 9 million tonnes to 18.5 million tonnes. Rail carrier Canadian Pacific (NYSE: CP) is playing along, adjusting its infrastructure to expand the number of coal cars that can attach to a single train shipment by 20%.
More likely to have contributed to the pullback in Teck's shares from their strong trailing rally, meanwhile, is the company's newly honed estimate of long-term cost impacts at the Elk Valley coal mines relating to the mitigation of selenium. Teck may incur a capital cost of $600 million over the next five years to address selenium content in the water that passes through waste rock at the mines, with long-term annual operating costs reaching as high as $140 million ($6 per tonne of coal produced) thereafter.
If Teck follows through on its stated interest in acquiring copper assets to replace some of the maturing mines in its copper portfolio, the market may further punish these shares. After a series of high-profile asset impairments by Rio Tinto (NYSE: RIO) and its ilk, major acquisitions will likely be subjected to intense scrutiny. And if Teck's shares dip lower as a result, it's a good bet I'll be adding to the stake that I intend to hold for at least the next 20 years.
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