A large downturn in coal pricing could result in dramatic cost reduction initiatives by Teck Resources Ltd in the Elk Valley.
In a letter dated September 26 from Teck’s Senior Vice President (SVP) of Coal, Robin Sheremeta, to all coal employees, the company outlined the cause of the downturn and how it could affect employees around the Elk Valley and parts of Alberta.
Over the last few weeks the price of coal has plunged from about $210/tonne to around $130/tonne. The company said that not only is the magnitude of the decline substantial, but the rate of the decline is ‘unprecedented’.
Sheremeta explained that they have lost 80 per cent of their margins in just four months, with no end in sight. As a result of this, the organization says they’re taking steps to ‘protect the business’ through this uncertain time.
The US$80/t downturn is projected to have reduced the company’s earnings (before interest, taxes, depreciation and amortization) by about C$2.7B in the last few months alone.
The letter was sent to all employees at Teck’s four Elk Valley operations, as well as to their employees at Cardinal River operation near Hinton, Alberta.
Teck operates four steelmaking mines in the Elk Valley and employs over 4,000 people.
A positive market for the past three years ‘never lasts forever’, explained Sheremeta in the letter. This, he said, is the nature of the business.
The last time the company experienced a severe downturn was five years ago, largely driven by oversupply. Sheremeta explained that due to the US China trade war, Brexit and a host of other world issues, this most recent downturn has materialized much faster.
He said Teck is taking a number of steps across all areas of the business to keep in line with competitors in Australia who have a ‘logistical advantage’. The letter mentions several ways Teck is looking to close this gap including investing in the ‘Neptune’ expansion, maximizing production, and closing the gap in operating costs, or else ‘we will become uncompetitive and struggle to generate positive returns in this market’.
A memo this week issued to senior management by Teck’s President and Chief Executive Officer, Don Lindsay, worked to address the downturn.
Lindsay said the company would have to ‘move quickly’ to implement their cost reduction program.
“As we go through this process you can assume that there is an immediate hiring freeze in place, that salaries are frozen save for a very few exceptions, that all “job vacancies” are cancelled, that travel will be severely limited, training reduced or deferred, projects declined or halted, equipment parked, sustaining capex cut, etc. And yes, sadly, there will be job losses involved,” said Lindsay in the letter.
“However, notwithstanding what we need to do on our general cost structure, we will need to maintain production levels.”
In a request for comment, Teck’s Manager of Social Responsibility, Nic Milligan, said no decisions have been made around specific cost reduction initiatives.
“We will provide updates as measures are implemented and as part of regular disclosure,” he said.
Milligan explained that the company is always closely tracking markets and taking steps to manage their costs in response to challenging conditions.
“As noted in our second quarter results, we are actively identifying further cost reduction initiatives that can be implemented quickly to ensure we continue to remain well-positioned,” he said.