China is using more and more coal in its efforts to fuel economic growth. Teck Resources Ltd (USA) (NYSE:TCK) has been taking advantage of that and, at the same time, boosting results at port-operator Westshore Terminals . But, what if Teck Resources Ltd (USA) (NYSE:TCK) stumbles?
Teck Resources Ltd (USA) (NYSE:TCK) is a diversified Canadian miner. The company’s main products today are metallurgical coal, copper, and zinc. It also recently announced plans to move ahead on a project to mine the Canadian oil sands with partners Suncor Energy Inc. (USA) (NYSE:SU) and Total SA (ADR) (NYSE:TOT). That will make oil an increasingly important part of the mix, too, starting in late 2017 or early 2018.
For now, however, coal is the company’s largest segment, making up about 45% of its business. Even after the oil starts flowing out of the oil sands, coal will remain the biggest piece of Teck Resources Ltd (USA) (NYSE:TCK)’s top and bottom lines. With coal in the doldrums, that’s hampered recent results. However, low coal prices haven’t stopped the company from mining more coal.
In fact, Teck Resources Ltd (USA) (NYSE:TCK)’s CEO Don Lindsay announced that third-quarter coal volumes “set a quarterly record and demand from customers is strong.” And while he made sure to note that low prices were a problem, there are signs of a firming on the met front. But Teck Resources Ltd (USA) (NYSE:TCK) is in Canada, and its biggest customers are in Asia. That’s where Westshore comes in.
Westshore owns terminals and loading facilities on the West Coast of Canada. Although it has numerous customers, Teck Resources Ltd (USA) (NYSE:TCK) accounted for more than 57% of its volume in 2012. That was up two percentage points year over year. And the percentage is likely to increase again in 2013 as Teck Resources Ltd (USA) (NYSE:TCK)’s production has increased.
So Teck Resources Ltd (USA) (NYSE:TCK)’s increasing production is one of the reasons why Westshore is calling for full-year volume of around 30 million tonnes. That would be a record amount of coal for Westshore and should lead to solid full-year earnings. Better yet, however, the company is projecting 2014 coal volume of between 32 million and 33 million tonnes. So next year should be another good one on the earnings front.
Because of the close relationship between Teck Resources Ltd (USA) (NYSE:TCK) and Westshore, it’s also a safe bet that the miner will be selling more coal, too. Assuming prices firm up, that could mean a solid year at Teck Resources Ltd (USA) (NYSE:TCK), at least when compared to a relatively weak 2013.
The risk, or not
The big risk in this relationship is Westshore’s reliance on just one customer for so much of its business. If Teck Resources Ltd (USA) (NYSE:TCK) pulls back, Westshore risks seeing its volumes, and profits, fall. However, coal export capacity is at a premium and other Westshore customers are waiting on new ports to gain access to the Asian market. One prime example is Cloud Peak Energy Inc. (NYSE:CLD) .
Cloud Peak Energy Inc. (NYSE:CLD) is solely focused on the ultra-cheap Powder River Basin and has, unlike many competitors, managed to stay profitable despite the coal-market downturn. Part of that has come from its efforts to export more of its thermal coal. Right now it’s the largest U.S. player in South Korea. But it’s sending test coal to Japan in an effort to expand its reach.
The problem it faces is port access. The miner is waiting on a port that is scheduled to be built but still doesn’t have all of the approvals needed yet. And Cloud Peak Energy Inc. (NYSE:CLD) has a deal with the Crow Indian Tribe that will give it access to years worth of low-cost coal. If Teck Resources Ltd (USA) (NYSE:TCK) were to pull back, Cloud Peak Energy Inc. (NYSE:CLD) would likely be more than happy to fill the void.
Owning an in-demand asset puts Westshore in a good position even if key partner Teck Resources Ltd (USA) (NYSE:TCK) struggles. And although Westshore’s shares have advanced about 20% in the last six months, the company’s around 3.7% yield should be well supported. In the end, the port operator can provide you with a direct way to play the export of coal to Asia without taking on the risks of owning a coal miner.
The article 1 Port Holds the Keys to Asia for Many US Coal Companies originally appeared on Fool.com.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Total SA (ADR) (NYSE:TOT). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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