Performance

Gross profit in the third quarter from our steelmaking coal business unit was $425 million compared with $634 million a year ago. Gross profit before depreciation and amortization in the third quarter declined by $182 million from a year ago (see table below), primarily due to a 9% decrease in steelmaking coal prices and a 9% decline in sales volumes. These items were partially offset by higher royalties received in respect of our Greenhills Operations under the joint venture extension agreement signed in the first quarter of 2019.

Third quarter sales volumes of 6.1 million tonnes were 9% lower than a year ago and below our guidance range of 6.3 to 6.5 million tonnes. In the quarter, our sales were affected by material handling issues and planned construction outages as the facility upgrade at Neptune Bulk Terminals progressed, which limited our ability to overcome the shortfall. Efforts are focused on resolving the material handling issues. Our third quarter sales could have exceeded the high end of our guidance range had there been no logistical issues.

The table below summarizes the change in gross profit, before depreciation and amortization, in our steelmaking coal business unit for the quarter:

STEELMAKING COAL BUSINESS UNIT

Outlook

Consistent with the guidance issued in the second quarter, we continue to expect our 2019 production to be between 25.5 and 26.0 million tonnes.

We are expecting sales volumes in the fourth quarter of 2019 to be approximately 6.2 to 6.4 million tonnes. Planned outages at Ridley Terminals and Neptune Bulk Terminals will result in approximately 40 lost train dumping or berthing days, affecting our sales volumes in the fourth quarter.

In response to declining coal prices, we have deferred our planned capital expenditures by an additional $70 million from the previous guidance. We now expect our 2019 capital expenditures to be $120 million lower than our original guidance, with some of the reductions due to the timing of expenditures. Of the $70 million, $60 million relates to sustaining capital expenditures and $10 million relates to major enhancement capital expenditures.

As disclosed in the second quarter, mine sequence changes at some of our operations have increased our expected capitalized stripping costs in 2019 to approximately $445 million, above our original guidance of $410 million. This is a timing issue and spending on stripping activities in 2019 will reduce stripping costs in future years.

We continue to progress the Neptune Bulk Terminals facility upgrades, which will significantly increase terminal-loading capacity and improve our capability to meet our delivery commitments to our customers while lowering our overall logistics costs. The definitive cost estimate for the project is expected to be complete in the fourth quarter. The cost of the project has risen as a result of various factors including effects of executing construction activities within an active port operation, additional project scope, engineering design evolution, difficult geotechnical conditions and field productivity. Current indications are that the total cost of the project is expected to be in the range of $750 to $800 million. In light of the supply chain performance issues we have experienced, including ongoing contamination of our product by sub-bituminous coal, which adversely affects our customers, the business case for this project remains strong. It will provide us with an exclusive terminal that meets the long-term requirements of our customers for consistent, high-quality product at significantly reduced costs. The Neptune Bulk Terminals facility upgrades are expected to be completed in the first quarter of 2021.

Pricing softened in the third quarter of 2019, reflecting the pressure on steelmakers’ margins created by lower steel pricing and continued high iron ore prices. A number of steelmakers reduced production as uncertainty created by trade disputes and the global economy slowdown persist. While our cost of sales will be lower in the fourth quarter of 2019, we plan to complete the majority of our major plant outages earlier in 2020, reducing our steelmaking coal production in the first half of the year and increasing production in the third and fourth quarters. As a result, we expect quarterly cost of sales to be significantly higher in the first quarter of 2020 than the fourth quarter of 2019 with the lower production rates, and then decreasing significantly in the second half of the year when we are back to full production levels. Overall, we expect our cost of sales to be lower in 2020 than in 2019. As in prior years, annual production volumes can be adjusted to reflect market demand for our products, subject to adequate rail and port service. Assuming that current market conditions persist, annual production in 2020 is expected to be similar to 2019.

Related Link: Official Document