Teck Resources Ltd

Welcome to Tech Resources Q4 2018 Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. This conference call is being recorded on Wednesday, February 13, 2019. I would now like to turn the conference over to Mr. Frazier Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead, sir.

Thanks, Katrina, very much, and good morning, everyone. Thank you for joining us for Tech's fourth quarter 2018 results conference call. Before we begin, I'd like to draw your attention to the caution regarding forward-looking statements on slide two. This presentation contains forward-looking statements regarding our business. This slide describes the assumptions underlying those statements. Various risks and uncertainties may cause actual results to vary. Tech does not assume the obligation to update any forward-looking statements. I'd also like to point out that we use various non-GAAP measures in this presentation. You can find explanations and reconciliations regarding these measures in the appendix. With that, I'll turn the call over to Don Lindsay, our President and CEO.

Thank you, Fraser, and good morning, everyone. I will begin on slide three with some highlights from our fourth quarter and our year-end results, followed by Ron Mills, our CFO, who will provide additional color on our financial results as well. We will conclude with a Q&A session where Ron and I and several additional members of our senior management would be happy to answer any questions. But before we get into the highlights, I would like to note that very sadly there was a vehicle collision at our LFU operation on November 18th that resulted in the death of an employee and we want to extend our deepest sympathies to the employee's family and friends and colleagues and a full investigation into this instance is underway to ensure that we learn everything we can in order to prevent a recurrence. Turning now to the highlights from our fourth quarter and 2018. For the full year, our financial performance was strong with record revenue, record EBITDA, and record earnings. We had solid operating performance and average prices for our primary products increased from the prior year, particularly for steelmaking coal. The Fort Hills plant startup has exceeded expectations with respect to both production volumes and product quality, and it was fully commissioned by the fourth quarter. In fact, the plant achieved 201,000 barrels per day of production in December, which exceeds the design nameplate capacity. TechSport approved the Covada Blanca II project for full construction, and we announced a US $1.2 billion partnering transaction with Sumitomo Metal Mining and Sumitomo Corporation, who we will refer to collectively as Sumitomo. and the partnering transaction with Sumitomo further confirms that QB2 is one of the world's premier undeveloped copper projects and it significantly de-risks tech's investment in the project and greatly improves the project economics for tech. We are in a very strong financial position with 6.6 billion in liquidity, which is after having already bought back a billion dollars U.S. in outstanding notes last year. And the QB2 partnering transaction dramatically reduces our equity requirements on the project to just US $693 million, which excludes escalation, with no cash required between the close of the transaction and late 2020. Importantly, we are returning significant cash to shareholders. In 2018, we paid $172 million and applied $189 million in dividends and applied $189 million to the purchase of Class B shares which represents 6.3 million shares that have now been canceled. In November, the board directed management to apply 400 million to the purchase and cancellation of shares and 130 million, 31 million was spent in the fourth quarter. The board will also consider additional returns to shareholders following the close of the partnering transaction with Sumitomo which we now expect by the end of March. We are happy that Moody's upgraded the company to investment grade in early January. Also, and this is very notable, we have agreed with POSCO Canada to substantially increase the royalty that they pay on their 20% share of Green Hills coal production from January 1st, 2019. And it's important to note that at current coal prices, that increase will amount to about $90 million annually. So, very significant. Finally, we were honored to be named as one of Canada's top 100 employers in 2018 by Mediacorp and as one of the 2019 Global 100 most sustainable corporations by Corporate Knights. Tech was the top ranked company in the metals and mining category. Turning to our financial results on slide four. In the fourth quarter, revenues were 3.2 billion and gross profit before depreciation and amortization was 1.4 billion. After adjusting for unusual items, adjusted EBITDA was $1.3 billion and bottom line adjusted profit attributable shareholders was $500 million or 87 cents per share and that would be 86 cents per share on a fully diluted basis. For the full year, we achieved record revenues of $12.6 billion, record EBITDA of $6.2 billion and record earnings of $3.1 billion. Prices continued to be strong for our primary products. particularly for steel making coal. We also had solid operating results despite some challenges particularly at the beginning of the year. Bottom line adjusted profit attributable to shareholders was $2.4 billion or $4.13 per share or $4.07 per share on a diluted basis. Details of the quarter's earnings adjustments are on slide five. On January 31st, we announced that we expected to report earnings and EBITDA for the fourth quarter significantly below consensus estimates at that time. The bulk of the difference was due to three factors that we do not adjust for. First was disappointing Q4 financial results from our energy business unit, which was negatively impacted by the decline in West Texas Intermediate and the dramatic widening of the Western Canada Select differentials. disappointing Q4 financial results from trail operations, which was impacted by lower metal prices, historically low treatment charges, and a planned major maintenance shutdown. Third, the decline in commodity prices during the quarter resulted in 80 million in inventory write-down charges. So together, these factors reduced earnings by 30 cents a share and reduced EBITDA by 195 million. I will now run through the highlights by business units starting with steelmaking coal on slide 6. Global steel production and demand for seaborne steelmaking coal remains robust. Steelmaking coal prices remain strong with the spot price above $200, I think we had $209 this morning. In the fourth quarter we generated significant cash flow based on continued solid operating performance. Customer sales were strong. and we achieved record high monthly sales in November. Steel making coal prices were significantly higher in the quarter than the Q4 of 2017 and we expect Q1 sales now of 6.1 to 6.3 million tons subject to the performance of our logistics chain. We set a quarterly production record in Q4 of 7.3 million tons. We also achieved record material movement in the quarter and for the full year which improves our operational flexibility for the future. Operating costs increased in the fourth quarter relative to Q4 2017, though they were lower than in Q3 2018. This reflects the decisions to capture additional margin given the current strong prices, including hauling a portion of LPU raw steelmaking coal to Coal Mountain's plant. Looking forward to 2019, we expect steelmaking coal production to be similar to 2018 in the range of 26 to 26.5 million tons. We expect our site unit cost to be higher in the range of $62 to $65 per ton, and this reflects the advancement of mining in new areas to compensate for the closure of Coal Mountain, which you'll recall was very low cost, and it maintains total production over time at a capacity of approximately 27 million tons. We also expect transportation costs to remain consistent in the range of $37 to $39 per ton. As I mentioned earlier, we've agreed with POSCO Canada to substantially increase the royalty that they pay on their 20% share of Green Holes coal production from January 1st. At current coal prices, that increase will amount to approximately $90 million annually. Turning to our Copper Business Unit, our QPOR results are summarized on slide seven. Copper fundamentals remain strong, with global exchange stocks falling 58% in the second half of 2018. Overall in the fourth quarter, gross profit before depreciation and amortization was down $166 million from the same period in 2017, mainly due to lower copper sales and lower prices for copper and zinc. Copper production was down, primarily due to lower copper ore grades at Highland Valley, which was anticipated in the mine plant. Copper grades at Highland Valley are expected to gradually improve from early 2019. And Tamina achieved record annual combined copper and zinc concentrate production. Also, Carmen Dandacoyo set a new quarterly record for mill throughput. And lower copper prices in Q4 resulted in 41 million in inventory write downs. The big news in the fourth quarter, of course, was that the Board approved the QB2 project for full construction and the announcement of the partnering transaction with Sumitomo. At the same time, we advanced activities to prepare for construction and enhance operational readiness of the project. Earthworks activities are fully underway. We also continue to focus on detailed engineering, procurement, and other contracting activities. We now expect the partnering transaction with Sumitomo to close by the end of March. rather than the end of April, which we had already indicated. Looking forward to our guidance for 2019, we expect slightly higher copper production of 290,000 to 310,000 tons for the full year. Net cash unit costs are expected to increase to $1.45 US to $1.55 per pound due to lower byproduct price and volume assumptions. Our zinc business unit results are summarized on slide eight As a reminder, Antimino Zinc-related financial results are reported in our Copper Business Unit. The zinc market remains tight. Reported exchange zinc inventories remain at their lowest levels since 2008, like the last 11 years. Reported zinc stocks held on the LME and the Shanghai exchanges are now estimated at 3.8 days of global consumption, compared with the 25-year average of 22.3 days. Again, the exchanges inventories are estimated at only 3.8 days global consumption compared with the 25-year average of 22.3 days. That's a tight market. In Q4, contained zinc sales for Red Dog were 4,300 times lower than our guidance due to timing of consignment sales. We expect Q1 sales for Red Dog to be in the range of 125 to 130,000 tons, reflecting our normal seasonal pattern. Red Dog had strong operational performance in the fourth quarter, with higher than planned throughput, resulting in higher zinc and lead production compared with Q4 2017. As noted earlier, trail operations profit was impacted by lower metal prices, historically low treatment and refining charges, and the Kivset maintenance shutdown that started in mid-September and ended in early November. Looking forward to 2019, we expect zinc and cost rate production to be in the range of 620,000 to 650,000 tons, including coproduct zinc production from our copper business unit. We expect trail refined zinc production to be in the range of 305,000 to 310,000 tons. And on the cost side, we expect mined zinc net cash unit costs to be higher in the range of US 35 to 40 cents per pound with higher costs in the first half of the year due to the normal Red Dog seasonality. Our Energy Business Unit results are summarized on slide nine. As a reminder, commercial production was achieved at Port Hills on June the 1st of 2018. Our realized prices and QPOR results in our Energy Business Unit were negatively impacted by the decline in the WTI price and the dramatic widening of WCS Differentials. In addition, costs associated with diluent increased significantly during the fourth quarter due to a seasonal increase in diluent consumption and the unusual widening in the spread between diluent and WCS. As a result of the decline in prices, we recorded inventory write-downs during the fourth quarter of approximately $34 million. On the other hand, the Fort Hills plant startup has exceeded expectations with respect to both production volumes and Product Quality and it was fully commissioned by year end. The plant was successfully tested and ran at full design nameplate capacity for much of the fourth quarter and in fact in December production exceeded design nameplate capacity at 201,000 barrels per day. Unit operating costs averaged $26.91 Canadian per barrel in Q4 and it is important to note that they continue to improve to below $23 Canadian per barrel in December as production exceeded nameplate capacity. Our sales of blended bitumen were 4.5 million barrels in Q4. Looking forward to 2019, we expect our share of bitumen production to increase to the range of 12 to 14 million barrels, and that is including the impact of the mandatory production curtailments announced by the government of Alberta. A high end of our production guidance reflects curtailments being lifted in the second quarter so we'll have to see whether that in fact occurs. We also expect to have our adjusted operating costs to be in the range of 26 to 29 Canadian dollars per barrel and note that we expect production to be lower and operating costs to be higher in the first half of the year given those production curtailments but in the second half of the year we should go back to something Finally, I would note that in the first quarter of 2019, Western Canada Select Differentials at Hardesty materially narrowed on increased demand and rail takeaway capacity as well as the Government of Alberta's mandated production curtailment. For the first quarter of 2019, we estimate market indices for WCS will settle at approximately $12.50 per barrel versus $39.45 per barrel in the fourth quarter of 2018, obviously quite a significant difference. And with that, I will pass it over to Ron Millis for some comments on the financial side.