Teck Resources Ltd

Ladies and gentlemen, thank you for standing by. Welcome to the Tech Resources Q2 2019 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 Thursday, July 25, 2019. I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead.

Thanks very much Jen. Good morning everyone and thank you for joining us for Tech's second quarter 2019 results conference call. Before we begin, I would like to draw your attention to the caution regarding forward-looking statements on slide 2. 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 would 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 will turn the call over to Don Lindsey, our President and CEO.

Thank you, Fraser, and good morning, everyone. We're pretty excited here today. We've got a lot of good news to share, so let's get going. I'll begin on slide three with highlights from our second quarter, followed by Ron Miller, CFO, who will provide additional color on the financial results. We'll conclude with a Q&A session where Ron and I and additional members of our senior management team would be happy to answer any questions. We achieved a number of important milestones in the second quarter that have put tech in a strong position moving forward. First, we updated our capital allocation policy and increased our share buyback to a billion dollars. We updated our capital allocation framework to reflect our intention to make additional cash returns to shareholders. I'll speak to this in greater detail later, but we intend to supplement our base dividend with an additional amount of at least 30% of available cash flow through supplemental dividends and or share repurchases. And I note that a couple of analysts have already missed the fact that that 30% is on top of the base dividend. Second, the BC government has endorsed the use of saturated rock fills to treat water at our steel making coal operations. We have begun construction of an expansion of the saturated rock fill at Elk View. We estimate that over the long term, Saturated Rock Pills will significantly reduce capital and operating costs compared to tank-based active water treatment facilities of similar capacity. Third, we are accelerating our innovation-driven efficiency program known as Race 21 to generate an initial $150 million in annualized EBITDA improvements by the end of 2019. There'll be much more going on into the future. In addition to Race 21, in light of economic uncertainty and trade tensions, We are actively evaluating further cost reduction initiatives which can be implemented quickly in the event that commodity markets turn against us. These measures are part of our straightforward strategy of running our operations safely, efficiently, and sustainably to generate cash, successfully executing our QB2 project, and returning excess cash to shareholders. We also had several additional highlights in the second quarter. We signed a $2.5 billion US limited recourse project financing facility to fund the development of the QB2 project. We redeemed $600 million of outstanding 8.5% notes due in 2024 on June 29th, reducing our outstanding notes to just $3.2 billion with no significant maturities for the next 16 years until 2035. And consistent with our capital allocation framework, we announced that we will not proceed with McKenzie Red Cap Extension at our Cardinal River operations and they operation will close in the second half of 2020. Critical path construction activities for QB2 are on track and we are building considerable value for shareholders through the development of this world-class copper project. And finally, we were pleased to be recognized as one of the top companies in Canada for corporate citizenship, placing fourth on the best 50 corporate citizens in Canada ranking. Looking at our capital allocation framework in greater detail, slide four shows How we think about it and prioritize our approach to capital allocation which is designed to both position tech for long-term value creation and growth while returning cash directly to shareholders at the same time. The starting point for the assessment is the operating cash flow which is first used to fund sustaining capital required to maintain our production levels in accordance with our long-term mine plans including capitalized stripping costs. The second priority is to fund capital spending on committed enhancement and growth projects are already approved by the board such as QB2 or Red Dogs VIP2 project or Neptune Terminal upgrades. Contributions from partners and drawdown of project finance facilities are netted off in the calculation of capital allocated to this purpose. Capital is then used to fund the base dividend of 20 cents per share. It may also be allocated to strengthen the capital structure through the repayment of debt or to build cash balances consistent with our long stated objective of maintaining solid investment grade metrics and strong liquidity. I should say that at this point we don't see a need for any further substantial decrease in notes outstanding, leaving more available cash for supplemental shareholder distribution. Our intention is to then distribute an additional amount of at least 30% of remaining cash flow to shareholders by way of supplemental dividends or share buybacks before taking on new major enhancement or growth projects. The allocation between dividends and buybacks will depend on market conditions at the relevant time, and we will consider additional distributions out of the proceeds of any asset sales on a case-by-case basis. Of note, for example, we have already exceeded the 30% figure for 2019 by a considerable margin. The balance of remaining cash flow is available to finance further enhancement or growth opportunities and if there is no immediate need for this capital for investment purposes, it may be used for further returns to shareholders or retained as cash on the balance sheet. On slide five, as I mentioned earlier, we are accelerating our innovation-driven efficiency program, Race 21, which was first introduced at our Investor and Analyst Day in April of this year. It is an integrated program that looks across the full value chain from mine to port. Race 21 leverages existing, Proven Technology to improve productivity and lower costs with a focus on delivering significant value by 2021. By the end of 2019, we intend to implement initiatives that we expect will generate an additional $150 million in annualized EBITDA improvements, primarily through the expansion of programs such as predictive maintenance, the use of mining analytics to improve cycle times and processing improvements. We expect the one-time implementation cost of these initiatives will be approximately $45 million in 2019 and that the benefits will be recurring thereafter. And I should say the $150 million is after the investment of $45 million. A good example of this work is our haul cycle analytics program. We currently track hundreds of data points related to the performance of our load and haulage fleet. For any human, this volume of data is simply too big to analyze. By streaming this data to the cloud and applying advanced analytics techniques, we are increasing our ability to identify truck underperformance or poor road quality and other factors in near real time. Reducing variability is the key to reducing cost in surface mining. Advanced analytics enables this reduction by targeting low performing trucks to increase average speed without increasing maximum speed. In our steelmaking coal business alone, we expect to realize $14 million in annualized EBITDA gains by the end of this year based on a total investment of just $3 million. As we look ahead and advance our mine autonomy program, we will be able to further reduce variability in cycle time and capture even greater value. Another example is our predictive maintenance program. We also track millions of data points there in real time that monitor the health of our haul trucks. As you can imagine, there is significant variation in this data due to differences in truck technology, equipment age, operating conditions, and dozens of other factors. This complexity coupled with the sheer volume of data makes it impossible for humans to analyze in anywhere near real time, which is what is needed to take predictive action. By using machine learning algorithms, we are now able to effectively model and predict component failure with adequate lead time to allow it to be replaced as part of regularly scheduled maintenance. Reducing unplanned downtime is expected to create $20 million in annualized EBITDA improvements in 2019 in our steelmaking coal business alone, and that's at a cost of approximately $3 million. We are rapidly advancing Race 21. We expect to identify and implement further opportunities to improve the cost structure of our business or increase our productive capacity. and we will provide guidance on further potential EBITDA improvements for 2020 this February when we do our normal annual guidance and we think that at that time it will be multiples of the current 150 that we are announcing today. Turning to financial results on slide six, we generated adjusted EBITDA of 1.2 billion in the second quarter which is in line with consensus expectations. Revenues were 3.1 billion for the quarter and gross profit before depreciation and amortization was 1.4 billion. Bottom line adjusted profit attributable to shareholders was 459 million or 81 cents per share on both the basic and a fully diluted basis. Details of the quarter's earnings adjustments are on slide seven. The most significant items in the table are the after tax charge on the debt repurchase of 166 million and the after tax impairment of $109 million relating to our decision not to proceed with the McKenzie Red Cap Extension at our Carmel River operations. There are also a number of additional charges that we do not adjust for, which total $77 million on an after-tax basis or $0.13 per share on a diluted basis, and these include negative pricing adjustments of $42 million or $0.07 per share, stock-based compensation of $7 million or $0.01 per share, a change in the estimated DRP otherwise known as decommissioning and reclamation provision of $12 million or two cents per share. Inventory write downs of $8 million or one cent per share and the loss on commodity derivatives of $8 million or again one cent per share. I will now run through highlights of business unit by business unit starting with steel making coal on slide eight. Sales were in line with our guidance. However, results were impacted by logistical issues in May. including a workforce lockout at Neptune, unplanned outages at West Shore and material handling issues. Production in the quarter was also constrained by logistic issues resulting in mine site stockpiles reaching maximum capacity at times and causing plants to be idle. However, second quarter production of 6.4 million tons was still higher than a year ago as a result of quarterly production records at our Line Creek and Green Hills operations and improved processing throughout and processing throughput at other operations. Demand remained quite strong in the quarter. Without the logistical issues, our Q2 sales would have easily exceeded the high end of our original guidance of 6.4 to 6.6 million tons. Site unit costs were higher than last year, but they are in line with our annual guidance range. Looking forward, we expect sales of approximately 6.3 to 6.5 million tons in Q3. The second half of the year, site costs are expected to decrease to between $62 and $65 per ton within our annual guidance range as we anticipate a higher production run rate in the second half of the year. For the full year, we expect transportation costs to come in at the high end of our guidance range of $37 to $39 per ton. As a result of the logistics chain issues combined with mining challenges at Cardinal River Operations, we have reduced our 2019 production guidance range to between 25.5 and 26 million tons. Turning to our copper business unit, our Q2 results are summarized on slide nine. Copper production was up year over year, primarily due to higher mill throughput and recovery at Highland Valley. Net cash unit costs were higher in Q2 2019 versus a year ago, impacted by substantially lower coproduct and byproduct credits. and Antamina had substantially lower zinc sales volumes as was expected in our plan. The additional D3 ball mill at Highland Valley was successfully commissioned and ramp up is in progress. The new mill is expected to contribute to continued improvement and recoveries in the second half of the year. And in June, we signed a new three-year collective agreement at Antamina. Looking forward, we expect continued improvement in throughput and grades and recoveries at Highland Valley and our full year copper production guidance is unchanged. But we have lowered our net cash unit cost guidance to $1.40 to $1.50 US per pound for the full year. Moving on to slide 10, I would like to provide a quick snapshot of our progress on QB2 over the last quarter. To the end of June, we've expended approximately 330 million US in 2019 and have approximately 60% of the total budget committed under contracts and purchase orders to date with the majority of the major contracts and purchase orders now completed. Engineering is now well advanced at 92% complete, procurement is approximately 88% complete and contracting is approximately 96% complete. All of these are tracking very well and we are moving into closeout activities for engineering. Overall, the project progress is over 14% and speaking of ramp up, we now have a workforce of about 3,100 on the project. The photo on the right shows some of the progress that we have made in the grinding area of the concentrator. Turning to slide 11, I'm pleased to report that the construction activities for our critical path are on track. Here you can see the first major concrete pour in the grinding area of the concentrator. Concrete placement for the mill foundations is advancing well and has been ongoing since the initial Sag Mill number one pour on May 20th, 2019. On slide 12, earthworks activities are advancing in all areas with approximately 7.7 million cubic meters moved to date. And this photo shows the main access road to the tailings management facility, which was completed in June, as well as lateral access roads that have been developed on the hillside. And these roads will be used for hauling materials to construct the tailings starter dam. Slide 13 shows progress at the port site. You can see the lay down and work area for the manufacture of the piles to be used in construction of the jetty for the ship loader. And shortly the Marine Works contractor will begin installing piles from the jetty above. Overall, we are satisfied with the progress to date with the project team working effectively with the EPCM contractors and field personnel to safely deliver the project on time and within budget. And beyond QB2, drilling and engineering studies are underway to define our expansion options for QB3 with the potential to double or more the throughput capacity of what is currently being built at QB2. These early-stage engineering studies are expected to conclude in the third quarter before kicking off a pre-feasibility study before year-end. Our zinc business units are summarized on slide 14, and as a reminder, antimony to zinc-related financial results are reported in our copper business unit. Red Dog sales of zinc and concentrate were above guidance. Red Dog recovered more quickly than anticipated after the severe winter weather closed the port road and impacted production in Q1 and second quarter production was higher than for the same period last year. Profited trail operations was negatively affected by the historically low treatment and refining charges from before and also higher electricity costs post-Wenita. The construction of the number two acid plant is complete and it is now fully operational so we're delighted to see that come in on budget and ahead of schedule. Looking forward, we expect Red Dog's contained zinc sales to be 165 to 170,000 tons in Q3, reflecting the normal seasonal pattern. Higher treatment and refining charges are expected to positively affect profits at trail operations in the second half of the year. And finally, Red Dog's net cash unit costs are expected to decline in the second half of the year due to the normal seasonal pattern. In addition to that, we have lowered are net cash unit cost guidance to 30 to 35 cents US per pound for the full year. Our energy business unit results are summarized on slide 15. And despite the government of Alberta's production curtailments, our energy business unit had strong performance in the second quarter with our share of Fort Hill's EBITDA of 70 million compared with 22 million in the first quarter of this year and 13 million in the second quarter last year. and this was supported by higher realized prices and strong operating performance. Production and unit operating costs in the quarter reflected the production curtailments offset with the purchase of curtailment credits. Looking forward, the government imposed production curtailments have been extended to at least the end of August and as a result we expect to come in at the low end of the guidance range for our shares of bitumen production of 12 million to 14 million barrels for the full year. and with the lower production we expect Q3 and Q4 unit operating costs to be similar to the first half of the year at the high end of our original annual guidance of $26 to $29 Canadian per barrel of bitumen. And with that I'll pass it over to Ron Mills for some comments on our financial results.