Teck Resources Ltd

This conference is being recorded. This conference is currently being recorded. Ladies and gentlemen, thank you for standing by. Welcome to Tech Resources Q4 2019 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. This conference call is being recorded on Friday, February 21st, 2020. I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead, sir.

Thanks very much Mohot and good morning everyone and thank you for joining us for Tech's fourth quarter 2019 results conference call. Before we begin I would 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 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 statement. I'd also like to point out 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. I will begin on slide three with highlights from our fourth quarter and our year-end results, followed by Ron Millos, our CFO, who will provide additional color on financial results. And we'll conclude with a Q&A session. Ron and I and additional members of our senior management team would be happy to answer any questions. So commodity prices were negatively impacted by global economic uncertainty in 2019. This has continued into 2020. There were some signs of improvement in December and early January with an agreement on a US-China phase one trade deal, but then the coronavirus emerged and the full impact of the virus is still unknown. We are monitoring developments in order to be in a position to take appropriate action. It has been a difficult start to the year. In addition to the coronavirus, our steelmaking coal operations in British Columbia have also been impacted by logistics constraints caused by severe winter weather in January and early February, and then more recently by railway interruptions across the country. And as many of you know, we are Canada's largest railway customer. Given this backdrop, our focus remains on those aspects of our business that are within our control. With that, I'll turn to highlights from our fourth quarter of 2019. In that respect, we've made significant progress on our four key priorities. First, construction continues at QB2 with over 7,500 people actively working on site across the six major construction areas. We closed a $2.5 billion U.S. project financing in the fourth quarter, and on February 3rd, we announced an agreement with AES Corporation to source approximately half of QB2's total operating power needs from renewable sources. QB2 is a world-class corporate project and a key component of tech's future growth. Second, our innovation-driven business transformation program, known as Race 21, continues to advance. We exceeded our initial target in 2019, having implemented projects aimed at achieving 160 million in annualized EBITDA improvements as of December 31st, Commodity prices that were in place on December 31st and those prices were substantially lower than the prices that were in effect when we set the initial target back in May of 2019. Race 21 is transforming our business through implementation of existing proven technology across the mining value chain to improve productivity and lower costs. We have set a target for a cumulative total of a billion in ongoing annualized EBITDA improvements by the end of 2021. To put it in perspective, Race 21 has the potential to have as big an impact on our financial results as QB2, yet with less than 25% of the capital and in just two years instead of 10. I'll come back to Race 21 in a few minutes. Third, the execution of our priority project at Neptune Terminals continues to advance. In order to match port capacity with the reduced production and improve productivity and safety as we advance construction, We intend to suspend terminal operations for five months from May to September. The upgrade project will significantly increase terminal loading capacity and improve our capability to meet our delivery commitments to our customers while lowering our overall logistics costs. Project completion is expected in Q1 of 2021 and we are evaluating opportunities to gradually increase port capacity earlier than that. And fourth, we are starting to see the benefits of the company-wide cost reduction program that we announced in Q3 of 2019. We have achieved $210 million of capital and operating cost reductions in the fourth quarter, exceeding our target of $170 million. And Ron Mills will speak to our cost reduction program in further detail a little later. We are pleased with the progress that we've made on our four key priorities, and at the same time, we reduced total shares outstanding to $547 million. Our financial position remains strong with current liquidity of around $5.8 billion and we continue to focus on health and safety and sustainability leadership. We are pleased to have recently received further recognition of our sustainability leadership by being named as one of Canada's top 100 employers. We were named to the 2020 Bloomberg Gender Equality Index and as one of the global 100 most sustainable corporations. We've been working on an updated sustainability strategy and goals which will be released with our sustainability report in March. As a preview of what is to come, we have announced an objective to be carbon neutral across all operations and activities by 2050. Turning to our financial results on slide four, in the fourth quarter, revenues were 2.7 billion and gross profit before depreciation and amortization was 875 million. The decline in steelmaking coal prices had a significant negative impact on fourth quarter profitability. Benchmark steelmaking coal prices declined from $210 US per ton in the first quarter of 2019 to $142 per ton in the fourth quarter. Current spot market prices are actually back up to $159 US. In addition, we recorded total non-cash after tax impairment charges of $999 million and 910 million was for our interest in Fort Hills, 75 million for Cardinal River steel making coal operation and 14 million for the remaining assets of our cathode operations at QB. Bottom line adjusted profit attributable to shareholders was 122 million or 22 cents per share on both a basic and a fully diluted basis which was below consensus EPS of 39 cents per share. There were three items that were not known or estimated by the market that reduced our adjusted EPS. First, a decommissioning and reclamation provision, second, inventory write downs, and third, other environmental expenses. These totaled 17 cents per share, which accounts for the whole difference between the consensus EPS of 39 cents per share and our reported adjusted EPS of 22 cents. For the full year, we generated 11.9 billion in revenue, and $5 billion in gross profit for depreciation and amortization. Bottom line adjusted profit attributable to shareholders was $1.6 billion, which is $277 per share or $275 per share on a diluted basis. Details of the quarter and the year's earnings adjustments are on slide five. The $999 million in total non-cash after tax impairment charges was the only significant adjustment in the fourth quarter. All of the additional charges in the fourth quarter that we do not adjust for are detailed on the slide, and they totaled 105 million on an after-tax basis, or 19 cents per share on a diluted basis. I will now run through the highlights by business units starting with steelmaking coal on slide six. In the fourth quarter, sales of 6.3 million tons were at the midpoint of our guidance range, despite some logistics challenges. 2019 production was in line with revised guidance. The fourth quarter production was impacted by mining challenges at the Forting River operations, which were partially offset by record production at Elkview operations and strong processing throughput at other operations. Our mine site clean coal inventory storage areas were at full capacity at times in the fourth quarter due to logistical constraints, which reduces our operational flexibility into 2020. 2019 site costs of sales and transportation costs were in line with guidance and at the upper end of the range. In December 2019, we entered into a long-term agreement with CN for shipping steel making coal between Kamloops and Neptune and between Kamloops and Ridley from April 2021 to December 2026, which will enable us to significantly increase shipment volumes through Neptune. We also announced an expanded commercial agreement with Ridley Terminals in January 2020, increasing our contracted capacity from 3 million tons per annum to 6 million tons with an option to extend up to 9 million tons commencing January 1st, 2020. Looking forward, we expect sales of approximately 4.8 to 5.2 million tons in the first quarter of 2020, down from our previous estimate of 5.1 to 5.4 million tons. As I mentioned earlier, our steelmaking coal operations in British Columbia have been impacted by severe winter weather in January and early February and more recently by railway interruptions across the country. This caused rail and port terminal performance issues with an estimated impact of over one million tons on our Q1 sales. Given the potential for weaker demand in the short term due to the effects of coronavirus and the high inventory levels due to rail and port constraints, We are choosing to temporarily reduce production and implement a shutdown of Neptune bulk terminals in order to progress the facility upgrade. This reduction, combined with extreme winter weather in January and early February, which was then followed by rail blockades, means that we are now expecting our steelmaking coal production in 2020 to be between 23 and 25 million tons. As we had previously disclosed in Q3, We plan to complete some 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 second half of the year. The extended construction outage from May to September at Neptune will also affect our quarterly cost of sales. As a result, we expect our cost of sales to be higher in Q1 2020 than in Q4 2019, and then to decrease in the fourth quarter of 2020 when we are back to near full production levels. Finally, as part of our strategy to maintain production capacity of approximately 27 million tons in the Oak Valley, our Elk View operation is scheduled to complete its plant expansion project in the first quarter of 2020. Turning to our copper business units, our Q4 results are summarized on slide seven. Copper production declined by 2,000 tons from a year ago primarily due to the labor action at Carmen de Andocoyo which resulted in around 9,000 tons of lost production. This was offset by increased production from Highland Valley as a result of higher copper grades and recoveries. Overall, 2019 copper production was in line with guidance. Our cash unit costs for byproducts decreased by about 18 cents US per pound in the fourth quarter. However, lower moly and zinc prices and sales volume resulted in substantially lower byproduct credits, and as a result, our net cash unit costs were up six cents per pound. For the year, cash production costs came in just below the lower end of our annual guidance range. Looking forward to 2020, we expect our copper production to be similar to last year and our net cash unit costs to decline. Moving on to slide eight, I'd like to provide a quick snapshot of our progress on QB2, which is one of the world's largest undeveloped copper resources. QB2 is expected to have low operating costs, initial mine life of 28 years, and significant potential for further growth, which we are evaluating as part of the QB3 expansion study. Overall progress stands at about 25%. Engineering, contracting, and procurement activities are each over 95% complete. With earthworks and concrete installation well advanced, the project has commenced steel erection and the placement of mechanical equipment, including the first components for the grinding mills and the concentrator. The photo on the right shows the first mill shell being lifted into place. Construction of the tailings facilities, the pipelines, the roads and power lines is also progressing. The project continues to target first production in the fourth quarter of 2021, with ramp up to full production expected during 2022. However, there have been delays in the schedule, primarily due to permitting and social unrest, and those delays will also affect cost. I should note here that the recent weakness in the Chilean peso is having a significant beneficial effect on project capital expenditures. As we have said before, an updated capital estimate and baseline schedule is currently under development with completion expected by the end of March 2020, and we'll be going through that at our investor day on April 1st. On slide nine, you can see the primary crusher area where we are in the process of pouring concrete foundations and completing the platforms for the ore transport conveyors that will take the crushed material to the core source stockpiles, providing feed for the mills. Overall, the project has moved over 12 million cubic meters of earthworks, representing approximately 47% of the overall plan. The majority of the remaining earthworks are associated with the tailings management facility the pump station platforms and the pipeline right away. On the next slide you'll see concrete installation is progressing well in both the concentrator and port areas with approximately 50,000 cubic meters or 29% place to date. This slide shows the progress we've made in the grinding area of the concentrator where we have been pouring concrete for the two sag and the four ball mills since May. We will continue with concrete, structural steel and mill erection in this area throughout 2020. Moving to the flotation area of the concentrator on slide 11, you can see the first of 14 650 cubic meter flotation cells in place on its foundation. In addition to the erection of mechanical equipment, we continue to advance the concrete foundations for the molybdenum plant and concentrate and the tailings thickeners. The platform for the tailings transport thickener is near completion and the cofferdam at the tailings management facility has reached its crest and work is ongoing with respect to the starter dam. On slide 12 you can see some of the progress on the pipeline where the contractor is working on multiple fronts developing the platform and the trenching. Pipe stringing and welding is now also underway. The photo shows the pipe stringing and welding for the 36 inch water system with the trench for the pipeline to the left of the photo and construction of the 8 inch concentrate transport system will follow a similar process. Finally on slide 13 you can see the port site We are progressing both onshore and offshore activities. This photo shows progress of the desalination plan with foundations well advanced ahead of installation of mechanical components. Overall, the project team continues to focus on advancing construction across all areas of the project. On our zinc business unit results, they're summarized on slide 14. And as a reminder, Antamina's zinc-related financial results are reported in our copper business unit. Red Dog sales of zinc and concentrate were above our guidance range at 174,000 tons. Red Dog zinc production declined by 29,000 tons compared to a year ago, primarily due to reduced mill throughput as a result of planned mill shutdowns related to the VIP2 Mill Enhancement Project. At trail operations, the electrical equipment failure in August contributed to a 10% reduction in refined zinc production and negatively affected trails profitability in the fourth quarter. However, the repairs were completed by the end of November ahead of schedule. Looking forward, we expect Red Dog's contained zinc sales to be 135 to 140,000 tons in Q1, reflecting the normal seasonal pattern. Red Dog's production is expected to be lower in the first quarter due to both lower grades and VIP2 commissioning activities. For the full year, we expect our zinc and concentrate production to be 600 to 640,000 tons including co-products zinc production from our copper business unit. Net cash unit costs at Red Dog are expected to increase in 2020 primarily due to lower production and increased treatment charges for both zinc and lead and are expected to follow the normal seasoner pattern. Our energy business unit results are summarized on slide 15. Gross profit before depreciation amortization from our energy business increased by 129 million. primarily due to higher realized prices. As I noted earlier, during the fourth quarter, we recorded a non-cash pre-tax assessed asset impairment for interest in Fort Hills of $1.24 billion or $910 billion after tax as a result of lower market expectations for future Western Canada Select heavy oil prices. Adjusted operating costs were higher in Q4 compared with the same period last year, reflecting the impact of lower volumes in the current period. Operations also advanced overburden stripping to take advantage of winter conditions resulting in higher costs. Despite the government of Alberta's mandatory production curtailments being in place throughout 2019, both production and unit operating costs remained within our annual guidance for the year. Overall, gross profit before depreciation amortization was 144 million for the full year. Turning to slide 16 and raise 21. Our innovation-driven business transformation program with a focus on transforming our business and generating significant value through 2021. We launched the program at our investor and analyst day last year and set an initial target in May 2019 to implement projects that would generate $150 million in annualized EBITDA improvements by the end of 2019. As I said earlier, we have exceeded the initial target and implemented initiatives aimed at achieving $160 million and annualized EBITDA improvements as of December 31st. And that is based on commodity prices on that day, December 31st, and those prices were substantially lower than when we set the initial target back in May. Approximately 65% of the EBITDA improvements comes from application of data analytics at our processing facilities. 25% comes from analytics of our mining processes and 10% from improvements and maintenance through the application of machine learning. Overall, 30 different projects are now currently operating. Going forward, we plan to expand these projects implemented to date more broadly across all our operations, as well as to identify and implement some new projects to create additional value. For 2020, we are targeting implementing projects that are aimed at generating an additional 350 million in annualized EBITDA improvements for a cumulative total of around $500 million. And looking forward to 2021, we are targeting implementing projects that are aimed at generating a further $500 million in annualized EBITDA improvements by the end of that year. So as I mentioned earlier, that would be a cumulative total of $1 billion for the Race 21 program. Those are ongoing annualized EBITDA improvements which are recurring year after year, which represents significant value. And with that, I will pass it over to Ron Mills for some comments on our financial results.