Teck Resources Ltd

Ladies and gentlemen, thank you for standing by. Welcome to Tech Resources Q1 2020 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 Tuesday, April 21, 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.

Thanks very much, Alana, and good morning, everyone, and thank you for joining us for TEC's first quarter 2020 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 the assumptions underlying those statements. Various risks and uncertainties may cause actual results to vary. TEC 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 Lindsay, our President and CEO.

Thank you, Fraser, and good morning, everyone. Well, these certainly continue to be difficult times, not just in the mining sector, but for all of us as we navigate the evolving COVID-19 challenge, both personally and professionally. Like you, we are continuing to work from home, and so the entire senior management team has dialed in remotely this morning, so please bear with us in the event there are any hiccups. We last spoke during our Investor and Analyst Day conference call on April 1st, just about three weeks ago, and that included a summary of our COVID-19 response measures, some initial highlights from our first quarter results, and of course our QB2 project update. Today we will focus on updates from the full results from our first quarter, as well as some additional detail on our COVID-19 protocols and the impact of COVID-19 on our operations. I'll begin on slide three with first quarter highlights followed by Ron Millos, our CFO, who will provide additional color on our financial results. We will 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. Our focus is on managing the risks around COVID-19 ensuring that we have the necessary measures in place to safeguard our people and our local communities. The global health situation posed by COVID-19 is unlike anything previously faced by companies, by families, and by communities. The scope and severity of this pandemic requires all of us to step up and do our part. We are proud to have announced last week the creation of a $20 million fund to support the COVID-19 response and future recovery efforts. Nothing is more important than the health and safety of our employees, our contractors and the communities where we operate. While our COVID-19 response has temporarily reduced production at some of our operations, all of our managed sites are currently operating. There has been no material impact on sales or shipments of tech products due to COVID-19 to date, but there is a risk that sales volumes could decline significantly in Q2 following the dramatic slowdown that we have seen in global economic activity. It is clearly still a very fluid situation with COVID-19 and the overall impact on our business will depend on the progression of the pandemic and on the success of measures in place to combat it. And as such, we have suspended all previously issued 2020 annual guidance. Now, despite the emergence of COVID-19, there were a number of positives in the first quarter. Steelmaking coal had a very strong finish to the quarter, with sales exceeding our quarterly guidance, adjusted site cost of sales coming in well below previous expectations, reduced finished coal inventories at our mine sites, and that provides greater operational flexibility, and the logistics supply chain performed very well in March, including Westshore. We completed the Elk View plant expansion in mid-April. This is a very important milestone because it increases annual capacity at Elk View from 7 million tons to 9 million tons. And this is important because it will enable us to replace higher cost production from Cardinal River, which produced 1.4 million tons in 2019, with much lower cost production from Elk View when Cardinal River closes later this year. And taking into account both the cost savings and the higher average pricing for Elk View Coal, because it is higher quality, and then assuming $150 US per ton of coal pricing and current exchange rates, this strategic move should translate to an annual increase in our EBITDA of approximately $160 million. The initial investment was just $135 million, so that is a rapid payback on an asset that will provide significant long-term value to our business literally for decades to come. At the same time, we continue to advance our four key priorities. On March 31st, we issued an updated capital cost estimate for our QB2 project with the to-go capital estimated at 3.9 billion US before considering any impacts of the current suspension as a result of the COVID-19 situation. This estimate is based on an average exchange rate over the remainder of the build of 775 trillion pesos per US dollar. at the current exchange rate of around 850 trillion pesos to the dollar, capital expenditure would be $240 million US lower than that 5.2 billion. We are consolidating the improvements that we implemented in 2019 under our Race 21 initiative, which is now focused on transforming the company for the future. We continue to advance the strategically important Neptune terminal upgrade, which will secure a long-term Low-cost and reliable supply chain solution for our steelmaking coal business unit. Preparations are underway for the suspension of terminal operations for five months starting on May 1st. You will recall that we made the decision to proceed with the extended shutdown of Neptune in order to match port capacity with reduced production and to improve productivity and safety as we advance construction. We have increased our target for total reductions under our cost reduction program to $1 billion from previously planned spending through the end of 2020. And we have achieved $375 million in capital operating cost reductions to date since starting the program in the fourth quarter of 2019. And importantly, we have maintained a strong financial position with current liquidity of $5.8 billion. Turning to our financial results on slide four. In the first quarter, revenues were 2.4 billion and gross profit before depreciation and amortization was 776 million. Profitability was impacted by the significant negative effect of COVID-19 on commodity prices. Our unadjusted EBITDA also reflects a non-cash pre-tax impairment charge of 647 million related to our interest in Fort Hills. Bottom line adjusted profit attributable to shareholders was 94 million or 17 cents per share on both a basic and a fully diluted basis. Details of the quarter's earnings adjustments are on slide five. With effect from January 1st, 2020, we have made changes to how we present adjusted profit attributable to shareholders and adjusted EBITDA. So going forward, we will include additional items that we have not previously included in our adjustments, and comparative figures have been restated. And this is really based on feedback that we've had directly from our shareholders. We now include adjustments for environmental costs, including changes related to decommissioning and restoration costs for our closed operations, also share-based compensation costs, inventory write-downs and reversals, and commodity derivatives. We believe that with these changes, our adjusted profit attributable shareholders and adjusted EBITDA will better reflect the results of our core operating activities and will help readers to understand the ongoing cash generating performance of our business and bring us more in line with practice at our peer group. In the first quarter, the most significant adjustment was the non-cash impairment charge related to our interest in Fort Hills, which was $474 million, this time on an after-tax basis. There were also $22 million of COVID-19 expenses in the first quarter on an after-tax basis, and Ron will speak to this in greater detail shortly. Environmental costs and share-based compensation reduced our adjusted profit attributable to shareholders by $87 million and $22 million, respectively. And this was partially offset by $27 million in inventory write-downs and 15 million in commodity derivatives. So with these and other minor adjustments, bottom line adjusted profit was 94 million or 17 cents per share, again on both a basic and a fully diluted basis. Please note that we continue to not adjust for settlement pricing adjustments which were negative 64 million or negative 12 cents per share in the first quarter on an after-tax basis and again that is based on feedback from analysts and shareholders. Turning to our response to COVID-19 on slide six, as I've said many times, nothing is more important than the health and the safety of our employees, contractors, and the communities where we operate. And so we have put in place comprehensive preventative measures at every one of our sites. And these measures include reducing onsite crew sizes, enhanced cleaning and disinfecting protocols, eliminating group meetings and promoting physical distancing, and also requiring anyone with symptoms not to come to work and promoting preventative measures like frequent hand washing. We're also being diligent in ensuring those preventative measures are being followed and we are working closely in collaboration with employee unions such as the United Steelworkers.