Teck Resources Ltd

All participants, please stand by. Your meeting is ready to begin. Ladies and gentlemen, thank you for standing by. Welcome to TEC's second quarter 2020 earnings release conference 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 23, 2020. I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Industrial Relations and Strategic Analysis. Please go ahead.

Thanks very much, Laurie. Good morning, everyone. Thanks for joining us for Tech's second quarter 2020 results conference call. Before we begin, I would like to draw your attention to the caution regarding forward-looking statements in 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 statement. 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. Don Lindsay Thank you, Fraser, and good morning, everyone. Thank you for joining us today.

I will begin on slide three with our second quarter highlights followed by Ron Mills, our CFO, who will provide some additional color on the financial results. We will then 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. So these continue to be challenging times as the world works its way through the COVID-19 pandemic. At Tech, we remain focused on protecting our people and communities while continuing to operate responsibly and safely and many more. Thank you for joining us. In the second quarter, revenues were $1.7 billion. Gross profit before depreciation and amortization was $453 million. Profitability was impacted by the significant negative effects that COVID-19 had on both prices and demand for our products, as well as abnormal costs because of the pandemic. Bottom line adjusted profit attributable to shareholders was $89 million, or $0.17 per share, on both a basic and a fully diluted basis. Details of the second quarter's earnings adjustments are on slide five. The most significant adjustment was $147 million of COVID-19 expenses in the quarter on an after-tax basis, which was primarily related to the suspension of our QB2 project. We also had a $69 million adjustment for environmental costs, which relates to the impact of re-measuring our decommissioning and restoration provisions for our closed operations using a current credit-adjusted risk-free discount rate. In addition, we had adjustments of $38 million for inventory write-downs and $17 million for share-based compensation. This was partially offset by commodity derivatives and taxes and other items, which were $20 million and $21 million, respectively. With these and other minor adjustments, bottom-line adjusted profit for shareholders was $89 million, or $0.17 per share, on both the basic and full-advanced basis. I'll now run through key updates for the quarter starting on slide six. The COVID-19 pandemic obviously had a significant negative impact on our business in the quarter. While all of our operations are currently producing with comprehensive virus prevention measures in place, the economic impacts of the pandemic have reduced demands and crisis for our products. We expensed $260 million in costs associated with COVID-19 in the second quarter on a pre-tax basis. and this includes $151 million of QB2 demobilization, remobilization and care and maintenance costs and $75 million of borrowing costs that would otherwise have been capitalized had QB2 construction not been suspended. Ron will speak to these items in a few minutes. Looking at our key updates in our steelmaking coal business on slide seven, we continue to focus on increasing margins, not volumes. Our second quarter sales were 5 million tons as the pandemic continued to negatively impact supply and demand, particularly outside China. I'll just ask if everyone could please go on mute so we can eliminate the paper shuffling. Thanks very much. Chinese steel production returned to pre-pandemic levels during the quarter and established new average daily record highs in both May and June. We are shifting to a lower cost base due to a declining strip ratio, also due to the Elk View plant expansion, which was completed through the Cardinal River closure, and as well as our cost reduction and Race 21 programs. Our adjusted site cost and sales are expected to decrease over the remainder of 2020, and to the end of the year, we expect to be below $60 per ton. Our strip ratio was 11.4 to 1 in 2019 and we now expect it to decline to below 10 to 1 by 2021 as planned. We completed the major expansion of our LQ operations plant in Q2 despite the pandemic. The plant now has the capacity to produce 9 million tons annually, which will enable us to replace that higher cost production from Cardinal River with higher quality coal products at lower cost from our LQ operations. As planned, Cardinal River completed its final production in June after 51 years of mining, and the operation is now transitioning to closure. I'll come back to our steelmaking coal business in just a few minutes. Turning to QB2 on slide 8, QB2 is a key component of Tech's future growth as we rebalance our portfolio. Construction activities are ramping back up, with over 3,000 people currently on site, and robust COVID-19 prevention protocols in place. We are planning to continue a gradual ramp up of the construction workforce over the next three months towards the pre-suspension workforce level as conditions allow. We expect to have approximately 4,000 people on site by the end of July and approximately 8,000 people on site by the end of October. We are also aiming to achieve overall project progress of close to 40% by year-end. The impact of the suspension on cost and schedule will depend on the length of the suspension and the ramp-up period that I just described. I'll provide more detail on QB2 in a few minutes. Looking at progress on our Neptune facility on slide nine, we continue to advance the project which will secure a long-term Very low cost and reliable supply chain solution for our steel making coal business unit.