Teck Resources Ltd

All participants, please stand by. Your meeting is ready to begin. Ladies and gentlemen, thank you for standing by. Welcome to TECH's second quarter 2021 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 Tuesday, July 27, 2021. 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, Laurie. Good morning, everyone, and thanks for joining us for Tech's second quarter 2021 call. Before we begin, I would like to draw your attention to the caution regarding forward-looking statements that's 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 statement. 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 will turn the call over to Don Lindsay, our President and CEO.

Well, thank you, Frazier, and good morning, everyone. I will begin on slide three with our second quarter highlights. followed by Jonathan Price, our CFO, who will provide additional color on our financial results. And we'll then conclude with a Q&A session where Jonathan and myself and several additional members of our senior team will be happy to answer any questions. So, solid performance at our operations in our priority project against the backdrop of improving market conditions made for a very positive second quarter of 2021. At our QB2 project, we had our best quarterly progress to date and this is despite the largest COVID-19 case surge so far in Chile. Let me review a few numbers just to describe how it was. During the second quarter, the number of COVID-19 cases skyrocketed to a high of around 8,900 per day in Chile. Thankfully, recently the number of cases has declined, is now averaging about 1,500 per day. Critical care bed occupancy is still high though at 88%, but it is down from the peak of 99%. And in the Terra Paco region, where QB2 is located, that number is 49%. And there's currently a daily average of 30 cases compared with a high of 251. Chile has done a very commendable job with their vaccination program. Of its total population of 19 million people, around 85% have had their first dose and 74% have had their second dose. And at QB2 itself, more than 60% of the project workforce is fully vaccinated with over 80% of the workers having received at least one dose. The most recent wave of the pandemic has had a much larger impact on QP2 than the first wave. When construction restarted last year following the temporary suspension, we had nowhere near the challenges that we have had in these past three months. All of the restrictions, protocols, and testing that have been so important in the prevention of the spread of COVID-19 are also a large burden that has put the QB2 team to the test, but our team has risen to that challenge. The substantial progress in the second quarter has been hard won and is remarkable under these challenging conditions. It's a bit more color on what it's like for those of you who may be sitting in an investment center, perhaps in New York where it's wide open. What we're dealing with now is when an individual has symptoms that are taken off their project and they're taken to hotels on the coast where we've secured them permanently for quarantine purposes. They are PCR tested. The results are returned in about four days. They are then contact traced, and the contact individuals are also taken off the project and put in quarantine hotels, and they are PCR tested. If they test negative, they're returned to work. If they test positive, they're quarantined for 14 days. At the peak in Q2, we had 350 individuals in quarantine and monthly averages were very high. So you can imagine what that does to your crew consistency, to your productivity and the construction weekly plans, especially when the affected individuals are mission critical people like supervisors or crane operators or welders. And then you combine that with absenteeism running at 12% during the quarter. It is a huge challenge. and so that is why we are immensely proud of the progress that we made during that quarter and now we are very excited because just in the last couple of weeks we've now got things down to just about three active cases and we are able, already putting three people to room and increasing the resources in sight and finally getting a chance to go to full strength. So this will be a tale of two projects, the project up to date, heavily influenced by COVID, and we hope for the next 12 months, an entirely different project where we can make full progress. We continue to expect first production of QB2 in the second half of 2022, which is next year. And QB2 is expected to double our consolidated copper production by 2023. At the same time, our next facility upgrade is ramping up to full capacity across the site. The equipment there is performing according to or better than planned. I was there a week before last. It is exciting to see. And this upgrade is a key component of securing a long-term, low-cost, much, much lower cost and reliable supply chain for our steel and making coal business. We saw a significant improvement in our financial results in the second quarter, reflecting spot price increases in all of our key commodities. Adjusted EBITDA was up 104% compared with Q2 last year. Our operations performed well during the second quarter. Production was in line with plan across our business units and we met our quarterly sales guidance in steel making coal and in zinc. At the very end of the quarter though, our rail logistics were impacted by the wildfires in British Columbia and the situation remains very difficult and the provincial government declared a state of emergency last week. We extend our deepest condolences to all those who have been directly affected. While the wildfires did not impact our second quarter results, they are currently impacting transportation at our operations in BC. Rail services have been disrupted, which is expected to negatively impact our steelmaking coal business. Our third quarter steelmaking coal sales are now expected to be reduced by 500,000 to 800,000 tons, with guidance revised to 5.7 to 6.1 million tons for the quarter. Our annual production guidance, that range has been lowered by 500,000 tons to between 25 and 26 million tons. And we have increased our annual transportation cost guidance range by $3 Canadian per ton to $39 to $42 per ton. I think it's important to view that increase in context and in our transportation costs as a result of the wildfires within the context of current steelmaking coal prices While we're raising our cost guidance range by $3 Canadian, the Australian FOB price during the quarter rose by $100 US. That's just a little bit of context for you, and it is due to the wildfires, the cost increase. We do have contracts in place to ship through all three West Coast ports, and that gives us the flexibility to divert some trains and vessels through the terminals, which is clearly very economic for us. At the same time, like others in the industry, we are seeing signs of cost inflation across the business more generally. We have noted increases in the cost of certain key supplies, including mining equipment, fuel, tires, and explosives, driven largely by price increases for underlying commodities such as steel, crude oil, and natural gas. For our operations, the largest impact is on our fuel costs. While the impact on our second quarter results was slight as we delivered an adjusted EBITDA margin of 39%, we expect these price increases to put modest upward pressure on our cash unit costs in the second half of the year. Despite this, we have not changed our guidance for full year total cash unit costs in copper and zinc, an adjusted site cash cost of sales in steelmaking coal, and we have lowered our guidance for full year net cash unit costs in zinc. Finally, we were very proud to be named to the best 50 corporate citizens in Canada, which is the 15th consecutive year that we have been ranked as one of the top 50 companies in Canada for corporate citizenship. Now turning to an overview of our second quarter 2021 financial results on slide four. Our financial results are significantly improved compared to Q2 last year, supported by improved commodity prices. Corporate prices reached all time record highs in the quarter. with average prices 81% higher than in Q2 last year. Our realized field making coal prices benefited from around 2 million tons of sales to customers in China that were priced at premium CFR China prices. Revenues were up by almost 50% from a year ago to 2.6 billion. Profitability improved even more with adjusted EBITDA increasing 104% to $989 million. Bottom line, adjusted profit attributable to shareholders increased 281% to $339 million, which is $0.63 per share on a diluted basis. And Jonathan will review our financial results in more detail in a few minutes. I'll now run through some second quarter highlights by business units, starting with copper on slide five. Our copper business unit had a strong Q2. with a 385% increase in EBITDA compared to the same period last year, driven by substantially higher copper prices. Production was higher than in the same period last year when Antamina had temporarily suspended operations due to COVID-19. Total cash unit costs were $1.80 U.S. per pound, which was 23 cents per pound higher than a year ago. But the increase in costs is primarily due to higher workers' participation and royalty expenses resulting from increased profitability at Antamina. And this had a 20 cents US per pound impact compared to a year ago, as well as higher consumables costs and the strengthening of the Canadian dollar. Despite those cost pressures, we delivered an adjusted EBITDA margin for the copper business unit of 67%. We've maintained our annual production operating cost guidance in copper. Turning to an update on our QB2 project on slide six, As I mentioned earlier the project has continued to effectively advance construction with the best quarter of progress to date despite the significant ongoing wave of COVID-19 in Chile. We continue to maintain and enhance our extensive COVID-19 protocols in order to protect the health and safety of our workers and the communities in which we operate. Pre-screening and on-site testing have been key to our success in managing COVID and in fact we have screened out 1,300 positive cases, more than 1,300 positive cases that otherwise would have gone to site. Additionally, in coordination with the government, we successfully rolled out a vaccination campaign for our workers right on site. With COVID-19 cases in Chile declining, coupled with the country's and the project workforce's high rates of vaccination, we are aggressively ramping up towards peak workforce levels. The critical path, which is the grinding circuit, remains on plan, and we are still on track for first production in the second half of next year. Based on the solid pace of construction through that last quarter, we expect to achieve 60% overall completion in early August, so either next week or very early part of the week after. Our capital cost estimate remains at $5.26 billion, including contingency and escalation, and our estimate for COVID-19 capital impacts which are tracked separately has been updated to 600 million US as a result of the forecast impacts of the second wave of COVID-19. Slide seven provides an aerial view of the concentrator area where we are making strong weekly construction progress. The gliding lines shown in the background currently remain the critical or the longest path for the project and we have made significant progress here with all six mills now in place. and behind that you can see the tower for the core source stacker that has been erected where the stockpile dome will go up and we continue to advance the structural steel of the grinding building and the mechanical installation of the stage flotation reactor cells which you can see in the middle left of the photo in green just to the left of the 14 large 650 cubic meter flotation cells in blue in the foreground you can see where we've advanced construction and mechanical installation of the copper and bulk concentrator thickeners and the regrinding facilities. And lastly, in the middle right, you can see the advanced stage of the onsite power substation. Slide eight shows the starter dam of the tailings management facility, where we have raised the dam elevation significantly in the quarter. We are continuing to utilize the tech mine fleet and some of our new fleet of CAF 794s, which are performing well. Slide nine shows our progress in advancing the jetty from the onshore workfront and we have two additional offshore work fronts now to advance the jetty from a jack-up barge in Temporary Island where we've commenced pile driving. As the pipeline right-of-way and platform development is now effectively complete, we are focused on advancing the pipe stringing, welding placement and backfill. Slide 9 shows the pipeline trench, the welded water pipe on the right and the string concentrate pipeline on the left ready for welding In the back right, you'll see our port workings. To see more of the latest progress on QB2, I encourage you to watch a video of the project and view our latest quarterly photo gallery, which we have posted with our quarterly conference call materials in the investors section of tech.com. And you will find links to them in our Q2 press release. Next, our zinc business unit results for the second quarter are summarized on slide 11. and as a reminder, Antonina Zinc related financial results are reported in our copper business unit. Red Dog has strong performance in the quarter with production increasing by 67% compared with the same period last year. And as we had previously flagged, lower 2020 production volumes at Red Dog resulted in lower material available for 20 for sale and higher unit cash costs of sale for zinc mining operations in the first half of this year. We are now through that. Red Dog sales zinc and concentrate were 39,000 tons, which was in line with our guidance, and total cash unit costs of 61 cents U.S. per pound reflect higher treatment charges and the higher cost of inventory for sale related to the lower 2020 production volumes. And sale was longer than planned annual zinc roaster maintenance, which is now behind us. Looking forward, Red Dog shipping season commenced on July 19th, and our Q3 sales guidance for Red Dog zinc and concentrate is 180,000 to 200,000 tons. For 2021, we expect higher production at Red Dog. We've increased our full year zinc and concentrate production guidance range by 20,000 tons to 605,000 to 630,000 tons. And we've lowered our full year net cash unit cost guidance range by 5 cents per pound to 35 to 40 cents US per pound. We've also lowered our full year refined zinc production guidance range for trail by 10,000 tons to 290 to 300,000 tons due to lower availability of quality zinc concentrate feed sources and the longer than planned roaster maintenance shutdown during the quarter. Turning to our fuel making coal business on slide 12. and if you could all remain on mute, that would be appreciated. In the second quarter, sales were 6.2 million tons in line with our guidance range and our average realized price includes around 2 million tons of sales to Chinese customers similar to the first quarter at high CFR China prices. And just as a reminder, the CFR China prices are around $314 to $315 a ton. and our LPU operations set a new all-time quarterly production record thanks to the expansion that we did last year. Adjusted site cash cost of sales were $64 Canadian per tonne, which was at the high end of our guidance range as anticipated, and $4 Canadian per tonne lower than a year ago. Our transportation costs of $42 Canadian per tonne were above our full-year guidance range, which was expected and higher than a year ago, as a result of higher fuel surcharges and tariffs. Now, as I mentioned earlier, wildfires are currently impacting our operations in BC. Rail services have been disrupted, which is expected to negatively impact our third quarter sales volumes and our annual production volumes and annual transportation costs in steelmaking coal. Our third quarter steelmaking coal sales are now expected to be reduced by 500 to 800,000 tons and we expect 5.7 to 6.1 million tons of sales in the third quarter. We will continue to prioritize available spot sales volumes to China, which is expected to continue to result in favorable price realizations. We continue to target 7.5 million tons of sales to China in 2021 and that is unchanged from previous guidance. Our annual production guidance range has been lowered by 500,000 tons 25 to 26 million tons. And we have increased our annual transportation cost guidance range by $3 Canadian per ton to between $39 and $42. Again, it is important to view this cost increase in the context of current steelmaking coal prices, which have risen by $100 during the quarter. We have not increased our adjusted site cash cost to sales guidance for the full year. However, Upward pressure on input costs due to cost inflation and the impact of the BC wildfires are expected to result in costs coming in at the higher end of the range. In the second quarter, our steelmaking coal business unit delivered an adjusted EBITDA margin of 41%. And in the third quarter, we expect our financial performance to reflect the sharp increase in prices that occurred in the latter half of Q2. By 13, As I indicated earlier, our Neptune port project is in the ramp-up phase, and since the first fuel-making coal was unloaded using a new double railcar dumper on April 19th, work continued on fully commissioning the double dumper and then moved on to the site-wide ramp-up. August and September are anticipated to be big months for train handling and vessel loading. We are seeing excellent train handling times at Neptune with the combination of the double and single dumper. indicating that the terminal will be capable of processing in excess of 18.5 million tons per annum. Terminal throughput paused for the first two weeks of July as a result of the rail disruption due to wildfires. This should not affect the site-wide ramp up and the pause gave us the opportunity to complete preventative maintenance. Slide 14 shows a photo of the new indexer for the double dumper which is used to position advanced trains in the dumper and you can see the drive system and the arm that comes down between the cars which is world-class technology. Slide 15 shows the largest cape-sized vessel ever loaded at Neptune Terminal which is 300 meters long and loads up to 200,000 tons and a bunch of us went to see it and climb up on it and watch the loading. It was very exciting. We're really pleased to see the project move into the site-wide ramp-up phase as Neptune is a key component of our long-term, low-cost, and reliable supply chain for our steelmaking coal business. And to see more of the latest progress at our Neptune upgrade project, we have posted our latest quarterly photo gallery with our quarterly conference call materials in the investor section of tech.com with a link to it in our YouTube press release. Turning to our energy business unit results for the second quarter, which are summarized on slide 16, Our realized price and results reflected material improvement in Western Canadian Select prices compared with Q2 last year.