Teck Resources Ltd

Gentlemen, thank you for standing by. Welcome to TEC's fourth quarter 2022 earnings release conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. To join the question queue, press star then 1 on your touch-tone phone. Should anyone need assistance during the conference call, they may signal an operator by pressing star then 0 on their telephone. This conference call is being recorded Tuesday, February 21st, 2023. 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, Ariel. Good morning or good afternoon, everyone. Thanks for joining us for Tech's fourth quarter 2022 conference call. Please note today's call contains forward-looking statements. Various risks and uncertainties may cause actual results to vary. The Act does not assume the obligation to update any forward-looking statements. Please refer to slide two for the assumptions underlying our forward-looking statements. In addition, we will reference various non-GAAP measures throughout this call. Explanations and reconciliations regarding these measures can be found in our MD&A and the latest press release on our website. Now we know there's a great deal to digest this morning. We've got four issues, four press releases, which you should now have. The first on the spinoff of still making full business. Second on the sunset for the dual class share structure. The third on the dividend and share buyback that was announced. And finally, of course, on the Q4 results. In addition, there's a copy of our presentation to go with the releases. You do not have all five documents. They are available on our website. www.tech.com slash separation. There's a lot of time to discuss the strategic announcements we issued this morning. Jonathan Price, our CEO, will begin today's call with a brief overview of the fourth quarter results. We'll then shift to the focus of the three strategic announcements. Again, the separation of tech into two independent public-assisted companies, related transactions with our steelmaking coal joint venture partners and major customers, Nippon and Costco, and the six-year sunset protects Class A shares. We will then conclude today's session with a question and answer period. With that, I will turn the call over to Jonathan.

Thank you, Fraser, and good morning, everyone. Starting on slide five, we are pleased to have achieved several financial records in 2022, including a record $9.6 billion in adjusted EBITDA. This was driven by strong commodity prices, during the year. These remote business units made substantial contributions to our profitability in 2022. In the fourth quarter, the resilience of our teams was demonstrated as we successfully managed through severe winter conditions and short-term production challenges, specifically at Elk View, Highland Valley Copper, and Trail. However, we did fall short of consensus analyst estimates for fourth quarter adjusted EBITDA and EPS, variance was driven by lower-than-consensus gross profit, which was partly because of the extended maintenance activities of trail during the quarter, higher-than-consensus non-operating expenses, and the timing of the removal of four hills from analyst models. Importantly, strong profitability enabled us to deliver record cash returns to our shareholders in 2022, including $1.4 billion in share buybacks, and $532 million in dividends, while continuing to strengthen our balance sheet through the repayment of $1.3 billion of debt during the year. And we are adding to this with our announcement that the Board has declared a dividend of $0.625 per share to be paid on March 30th. This consists of our base quarterly dividend of $0.125 per share and a supplemental dividend of $0.50 per share. In addition, the board has authorized up to $250 million share buyback. In total, these returns to shareholders include a distribution of 40% of the proceeds from the sale of Port Hills received earlier this month in accordance with our capital allocation framework. In aggregate, these returns bring total approved returns of over $2.4 billion since the start of 2022. Now looking at slide six, we made significant progress against each of the four pillars of our copper growth strategy in 2022. We advanced our flagship QB2 copper growth project despite COVID-related productivity impacts and challenging weather and subsurface conditions. It is currently ramping up and we look forward to doubling our consolidated copper production when it reaches full capacity by the end of 2023. We also advance to pass the value for our industry-leading copper growth pipeline through joint partnerships with San Nicolas in Mexico and at New Range Copper Nipple in Minnesota. I will come back to QV2 and our progress in copper growth in just a moment. As I mentioned earlier, we closed the sale of Fort Hills in February. Our exit from the energy business provides a step change towards the rebalancing of our portfolio to low-carb metals. And we continue to balance copper growth and cash returns to shareholders as demonstrated by our record cash returns in 2022. As of February 20th, we have $8.2 billion of liquidity, including $2.8 billion of cash. We also made significant progress against our sustainability goals during the year. We secured 100% clean renewable power at QB2 in 2025. and I'm especially proud that we recorded our lowest ever high potential incident frequency rate last year. Full details of our performance will be in our 2022 sustainability report, which will be released on March 16th. Now coming back to our progress on copper growth on slide 7, our priority for 2023 will be to ramp up at QV2. We are in commissioning of line one, a concentrator, and making final preparations to pre-water the mill. Construction and commissioning are progressing across all areas of the project. Construction is essentially complete in the pipelines, power, and mining areas. We expect QB2 to reach full capacity by the end of 2023. Our CAPEX guidance for the project remains unchanged from previous disclosure. We expect QB copper production to 180,000 funds in 2023, increasing to a range of 285,000 to 315,000 in 2024 to 2026. It is important to note that recent changes to IFRS will impact unit costs of QB2 this year. We are now required to recognise sales proceeds and related costs associated with products sold during the ramp-up and commissioning phase through earnings. rather than capitalizing these amounts. Once QB2 is at full capacity, we expect average net cash unit costs of US $1.40 to $1.60 per pound. Moving to slide 8, we are also making meaningful progress on other projects in our industry-leading copper growth pipeline. We initiated a feasibility study at San Nicolas last year and expect completion in early 2024. We are targeting submission of the EIA in the first half of this year. Transaction with Agnico Eagle is expected to close in the second quarter of 2023. We are continuing to advance feasibility study for QB mill expansion, representing a throughput increase of approximately 50% to QB. EIA permit application was submitted to the Chilean regulator in early 2023, and the feasibility study is expected to be completed later this year. At Safran Al, we successfully completed a comprehensive public participation session and responded to the SEIA observations last year. We are expecting receipt of the SEIA permit in the first half of this year. And just last week, we closed the new range copper nipple LLC transaction with PolyMet to join the advance both North Met and Masaba. And at Galore Creek, completion of the pre-feasibility study is targeted for the second half of the year. Overall, our progress in 2022 positions us well for our very exciting next chapter. So with that, we'd like to move from the fourth quarter results and discuss the transaction we announced today, the spin-off tech steelmaking coal business for shareholders and the creation of two world-class independent companies. Starting on slide 10. we take a major step forward to unlock value for tech shareholders by establishing a path to separate our steelmaking coal and base metals businesses. As independent companies, Tech Metals and Elk Valley Resources, or EVR, will have simplified portfolios, allowing for heightened strategic and financial focus and the ability to pursue their own tailored capital allocation strategies. We are confident this plan positions both companies with greater success. while supporting a sustainable future for the benefit of our employees, communities, and indigenous peoples in the areas where we operate. Importantly, this separation will provide investors with choice for allocating their portfolios between two businesses and commodities with unique fundamentals and value proposition. We will realize our full potential at TechMetals as a premier growth-oriented producer of critical metals essential for the energy transition. and EVR will be a pure-play, high-margin steelmaking coal producer. Tech Metals will retain a significant portion of the steelmaking coal cash flows during a transition period to fund our proper growth. Concurrent with the separation, we announced agreements two of our steelmaking coal joint venture partners and major customers to exchange their minority interests in the Elk View and Green Hills operations for interest in EVR. Notably, Nippon Steel's $1 billion cash investment implies an $11.5 billion enterprise value for our steel-making coal assets. Lastly, we also announced today a sunset of the dual-part share structure, which will modernize TechMetal's governance structure. I'm turning to slide 11. I want to provide some context on the rationale for this transaction and why Tech is taking this step now. We recognize that the investment landscape has changed over the last 10 to 15 years. Previously, broad-based demand growth across all commodities to support global development drove investor preferences for miners with diversified strategies, who as a result were often rewarded with premium valuation. In recent years, the investor basis for base metals and steelmaking coal businesses has become increasingly divergent. This proposed separation responds to that changing landscape. It will allow investors to optimize their exposures to each of these metals and steelmaking coal through the creation of two world-class pure-play companies with compelling but different value propositions. COPPA's critical role in electrification and the energy transition will drive continued demand growth and premium valuation. High-quality steelmaking coal will remain an essential input for steel production necessary for decarbonization infrastructure over the long term. Turning to slide 12, following the separation, tech resources will become tech metals, a premier growth-oriented base metals company. Tech metals is focused on copper growth. we are well positioned to capitalize on the strong demand generated by the accelerating transition to the low carbon economy foundation of our portfolio is our high quality low cost and long life operations which are located in well-established mining jurisdictions in the americans and we have significant growth potential and resource optionality through our industry-leading five With the ramp-up of QB2 this year, we expect our copper production to double in the near term. And the vast, long-life deposit at Cabrada Blanca can support multiple expansions. We currently have a little over 8 billion tonnes of reserves and resources at QB, and the ore body is open in multiple directions for further potential increases. Beyond QB2, we have an attractive suite of additional projects, diversified by geography, scale, and time to develop. we have the potential to add more than 1.5 million tons of annual copper equivalent production to our current portfolio. TechMetals has the potential to become one of the top 10 copper producers in the world. Importantly, cash flow from the transition capital structure provides TechMetals with continued funding to make prudent investments in growth, balanced with disciplined returns to our shareholders, and while maintaining our financial resilience. This transaction will unlock the full potential of our industry-leading copper growth portfolio, which is significantly undervalued relative to our peers. Turning to slide 13, EBR will be a pure-play, world-class Canadian steelmaking coal company. High-quality, long-life assets that are high-margin operations, focused on long-term cash generation and providing cash returns to shareholders. The existing Elk Valley operating team will continue to lead EVR and ensure continuity of operating principles and responsible environmental and social stewardship. The team will be led by President and CEO Robin Sheremeza, who is currently Tech Senior Vice President of Coal. EVR will have four producing steel making coal operations in the Elk Valley of British Columbia and the recently expanded Coal Handling Facility Its high-quality, low-emissions hard coking coal product is sought after by the world's largest steelmakers as they work to reduce their own emissions. And this is demonstrated by the agreements with Nippon Steel and POSCO to be announced today. The significant participation by two of our major customers emphasizes the long-term and critical importance of high-quality steelmaking coal. And as I mentioned earlier, The $1 billion investment by Nippon Steel implies an enterprise value of approximately $11.5 billion, further validating the EVR value proposition. Importantly, underpinned by its extensive reserve base with over 30 years of reserve life, EVR has significant equity value accretion potential as the transition capital structure is paid down, as shown in the graph at the bottom right. And turning to details of the transaction on slide 14, at the highest level, the separation is a spin-off of steel-making coal business to shareholders. Tech metals will retain substantial access to steel-making coal cash flows in the form of a royalty and preferred shares. The separation will be implemented by way of the distribution of the equity common shares of EBR to existing tech shareholders. Shareholders will receive one common share of EBR for every 10 shares of tech resources together with a share of a total cash distribution of $200 million. Shareholders can elect to maximize the amount of cash or EVR common shares they receive, subject to corroboration through a Dutch auction process. In consideration for the transfer of the steelmaking coal assets to EVR, EVR will issue a gross revenue royalty and preferred shares, together called the transition capital structure, Further, in exchange for their minority interest in the Elk View and Green Hills operations and an additional $1 billion cash investment by Nippon Steel, Nippon Steel and POSCO will own a combined 12.5% interest in both EBR common shares and the transition capital structure. Payable quarterly, the royalty will be based on steelmaking coal revenues. generally equivalent to 90% of EBR's free cash flow, and payable until the later on, an aggregate amount of $7 billion in royalty payments will be made, or year-end 2028. EBR will also issue $4.4 billion of redeemable preference shares for the 6.5% cumulative dividend. Tech metals will continue to be listed on the Toronto and New York stock exchanges. EBR has applied for a listing on the TSA. When looking at the planned capital structure for EVR in more detail on slide 15, cash flow from operations will be prioritized for use to ensure the resiliency of operations, including capital investments and fixed annual contributions to a new environmental stewardship trust, which will provide for long-term environmental obligations. While the TCS is in place, 90% of free cash flow will go to the Royalty and preferred share redemptions. Once the TCS is distinguished, 100% of free cash flow is retained by EVR. The remaining free cash flow will go towards an initial base dividend of 20 cents per share and supplemental shareholder returns made up of at least 50% of the free cash flow after TPS payments. Importantly, EVR will be well capitalized at launch, with $1 billion in cash and working capital and no debt. PetMetals is expected to retain investment-grade credit ratings based on preliminary indications. Slide 16 provides detail on the sensitivity on the proceeds from the transition capital structure to changes in steelmaking coal prices. BCS has leveraged the hardcoking coal prices to provide flexibility and resiliency for EBR, while also providing tech metals with continued access to steelmaking coal cash flows during the transition period. This will allow TechMetal to prudently invest in our industry-leading copper growth portfolio while delivering cash returns to shareholders. BTS is forecast to provide TechMetal with not less than $12 billion in pre-tax proceeds over time. Because of the leverage to hard-coking coal prices, a higher price environment would both accelerate payments and provide upside participation for TechMetal through the royalty. Assuming a U.S. $185 per ton long-term benchmark car code control price and a Canadian-U.S. dollar exchange rate of $130, TTS would be fully paid in approximately 11 years. If long-term prices stayed at current spot levels, TTS could be paid in only 7 years while providing $34 billion in combined royalty payments and preferred share redemptions on a 100% basis over that time. Turning to slide 17, another important step announced today is to propose six-year sunset for the multiple voting rights attached to the Class A shares of TEC. This will modernize TEC Metal's governance and provide a simplified and competitive capital structure. On the effective date, each TEC Class A common share will be exchanged for one new Class A common share and 0.67 of a Class B subordinate voting share. Terms of the new Class A common shares will provide that, on the sixth anniversary of the effective date of the dual class amendment, all new Class A common shares will be automatically exchanged for Class B subordinate voting shares, which will be renamed common shares, at which point the Class A common shares carrying multiple voting rights will be eliminated. Based on the 7.8 million Class A common shares currently outstanding and the exchange premium, The additional Class B shares issued on the effective date of the amendment represents approximately 1% dilution. The Separation Transaction and the Dual Class Amendment are subject to 66.2% approval by Class A and Class B shareholders voting separately by class. In addition, the Dual Class Amendment is subject to approval by a majority of Class B shareholders other than Tamagami Mining Company Simitomo Metal Mining, and Dr. Keeble. Those votes are expected to be held at TEC's annual and special meeting of shareholders on or about April 26, 2023. In addition to TEC's shareholder and course approvals, the separation is subject to customary conditions, including approval by the TFS. We expect that the transaction will be completed in the second quarter of 2023, at which time TEC Metals and EBR would begin operating as separate companies. So before we turn to Q&A, I want to start where I began. We could not be more excited about this transformational transaction that will unlock significant value for our shareholders. We strongly believe this transaction is the best pathway to separate and realize the full potential of the two businesses. It will increase the strategic and financial focus of both organizations, allowing the two entities to pursue tailored growth and capital allocation strategies to realize their full potential. It will enable TechMetals to unlock the value of our world-class copper-grown portfolio and capitalize on the opportunities created by the energy transition, funded by steelmaking coal cash flows during the transition period, and position EBR as a pure-flame, high-margin steelmaking coal producer with exposure to strong steel fundamentals and a significant equity value accretion potential as the transition capital structure is paved. each company providing exposure to different commodity fundamental, capital return policies, and value propositions. Further, the dual-class sunset will modernize TechMetal's governance structure. As we move forward, our purpose and values, which are deeply embedded, will ensure health and safety and sustainability are at the forefront of everything we do across both businesses. This includes our unwavering commitments to become net zero by 2050 and nature policies by 2030, and ongoing support for the people and communities where we operate for decades to come. With that, operator, please open the line for questions.