This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk14: 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.
spk16: 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.
spk04: 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.
spk14: Certainly. To join the question queue, please press star, then one on your touchtone telephone. You'll hear a tone acknowledging your request. We ask that you please limit yourself to one question and one follow-up. If you are using a speakerphone, please ensure you lift the handset before pressing any keys. If you wish to remove yourself from the question queue, you may press star, then two. The first question comes from Ores Swogdow of Scotiabank. Please go ahead.
spk02: Hi, good morning and congratulations on the proposed transaction. I'm wondering, Jonathan, if you can give us some colour in terms of some of the options that were being evaluated and why ultimately the spin-out was the chosen, I guess, avenue to separate the business versus just an outright sale of the core business.
spk04: Yeah, Oris, thanks very much for your question. You know, this is something that's been under consideration by the Board of Directors of Tech for a number of years now, and we've worked very hard through a range of alternatives to get to this point that we're announcing today. Ultimately, we decided that a separation via a spin-out of steel-making coal business to tech shareholders was the optimal means of raising the two great companies, Tech Metals and Elk Valley Resources. It sets both companies up for success. For Tech Metals, of course, this allows us to continue to use cash flows from the coal business to fund our unrivaled copper growth portfolio. and continues to develop and deliver the copper that the world is going to need for electrification and decarbonization. In the case of the steel-making coal business or Elk Valley Resources, that will be a world-class standalone company with high margins, long life reserves, and producing a product that the world needs for decades to come to produce steel required for the infrastructure for decarbonization. Ultimately, the creation of these two Separate companies, we believe, will give investors a choice to allocate funds from their portfolios based on their priorities and based on the different strategies and capital allocation framework that these companies will have going forward. So, Oris, it's been an extensive process, as you would imagine, conducted over an extended period of time. We've all our buildings on the table, but ultimately, the board and the management team concluded that this was the optimal way forward.
spk02: Thank you. And as a follow-up, on your slide 16 that talks about the illustrative sensitivities to the proceeds, how should we think about sort of your OpEx and CapEx assumptions moving forward here? Does this assume kind of 23 guidance levels for both stay flattish moving forward, or does this assume kind of a, I guess, revision here to the norm with respect to CapEx and OpEx. I'm just wondering, you know, in terms of backing into the 11-year DCS payment on the base case.
spk04: Yeah, I think what you'll see in that, Boris, and I'll start with referencing the coal prices used there, that, you know, they reflect the near-term consensus prices over the coming years, and then we make a long-term assumption that it's US$185 per tonne for hard coal and coal. It would be fair to say that operating costs somewhat follow that profile. In the near years, they reflect elevated costs as a result of the inflationary environment that we're working in. As we've said, in our quarterly, we expect elevated costs to remain through 2023 and, of course, potentially into 2024. we would expect to see some reversion and reduction in unit cost in the steelmaking coal business, which of course is going to be required if we're going to see the sort of reversion in coal prices that we highlight in the deck. From a capital expenditure perspective, we do expect elevated levels to remain through the current year and in the near years. In particular, as we continue to make heavy investments in water management and water treatment in the coal business, However, beyond that, the investments in water management and treatment should decline, and we'd expect to see our sustaining capital revert back towards historical long-term levels. So, Horace, that's a long answer, I know, but we do see some continued elevated unit costs and capital costs in the near years, but we do expect to see something of a reversion in the years beyond that.
spk14: Our next question comes from Greg Barnes of TD Securities. Please go ahead.
spk05: Yes, thank you. Jonathan, can you talk about the timelines for all of this to really unwind? It's seven to 11 years on the TCS and six years on the sunset on the Class As. Was there some reason you pushed them out that long, or is it just maximizing the opportunities?
spk04: So starting with the TCS, Greg, what we're trying to achieve here is getting a balance between continuing to fund the copper growth portfolio for tech metals and, of course, to realize the full value of the EGR business against the desire ultimately to separate the two. and that's a balance that I think struck well through the timelines here. Of course, as you note, ultimately that will be a function of predominantly hard-coating cold prices, but also the underlying cash flow generation of the EVR business. With respect to the sunset provision of the Class A shares, ultimately that was the subject of a negotiation between the majority Class A shareholders and a special committee We think that the 60th sunset provides tech metals with good cover to continue to deliver on our unrivaled copper growth pipeline, but ultimately provides a fixed timeline for aversion to a modern capital governance structure.
spk05: And secondarily, both of these transactions require votes from shareholders because either one of the votes depends on the other or they go ahead independently of each other.
spk04: Yeah, the votes for the separation, Greg, and for the changes to the A4 share structures are independent of one another.
spk05: So one will go ahead if the other is not approved.
spk04: That's correct, yeah.
spk05: Thank you.
spk14: Our next question comes from Lucas Pipes of B. Riley Securities. Please go ahead.
spk06: Thank you very much. Good morning, everyone. My first question is on the capital return profile of tech metals. You mentioned discipline. How do you envision balancing capital returns at tech metals with the desire to grow that business? Thank you very much.
spk04: Yeah, thanks for the question, Lucas. And essentially the approach to capital allocation will remain unchanged at TechMetals as it has been in tech for the last number of years. We will continue to advance our copper growth pipeline and we will continue to invest in the development of those copper projects throughout the Americas. However, we will continue to focus on balancing that investment in growth against strong cash returns very well through 2022, where we invested significant capital in QV2 and bringing that towards completion, whilst ultimately approving and announcing around $2.4 billion of returns to shareholders through a combination of dividends and buybacks, and also buying back $1.3 billion of our debt to improve the balance sheet foundation that we have. So that will remain unchanged. Just as a reminder, the way the capital allocation framework operates is that the first 30% of available cash flow is automatically returned to shareholders by way of dividends and buybacks. And beyond that, the balance of 70% could also be returned to shareholders or could be allocated to the new growth options in the portfolio. And that will be the same allocation framework that's going forward.
spk06: That's very helpful. Thank you. Then a quick follow-up on Nippon Steel and POSCO respectively will control 10% and 2.5% of both the EVR and TCS following the separation. Is that right?
spk04: Yeah, that's absolutely correct, Lucas. We couldn't be more excited by the investments that we've had here from Nippon Steel and from POSCO. They are both world-class steelmakers. They have been long-term customers. the business here. In particular, the $1 billion of cash received from Nippon, I think, is such a strong endorsement both for the quality and valuation of EVR, equivalent to an enterprise value of $11.5 billion.
spk14: Our next question comes from Brian MacArthur of Raymond James. Please go ahead.
spk03: Good morning, and thank you for taking my questions. Can you just tell me what happens in this scenario? I realize there's a minimum 250 in the coal business, and I understand there's a sunset in 2028. But what happens if, you know, coal business has a really tough year, go down to the 250, so you don't kick out anything for the quarter, then the call price goes up a lot. Is there a catch-up mechanism to get back that cash flow in the quarter you missed, or do you just plain lose it because you tap out at the low end? Does that make sense to you, if you see what I'm saying?
spk04: Yeah, well, I wasn't quite sure, Brian, about the $250 that you were referencing here, but essentially there wouldn't be a catch-up in the quarter. The cash flows will flow to the TCS and the tech levels when available.
spk03: Oh, sorry, you mean the cash balance. Yeah, the cash balance, the $250. So say it goes to $150, right? Then technically for a quarter, I guess you don't – I assume you pay the prep, but you don't pay the royalty – then the next quarter your cash balance goes up because the coal price is volatile. Do you actually make up that lost payment, I guess is what my question is, or does it just, you know, the time clock keeps moving to 2028 and then what, or the $7 billion and you either make it or you don't make it?
spk04: So you would still operate on the $7 billion of royalty and the $4.4 billion of fresh air. They would be unchanged. I guess in the scenario you're painting it, once the coal business has recovered its cash position back to $250 million. So there's no permanent loss of recovery of cash flows to tech metals. It really just extends to duration.
spk03: Perfect. Thank you. And the second question, just to be very clear, on the A shares, you're spinning out these new shares in coal. They don't have A's and B's, right? They're just common shares in the new vehicle, so there's no protective rights there.
spk04: That's exactly right. There'll just be a single class of common shares at EBR.
spk03: Thank you very much. I'll get back in line.
spk04: Thanks, Brian.
spk14: Our next question comes from Tamina Tanners of Wolf Research. Please go ahead.
spk09: Hey, good morning, everyone. Thanks for the detail. Just trying to process it all still, but wondered on the coal spin, if you could talk a little bit more about, you know, could there be further partners, any offtake agreements, or is this just purely a stake? Why just Toronto listed? And, you know, is there any price embedded in the $11.5 billion, or is that simply in this conclusion from the amount that was paid by or that will be paid by Nippon Steel?
spk04: Yeah, thanks. Thanks. year. We don't have plans for further investment into that business and we don't have plans for further off-takes associated with that business. As I said, we're incredibly excited by the investments we have secured from Nippon and Costco, but nothing in the works beyond that at this point in time. The $11.5 billion enterprise value, of course, reflects the long-term outlook for the business based on typical production operating cost and capital assumptions and of course there is an embedded long-term steel making coal price in that as well. We think it's an absolutely fair valuation for the business and we're very happy to see Nippon Steel confirm that with their $1 billion investment for 9%.
spk09: Okay, thanks. And just on that last question, just wondering if it would be just Toronto listed or why that decision. And the second question was just on QB2. Just to clarify, it sounds like there's really not any update on QB2 from when we heard from you last in terms of, aside from the comment on the accounting for costs. Is there anything we're missing or is it exactly the same guidance as before in terms of volumes and cadence?
spk04: Sorry, I missed your question on the TSX. Yes, EDR will be listed on the TSX only. There's no magic behind that. That's just where we were elected to have that. It's a Canadian company and a world-class mining company. QB2, that's in very good shape. We are in touching distance of this production. I'm going to hand over to Red Conga briefly, who can just give you a slightly more detailed update on status and when that first production is expected.
spk10: Yeah, good morning, Tanana. We're really in an exciting part of the project right now. We're commissioning all of the equipment from the seashore all the way up to the concentrator at elevation. We're really happy with the desalinization plant and how that's running and we're pushing water up the hill now to the concentrator. At the concentrator, we've run all of the motors, the big mills, a lot of those pieces and commissioning require lengthy runs of 8-12 hours consistently. We've done all of those successfully uh there were a couple of uh items with uh key conveyor belts where one one we're resplicing it right now weren't we weren't happy with that configuration and another conveyor where we're doing a little extra work on the tensioning mechanism so it's it's ready to go we've already crushed rock and uh in the primary pressure and, you know, it's imminent pushing rock through those grinding mills and getting all the rest of the equipment going. So very, very exciting time for us on the project.
spk09: Okay, great. Thank you.
spk14: Our next question comes from Emily Chang of Goldman Sachs. Please go ahead.
spk13: Good morning, Jonathan, and thanks for taking my question. My first question is around the tech metals business. It sounds like there's going to be a lot of copper growth there in the portfolio, but how are you thinking about the zinc assets? Do they at some point become non-core or is there still investment there ahead?
spk04: Hi, Emily. Thanks very much for that question. No, zinc remains absolutely core to tech metals going forward as it is today in the portfolio. What we've said about zinc is we don't expect that to be an area of growth. to the same extent that we focused on copper. But certainly we'd like to maintain our current levels of production there or thereabouts in insect mammals going forward. Obviously, we have a large position in Antamina, which we expect to continue to operate for a long time. Red Dog, as we've said before, the current open cut mine comes toward end of life in the early 2030s. We're working now on the extensions beyond that, which would involve us going underground at Red Dog. That is something that... looks very attractive given the quality of the resources that we have there. And we would fully intend to maintain the trail starting and refining operations that we have. So it will remain very much a core business for us. It's a very strong cash-generative business for us. You know, people will take it as about a billion dollars a year and doesn't consume a great deal of capital.
spk13: Great, that makes sense. And a follow-up is just around the dual-class share structure collapse discussion there. During this sunset period, what does this mean for the voting rights of the Class A shareholders? Does this essentially preclude tech from any M&A during this period?
spk04: So there will be no change to the voting rights until the end of the six-year period, so as is today.
spk13: Very clear. Thank you.
spk14: Our next question comes from Lawson Winder of Bank of America. Please go ahead.
spk11: Hi. Good morning, Jonathan and team. Thanks for the update, and congratulations on an interesting transaction. I wanted to get your thoughts on the way that the Class A shares are being converted. So, effectively, each class share is being converted, plus they're getting 0.67% of Class B. And yeah, I'd love to hear your views on how that kind of valuation gets arrived at.
spk04: Yeah, look, ultimately, Lawson, that was a negotiation between the majority holders of the Class A shares and the special committee of the board. You know, it reflects consideration for valuable voting rights, essentially, that will be foregone through this sunset period. But importantly, this represents only 1% dilution of tech shares overall. So, in that context, we think that the valuation struck here benchmarked very well against precedent.
spk11: Okay. That's fair. Obviously, I understand that you can't say a lot there. And I also wanted to follow up on QV2 and just get an idea for how the ramp up to first concentrate production might look. So from when you feed first ore to the mill to when you have first concentrate, like how long will it take for that to flow through the process?
spk04: Sorry, Red, the timing from first ore to the mill to first concentrate?
spk11: Yeah, exactly. Thank you.
spk04: Red, do you want to add a bit of color to that?
spk10: Yeah, well, listen, no. Think about the first half of this year as the ramp-up period, and as we get toward the end of the year, the facility will be running at full speed. And, you know, that guidance range that we've provided would have copper production commensurate with that.
spk11: Okay, so somebody asked another way, do you expect to produce concentrate in Q1?
spk10: Yeah, we'll make first copper in Q1 for sure.
spk11: Okay. Okay, fantastic. Thanks for clearing that up.
spk14: Our next question comes from Carlos de Alba of Morgan Stanley. Please go ahead.
spk15: Yeah, thank you. Good morning, Jonathan and team. Just on the transaction EBR, given the potential environmental and remediation considerations of that business, does the authorities in Canada have to approve the transaction or have you discussed with them, you know, the spin-off plan so that they are aware and there's no potential issues down the road? And second question is just to clarify, the EVR will start with not debt, right? So basically, debt free going forward.
spk04: Yeah, so I'll just address the second question first. You're exactly right, EVR will be debt free. Talking then just about the environmental and external approvals you asked about, there are no required approvals for the separation. There is an approval required from the TSX for the listing, for the site of our shale approval. We don't require anything from regulators or government. We have engaged with both provincial and federal government regarding this transaction, and we've also critically engaged with the indigenous groups who are present in the Elk Valley and very much involved with our steel making coal business there. We don't require approvals from them, but of course, we will continue to maintain very strong productive relationships with them going forward.
spk15: All right. Great. Thank you.
spk14: Our next question comes from Dalton Barreto of Canaccord. Please go ahead.
spk07: Thanks. Good morning, Jonathan and team, and congratulations. My first question is on the proceeds from EBR into tech metal. Jonathan, can you tell me if there are any restrictions on the use of proceeds in tech metals, or do you have full carte blanche into how you use those funds?
spk04: Hi, Dalton. Thanks for the question. No, no restriction at all on the use of proceeds that tech metals receives from EBR. As mentioned previously, our focus will be to deploy those and to assist with the growth of our copper portfolio while balancing return to shareholders and maintaining a strong partnership. So we will use those proceeds in a manner that's very consistent with our strategy.
spk07: Okay. And then when you're running tech metals, does the strategy remain the same, or will you look to be more aggressive on things like M&A to accelerate the growth profile?
spk04: The strategy will remain the same, Dalton. The focus is on copper growth, and the focus of our copper growth is through our organic pipeline of projects whilst returning cash to shareholders. So no change in that respect. And, of course, we maintain for a number of years what has been a key part of our strategy, which is to use cash flows from the steelmaking coal business to support that capital allocation strategy.
spk07: Okay, thanks. Then maybe one last one. You're harvesting, call it 90% of the free cash flow back into tech metals from EVR. So tech metals doesn't really look very different to the business today when you consider where those funds are coming from. So what kind of gives you comfort that you will re-rate on the back of this?
spk04: Just one point of clarification there, while 90% of the free cash flow from EBR goes to the transition capital structure, 87.5% of that goes to tech metals and 12.5% goes to Nibon and Costco, just for clarification there. But we are creating two entirely separate businesses here with separate listings, with separate management teams and separate boards. We do recognize, of course, that through the transition capital structure, this is, as it's described, a transition which will go on for a number of years until we see a complete separation or financial independence of the two companies. And, of course, we think as that is paid down, then that will create value accretion or equity accretion for DVR and will increasingly have tech metals as an entirely independent tech metals company.
spk07: Thanks, Jonathan. That's all for me.
spk14: Our next question comes from Chris Lafamina of Jefferies. Please go ahead.
spk01: Thank you, operator. Thanks for taking my questions. I have a couple of questions about changing control provisions. I think I read somewhere that in the case of DVR and a change of control, the the royalty payment that TechMetals would receive would increase from 90% to 92.5% of the free cash flow. What happens in the event that TechMetals becomes a potential acquisition target? Is there any change of control around tech's ownership in EBR? Any sort of poison pill there that would reduce the value to a potential buyer of tech if he were to be acquired? And then, sorry, so the first question is around, am I right about the change of control on EBR, and then secondly, change of control on tech if tech were to be acquired?
spk04: Thank you. Yeah, you're correct on both fronts. In the first instance, there is a step up from 90% to 92.5%, and there will be no implications with respect to any acquisition or sale of the equipment.
spk05: Okay, thank you.
spk14: Our next question is a follow-up from Maurice Waukadao, Scotiabank. Please go ahead.
spk02: Hi, thanks for taking the follow-up. Jonathan, just curious, given the spin out of the coal business, you obviously have a lot of copper growth options internally. Do you see advancing some of those growth options quicker than you would have previously? I'm just wondering if, given now you've got very clear focus on coal cash flow coming into the business to fund copper, whether we should anticipate that you may bring forward some of those internal copper projects.
spk04: I mean, I think, you know, in one sense here, there's no real change to the strategy for tech metals, which is to develop that copper growth pipeline. And this transaction per se doesn't signal a change or an acceleration of that. You know, of course, we're always looking at the optimal pace of development of the projects we have in the portfolio and the optimal sequence of those projects, recognising that we can't do everything at once. As you know well, permitting can be one of the greatest restrictions in terms of the timing for development. As I mentioned, at the top of the core, we're advanced, focusing studies on permits across a range of our projects here. And given the focus on critical minerals from a number of governments around the world, it could be that permitting timelines are reduced somewhat. As I mentioned, you know, this transaction in and of itself doesn't change the strategy because we've already been very focused on the development of the project.
spk02: That's perfect. Thanks. And can you just remind us, what's your current plan for the timing of the QB Mill expansion?
spk04: So we have submitted a permit application this quarter, and we are in the process of completing a feasibility study, which will be done by the end of this year. And therefore, we said that, you know, there's the potential for an approval for the Hubie Mill expansion in early 2024. Great.
spk02: Thank you so much. You're welcome.
spk14: Our next question comes from Alex Taranto of Stiefel. Please go ahead.
spk08: Good morning, everybody. I know there's a lot of details in here, and I appreciate you guys doing this call earlier today. But question for you on the tech coal spin-out EVR. I know you mentioned that you expect tech metals to retain investment-grade credit rating, but how do we think about the – or how will the cash flows from that be allocated to tech? I'm just trying to think of in terms of EBITDA calculations and any covenants or any ratios that we could think of for tech going forward.
spk04: Yeah, I will invite our CFO, Crystal Christi, to just talk a little bit about how those cash flows will be treated. We have had received preliminary indications from the three credit rating agencies that cover us, Fitch Moody's and S&P, and their preliminary indications are that we will maintain investment grade ratings for tech metals. But I'll just let Crystal briefly explain how those cash flows are treated.
spk12: Hi, Alex. Thanks for your question. Just in the context of the treatment on our financial statements, maybe that's the most important place to start. We will, in tech metals, deconsolidate our interest in the coal business unit on closing of the transaction. So, in our unadjusted profit figures, you won't see the results from the coal business unit reflected there. But given the recurring nature of these cash flows coming into tech metals, we are planning to adjust our EBITDA for both the royalty and the prep share dividends and redemption. So, you should expect to see those coming through our adjusted EBITDA calculations as well as adjusted ETF. And you could model it that way.
spk08: Okay, great. Thank you.
spk14: Our next question comes from Lucas Pipes of B. Reilly Securities. Please go ahead.
spk06: Thank you very much, Operator. Thank you for taking my follow-up question. I believe Nippon and Posco are receiving rights to the coal. Is that in exchange for their prior interest? How should we think about the soft takeaways? Thank you very much.
spk04: Yes. here is a conversion of those interests to their interests in equity and the transition capital structure here. They will retain off-date agreements, long-term off-date agreements with DVR. I won't talk about commercial terms of those contracts, but substantially similar to the sort of agreements that we've had with them in the past, so those are going to change that.
spk06: All right. I appreciate it. Thank you, and again, best of luck.
spk14: This concludes the question and answer session. I will now hand the call back over to Mr. Phillips for closing remarks.
spk16: Thanks, Ariel, and thanks, everyone. Just before I hand it over to Jonathan for his closing remarks, I just want to say that, again, lots to digest. I'm sure there will be plenty of other questions. Please reach out to me or Helen or indeed anybody on the IR team. We'll be happy to do our best to get in touch with you and have a conversation, and we will be delighted to help out. With that, Jonathan, over to you for any final remarks.
spk04: Yeah, thanks, Fraser, and thanks, everyone, for joining the call today and for the good questions. You know, we at Tech couldn't be more excited about this transformational transaction that we've announced today. We believe it will unlock significant value for our shareholders. And we do believe that this transaction structure is the best pathway to separate and realize the full potential of both of these great businesses. As I mentioned, it will increase strategic and financial focus for both organizations, allowing the two entities to pursue tailored growth and capital allocation strategies into the future. TechMetals, this is about unlocking the value of the world-class copper growth portfolio and capitalizing on the opportunities presented by the energy transition, continuing to be funded by steelmaking coal cash flows through the transition period. And, of course, we set up EVR as a pure-play high-margin steelmaking coal producer, exposed to strong long-term steel fundamentals, and we have the potential for strong equity value accrues as the capital structure is paying down. Critically, this separation provides our investors the flexibility to choose and optimize their portfolio allocation between bed metals and steel-making coal, given that both companies provide exposure to different commodity fundamentals and capital return policies. And finally, of course, the steel-class share sunset will modernize technical governance structure. With that, thank you very much. We look forward to following up this conversation with you
Disclaimer