Ladies and gentlemen, thank you for standing by. Welcome to Teck’s Third Quarter 2013 Results Conference Call. Instructions This conference call is being recorded on Thursday, October 24, 2013. I would now like to turn the conference call over to Greg Waller, Vice President, Investor Relations and Strategic Analysis. A. Waller
Thanks so much, Audrey, and good morning, everybody. Thanks for joining us for our third quarter 2013 conference call. Before we start, I’d like to draw your attention to the forward-looking information on Slide 2. This presentation contains forward-looking statements regarding our business. However, various risks and uncertainties may cause actual results to vary, and Teck does not assume the obligation to update any forward-looking statement.
At this point, I’d like to turn the call over to Don Lindsay. We will be following our usual presentation format this morning. I’ll begin with the highlights of our Q3 2013 operating and financial results, and then I’ll turn it over to Ron Millos, our CFO, to provide additional color on the financial side. And we will conclude with a Q session, where Ron, myself and several additional members of our management team will be available to answer your questions.
So starting with Slide 4, the highlights from our third quarter. We set a new sales record for Steelmaking Coal in the quarter at 7.6 million tonnes. Demand from customers in each of our market segments, including traditional contract customers, spot sales and development markets for new customers, has been strong.
We had very strong operational results in the quarter as well. Steelmaking Coal production on an annualized basis was close to our current capacity of 27 million tonnes. In copper, production was 7 higher than Q2, but lower than the record production levels we achieved in Q3 and Q4 of 2012. As a result, given the current market conditions, our near-term attention is on cost reductions, deferring capital spending and reviewing the timing of our various development projects.
As a reflection of our sharp focus on operating costs, unit costs were significantly lower in coal compared with the same period last year. We continue to make progress with our cost reduction program. To date, our existing operations have identified about $330 million of annual ongoing potential cost savings at constant production levels and have implemented $300 million of those initiatives. In addition, we have identified and implemented $130 million of onetime cost savings and deferrals.
We announced last quarter that we had deferred capital expenditures in light of current market conditions, including delaying the Quintette mine restart and slowing development of Quebrada Blanca Phase 2. We are targeting substantial deferrals of both sustaining and development capital expenditures through 2013 and 2014. Reductions to sustaining capital will have a greater effect in 2014 due to the lead times and existing commitments. We will provide a more complete update with our 2014 guidance in our Q4 earnings release. Revenues were $2.5 billion, which was similar to the same period last year despite lower prices for all of our principal products, partially offset by a stronger U.S. dollar and higher sales volume in coal and zinc.
Gross profit before depreciation and amortization was $919 million compared with $1.1 billion in the same quarter last year. Our profit attributable to shareholders was $267 million. Adjusted profit, excluding one-time and unusual items, was $252 million, and EBITDA was $815 million.
Looking at our adjusted profit in additional detail on Slide 6. As you can see, there are only a few adjustments for unusual items to calculate comparative earnings figures for the third quarter. Including these items, adjusted profit declined to $252 million in Q3, or $0.44 per share, compared with $425 million or $0.73 per share in the same period last year. This decline was primarily due to significantly lower coal prices, partially offset by record sales volume for Steelmaking Coal.
I’ll now review our Q3 and year-to-date results by business unit, starting with Steelmaking Coal on Slide 7. Production was up 6 over last year and 12 over the previous quarter. We have a strong sales outlook for Q4 and expect to be near the top end of our production guidance range at 24.5 million to 25.5 million tonnes for the full year.
As I mentioned earlier, we set a new sales record for Steelmaking Coal in the quarter. In addition to the good demand from customers, all of our logistics partners continue to provide consistently strong performance, including Neptune Terminals with its newly-expanded capacity.
However, the current price for Steelmaking Coal remains below what we believe is required to sustain adequate production in the industry in the long term. Revenue remained comparable to the same quarter last year, primarily due to substantially lower coal prices.
We continue to drive down unit costs due to productivity improvements and reduction of input and overhead costs. The total combined costs of our sales of $88 per tonne represents a decline of 7 from Q3 last year. Site costs declined 14 to $50 per tonne, and this was partially offset by a $1 per tonne increase in distribution costs, driven by slightly higher rail transportation costs.
We now expect our annual cost of products sold to be near the bottom of our guidance at $51 to $58 per tonne based on our current production plans. And as a reminder, this incorporates the new accounting rules around capitalized stripping.
Gross profit before depreciation and amortization for our Steelmaking Coal business unit declined by $131 million to $417 million, reflecting lower coal prices. This chart shows our rolling 4-quarter coal production. This somewhat masks the recent increase in production in response to market demand. Since August 2012, we had been running about 10 under capacity. We were running much closer to capacity this quarter at an annualized rate of nearly 27 million tonnes.
We expect to have the capacity to produce 28 million tonnes in 2014. Our production rate though will be a function of market demand. We also have the option to grow capacity by a further 3 million to 4 million tonnes by restarting our Quintette mine. We announced the deferral to restart last quarter, and we will review it again in the spring of 2014. In the meantime, we are continuing engineering work, so if market conditions are good and we decide to go ahead, Quintette could be in production in mid-2015.
At Line Creek, we received our British Columbia Environmental Assessment Certificate for Phase 2 in Q3, which will maintain production and extend the mine life by 18 years.
Looking forward to Q4, the benchmark price for premium products is USD 152 per tonne. We have reached agreements with our customers to sell 5.6 million tonnes at an average price of USD 145 per tonne, and we expect total sales to be at or above 6.3 million tonnes. Copper production was 7 higher than Q2 but lower than the record production levels that we achieved in the second half of 2012 when higher grades were mined at Highland Valley. Moly production also declined, primarily driven by the lower ore grades at Highland Valley.
Total operating costs were unchanged compared with the same period last year. Higher costs at Highland Valley and Antamina were offset by substantially lower costs at Quebrada Blanca. Gross profit before depreciation and amortization for our copper business unit decreased by 19 or $74 million, in Q3 compared with the same period last year, primarily as a result of lower copper prices, reduced sales volumes and low molybdenum revenues.
The chart on Slide 10 shows the progress we have made in increasing copper production over the past 3 years. We are on track to meet our production guidance of 340,000 to 360,000 tonnes for the full year. As we discussed last quarter, Highland Valley throughput and production in Q3 was affected by a 1-month partial shutdown of the mill required to connect the new pebble crusher to the existing grinding lines. The shutdown also resulted in higher operating costs for the quarter.
At Antamina, we set a new quarterly production record. The mine continues to run very well following the expansion completed last year.
At QB, we continue to see the benefits of our initiatives to reduce operating costs since Q4 2012, with a 25 decline in unit cash costs since the restructuring. Given the permitting issues that we face and current market conditions, we delayed development of QB Phase 2. Some additional capital operating costs associated with infrastructure upgrades and permit activities are expected in Q4 and in 2014.
At Relincho, the feasibility study is progressing towards completion at the end of this quarter, and we will review it in Q1 2014 before making any decisions on next steps to further optimize or advance the project.
Slide 11 provides a further update on the Highland Valley mill optimization project. The project is on schedule for substantial mechanical completion by year end, with first feed expected to be introduced in January. The new pebble crushing facility and grinding line updates were commissioned in Q3 and are operating as designed, with some minor modifications required. The new flotation facility will be commissioned next quarter.
We still expect to meet our Highland Valley copper production guidance of 100,000 to 110,000 tonnes for the full year, higher mill throughput rates are expected to start in Q4, with the full throughput benefit in 2014. Zinc in concentrate production was up, primarily due to an increase at Red Dog. As a reminder, we include Antamina’s share of zinc production in these figures, and Antamina’s financial results are reported in our copper business unit as zinc is considered to be a byproduct of this mine.
We continue to expect to achieve our 2013 production guidance of 560,000 to 590,000 tonnes of zinc in concentrate and 280,000 to 290,000 tonnes of refined zinc.
Red Dog sales of zinc and lead were approximately 25 higher this quarter than the same period last year as the shipping fees have got off to a much better start. The 2013 shipping season was completed yesterday, with higher volumes shipped this year than in the 2012 season.
Trail’s refined zinc and lead production grew 4 and 14 respectively, as a result of higher throughput and improved operating efficiencies.
Revenues rose by $57 million to $721 million, driven by significantly higher zinc and lead sales volumes from Red Dog. Gross profit before depreciation and amortization grew by $48 million to $183 million, and increased contributions from both Red Dog and Trail were driven by higher sales volumes and 6 higher lead prices.
Turning to our energy business on Slide 13, and we know that you are all awaiting the sanction decision for Fort Hills, which is still expected before the end of the year. If it is approved, we will be able to release further details covering the scope and cost and schedule in conjunction with the sanction decision.
We could tell you that a lot of time and effort has been put into the engineering studies to update the design basis for the project and to improve the accuracy of the cost estimates. Suncor, the project’s operator, has indicated that they are developing a cost-driven construction schedule, which means they will be focused on doing the project cost effectively.
I will now turn it over to Ron to provide additional color on the financial side.
Thanks, Don, and I’m moving on to Slide 15 here, and it shows our cash flow from operations was $647 million for the quarter. We did spend $486 million on capital projects and a further $160 million on capitalized production stripping costs.
Expenditures and financial investments and other assets were $85 million, which was primarily our investment in Fort Hills, which we account for on an equity basis. We paid $156 million in debt principal and interest and $259 million for our semiannual dividend.
After these items, distributions to noncontrolling interests, foreign exchange translation and other changes in working capital, our cash and short-term investments declined by $540 million — $549 million, I should say, and we ended the quarter with a strong cash balance of approximately $2.3 billion. And finally, we only have about USD 325 million of debt due between now and early 2017. Our pricing adjustments for the third quarter are summarized in the table on the chart. Pricing adjustments were $24 million on a pretax basis, compared with $54 million in the same period a year ago. And these adjustments are included in other income — on our income statement under other income and operating expense.
Pricing adjustments are driven by the change in the quarter and commodity prices.
The chart on the right-hand side simplifies the relationship between the change in copper and zinc prices, and the reported settlement adjustments. And as a reminder, refining and treatment charges and the Canadian-U.S. dollar exchange rate should be considered in your analysis of the impact of price changes in the adjustment, and you should also consider taxes and royalties when analyzing the impact on our net profit.
And with that, I’ll turn the call back to Don for some closing remarks. We have a new record for quarterly Steelmaking Coal sales and demand from customers is strong, and we had solid operational performance in the quarter. As a result, we retained our sharp focus on operating costs, we continue to make progress with our cost reduction program, and we have deferred capital expenditures and are reviewing the timing of our various development projects.
And with that, we’d be happy to answer any questions. And please note that some of our management team members are on the line in different locations so there may be a pause after you ask a question. Instructions Our first question is from Meredith Bandy from BMO Capital Markets. H. Bandy – BMO Capital Markets Canada
I guess my first question was just in terms of your cash costs for coal, if you are guiding to the low end of your guidance, that would seem to imply a pretty big step-up just for the fourth quarter. And is the low — those low 50s, is that a sustainable long-term cost? We expect to continue in the fourth quarter reasonably similar to what we have in previous 3 quarters. The fourth quarter does contain some of the remnant costs from the processing plant annual shutdowns, so that is a little bit of a bump there. And moving forward, we expect to see a continuity of costs rather than any step change over the next few years. And then in terms of Quintette, could you describe a little bit more about what a sustained upturn in met coal would look like that would encourage you to give the green light on Quintette? R. Lindsay
I’ll just make a brief comment and then Ian can as well. And we looked at a lot of factors general economic performance, the countries of our main customers first, the customers themselves, what competitors are doing in terms of supply coming on, all of the supply-demand factors that you would think. And we have 15 people in the room here we could probably get 15 different opinions. And Ian, what other factors would you
Well, as Don stated, I think, in the introductory remarks that we believe that the coal price right now is below the — needs to be sustained for a sustainable future for the level of production that we have across the globe at the moment. And so that we see that we will get back to that point, that we will get to a point where cost prices are — allow sustainable growth in production along with the sustainable demand in — across the globe, including developing countries. The pause in Quintette was to allow us to look at that project in the light of our overall production. We’ve been increasing our production from our existing mines to move closer to our capacity. And we are looking at the project at Quintette to look at all ways of optimizing the capital on that project and then using this pause to make sure that when we develop Quintette, we develop it as capital efficient as we possibly can.
Our next question is from Curt Woodworth from Nomura. Research Division
I was wondering if you could just kind of follow up on the met coal comment you made where pricing appears to be at an unsustainably low level, yet from a demand side perspective, your volumes were, by far, the best quarterly result you’ve had in some time. And if you looked at a lot of the trade data out of Australia, it implies that C1 demand is actually running up pretty strongly year-to-date. So do you feel that the pricing is more a function of cost curve shifts as opposed to demand? Or what is your view on what would kind of, I guess, take met pricing up as you look out the next several years? What we’re seeing in the market, actually, is the market levels have recovered from the lows that we’ve seen in the summer. But pricing, as we said earlier, is still below a sustainable level in the, long terms. However, we are starting to see some slight improvement in demand and in fundamentals, in a number of market areas, as the world economic uncertainty appears to be easing. For instance, China GDP was at 7.8 in the last quarter. Steel production is running at very high level, record levels actually. We’re also seeing increased hot metal production in India and in traditional Asian markets generally. The rest of the world is — demand is kind of flat or slightly lower. So to put all that in perspective, overall demand is better, but the pricing environment is still below sustainable level. And as a result of that, there’s been around 40 million tonnes of production cuts in met coal since the spring of 2012. So in our view, pricing needs to improve, and between now and the end of the year, there’s a number of analysts that are expecting further production cuts on top of the 40 million. And that should bring better balance in the market in terms of pricing.
And maybe I could just add a bit more color, and it links to the previous question as well, directly related to Quintette. A fact of life in this business is that you make far more money on price than you do on volume. And even though we know that Quintette will be much more competitive as an operation than some of the coal operations that are currently still running, we don’t want to contribute to the oversupply that’s in the market, and thereby, hurt the other 6 operating mines that we have. And so we’re very, very cognizant of that relationship between price and current production when we’re looking at bringing on additional price — additional production in an oversupplied market. So those are the kind of things that we’re looking at. And just as a follow-up in terms of the hedge book and the volume guide for coal in the fourth quarter, it does imply a fairly sharp deceleration from what you did in the third quarter, which I know is just a very strong quarter. Or is it more just kind of a tough comp off the third quarter? So I think the thing to emphasize, really, is the combined outlook for the second half of the year. When you add the third quarter sales to our estimates for the fourth quarter, we’re looking at a 28 million tonne annualized rate compared to the first half, which was around the 25.5 million annualized rate. So I think it’s sometimes misleading to compare quarters to — on a quarterly basis because there is some just inherent volatility in the market. But if you look at the overall trends from half 1 to half 2, it’s extremely positive.
Our next question is from Ralph Profiti from Credit Suisse. M. Profiti – Cr Suisse AG, Research Division
There’s been a considerable implied inventory drawdown since Q4 of 2012 in the coal business. And I’m just wondering how are inventory levels looking currently? And if it’s possible to get an approximate split between the mine and the port, that would also be helpful. There has been a drawdown and we had built up inventory levels significantly and a good thing that we did that. We’d like to have somewhere around, I don’t know, potentially 3 to 4 weeks inventory available. And we like to have around 2 of that at the port or at the various ports, and that gives us the most flexibility when it comes to managing the different sort of events that happened through the year in the supply chain. And so we’re around those levels at the moment and we’re pretty happy with the situation. I see now that QB1 has now been pushed into early 2019. But along with that is coming some increased permitting. And can we — can you be a little bit more specific on what those permits are? And our — as we mentioned on the previous quarter, our original EIA was done back before the mine was built back in 1991, and regulations have changed since that time. And with the life extension, we do need to — we’ll revise that EIA and update that for the life extension. But that also comes with upgrading some of our facilities to comply with that new environmental legislation. So that’s what we’re currently working through and the team’s preparing the data and the submission for that EIA update. And that EIA update needs to be completed and approved before we go forward with the QB Phase 2 EIA submission.
Our next question is from David Charles from Dundee Capital Markets. Research Division
Believe it or not, Ralph asked a question I was looking to ask on coal inventories. But I’m not sure if I heard the answer on what your current level of inventories are. Just to repeat what I mentioned before, we’re aiming for inventories between 3 and 4 weeks production. And that’s the situation we’re in at the moment, which is a very good situation for us, to be able to manage the different challenges that happen from time to time along the supply chain. Research Division
So that would suggest then or imply that your inventory levels will be around 2 million tonnes across the supply chain? My follow-up question, I suppose, is sort of switching gears a little bit from coal. Could you maybe give us an overview of the zinc market as it stands? It appears that in the recent LME week, there was some positive, how should I say, comments made on zinc. And I see that Red Dog had an excellent quarter, and I’m just wondering how you see the zinc market develop over the next year or so? The stats came out recently, and there’s still a concentrate surplus being predicted or reported, but it’s down from the surplus from last year. So the overhang on the cost stream market is being whittled down and moved downwards. The Chinese imports for concentrates are also still very strong. They’re up about 14 year-to-date, so the Chinese are still very aggressive in the importing of concentrates. On the metals side, yes, we are starting to see a drawdown of inventories on the LME.
We’re down about 180,000 tonnes so far this year, and the demand side is shaping up very, very well. The North American galvanizing lines are running at strong rates. The automotive sector is up on an annualized rate around 15 to 16 million units. So the galvanizing sector in North America is very strong, and that’s just supporting the premium side of the equation for zinc metals. So it’s a strong market for concentrates, and in China and domestically, for our metal sales is also strong markets. Research Division
And what are you seeing on the supply side? Do you think we’ll really get some of these large mines actually get taken out of production finally? A. Stonkus
Well, what we had — there’s a number of reported, the exact timing — I don’t want to comment on but we had the first large mine closed earlier this year, the Brunswick mine in eastern Canada. So that’s the first of a couple that are being predicted to be closed the next couple of years. So we’re starting to see the stress or the exhaustion of some of these long-life large mines, and that’s trying to impact the concentrate market as these mines start to come to the end of their lives. So we’re in the early stages of those mine reductions or closures, and I expect going to work its way through the metal supply side as well. So if you don’t have the concentrates, you won’t produce the metal, and that’s the signs that we see that are going to be supporting the underlying metal markets in the next upcoming just few months and years.
Our next question is from Josh Golden from JPMorgan.
I think there’s some concern about M and ultimately what the balance sheet would look like. So I guess can you sort of talk a little bit about your one, a commitment to an investment grade rating, your overall approach to credit ratings, and then can you sort of talk a little bit about your approach to M and how you would handle the balance sheet on such a scenario? Any M transactions that we might review, we review solely on that context, and we review it in advance with rating agencies to be sure that it would remain investment-grade, and as simple as that.
Let me ask you if I can get a little bit more granular. Is there sort of a commitment to a mid to a strong investment-grade rating, or are you willing to do some M and go down into a sort of the lower investment-grade rating? You’d have to be looking at an actual M opportunity to be able to answer the question with any sort of clarity. But I’ll repeat what I said that if we want to be committed to investment-grade, we wouldn’t want to be getting too close to where if some event happened in the world and the rating agencies took a very negative view of our industry, which happens from time to time, that they would end up downgrading us.
Our next question is from Alex Terentiew from Raymond James. Research Division
Just have one outstanding question on your coal business. In light of your comments on strong demand for your coal products and assuming demand stays around where it is today, should we expect your Q3 run rate at about 6.7 million tonnes or 27 million tonnes per year to be sustained in 2014?