Teck Resources Limited (TECKB) Earnings Call Transcript & Summary

Welcome to the Teck Resources 2020 Annual Meeting of Shareholders Conference Call, and a special thank you to everyone attending by phone as requested. [Operator Instructions] After the formal business of the meeting and a brief update from Don Lindsay, Teck's President and Chief Executive Officer, we will conduct a question-and-answer session. This conference call is being recorded on Tuesday, April 21, 2020. I would now like to turn the call over to Amanda Robertson (sic) [ Amanda Robinson ], Corporate Secretary of Teck Resources Limited. Please go ahead.

Hi, everyone, and welcome today. As a reminder, this is not a virtual shareholders meeting. We are broadcasting this as a courtesy given the circumstances right now. I will now turn the meeting over to Sheila Murray, Teck's Board Chair. Sheila?

Good afternoon, everyone. I'm Sheila Murray, the Chair of the Board of Teck Resources. And I'd like to welcome all of you to the AGM of Teck Resources Limited. Before we begin, I would like to acknowledge the unique circumstances of this meeting during the current COVID-19 pandemic. My fellow directors and I would like to thank all shareholders who voted by proxy and participating remotely to the extent possible, assisting Teck in safeguarding the health of our employees, shareholders and communities. Following the business of the meeting, there'll be an opportunity for Q&A with management via the conference call. The moderator will advise you how to join the queue once we move to that portion of the meeting. At Teck, we always begin each meeting with a safety message. Today, we would like to acknowledge the work being done every day by health care workers fighting the COVID-19 pandemic, workers at essential businesses who are keeping our society running and the general public for following the advice of local public health authorities in order to limit the spread of the virus. We at Teck are working hard across our sites to protect the health of our employees and communities. In addition, we have created a $20 million fund that will provide direct support to critical services in communities where we operate, including procuring essential medical supplies, donating to medical research, supporting local health care and social services affected by COVID-19, and contributing to international relief efforts. Teck and its people are proud to play our part during this unprecedented time. The meeting will now come to order. And I'll ask Teck's Corporate Secretary, Amanda Robinson, to act as Secretary of the meeting; and Tricia Murphy of AST Trust Company to act as Scrutineer. The Secretary has confirmed that the meeting materials were mailed to shareholders in accordance with all applicable laws on March 20, 2020. I direct that a copy of the declaration of mailing be attached as a schedule to the minutes of this meeting. Management will be pleased to answer any questions arising from Teck's annual report during the question period, which follows. I'll now ask that the Secretary read the Scrutineer's preliminary report on attendance.

We are pleased to report that there are 50 shareholders holding 6,006,592 Class A common shares, equal to 600,659,200 votes, and 333 shareholders holding 400,880,029 Class B subordinate voting shares represented in person or by proxy at this meeting. This represents a total of 383 shareholders holding 1,001,539,229 total votes. This represents 76.14% of the 1,315,457,507 issued and outstanding votes as of the record date.

Thank you, Amanda. Having determined that a quorum is present, I declare the meeting is properly constituted for the transaction of business, and I direct that a copy of the final Scrutineer's report be attached as a schedule to the minutes of this meeting. And now on to the business of the meeting. Scrutineers have advised that the proxies deposited for the meeting have been voted overwhelmingly in favor of each of the items of business to be voted on at this meeting. Nonetheless, because we are required to disclose detailed voting results, we will be conducting voting today by way of ballot. We'll also then hold up the business of the meeting for a final tabulation of votes. The final results of the poll on each matter before the meeting will be included with the minutes of the meeting. Detailed voting results will be filed on SEDAR for those who are interested. The first item of business is the election of directors. The meeting is now open for nomination of directors. 12 directors will be elected at this meeting.

I nominate each of the following persons to hold office as a director until the next annual meeting or until his or her successor is duly elected or appointed, unless his or her office is earlier vacated in accordance with the bylaws of the corporation; Mayank M. Ashar, Quan Chong, Edward C. Dowling, Eiichi Fukuda, Toru Higo, Norman B. Keevil III, Donald R. Lindsay; Tracey L. McVicar, Sheila A. Murray, Kenneth W. Pickering, Una M. Power; and Timothy R. Snider.

Are there any further nominations? If not, I declare nominations to be closed. As the number of nominees does not exceed the number to be elected, I declare that the persons just nominated are elected as your Board of Directors. The next item on the agenda is the appointment of the auditors. I will now entertain a motion to appoint PricewaterhouseCoopers LLP as auditors of the corporation and to authorize the directors to fix the auditor's remuneration.

So moved.

Due to the number of proxy votes received in favor, I advise that the motion has passed. And as such, PricewaterhouseCoopers LLP is hereby appointed as auditor of the corporation, and the directors are authorized to set their remuneration. Now on to the third motion. The advisory vote on approach to executive compensation. Consistent with past practice, the Board has determined to put before shareholders an advisory "say on pay" resolution. I'll now entertain a motion to approve the advisory resolution on the corporation's approach to executive compensation.

So moved.

Once again, due to the number of proxy votes received in favor, I advise that the motion has passed with approximately 95.3% support and that the advisory resolution to accept the corporation's approach to executive compensation has been approved. The last item of business is the approval of an amendment to the 2010 stock option plan and the ratification of 3,690,130 stock options granted under the amended stock option plan. I'll now entertain a motion to approve the resolution with respect to those items as set out in Teck's management information circular dated February 28, 2020.

So moved.

Due to the number of proxy votes received in favor, I can advise that the motion has passed with approximately 88% support and that the stock option plan amendment and the ratification of the 3,690,130 stock options granted under the amended stock option plan be and is hereby approved. We've now reached the end of the formal portion of this meeting. It's been an unusual meeting and an unusual one. It's my first one as the Chair of the Board. I look forward to an opportunity next year to see you all in person. Now before we move to the remarks of the CEO, I propose to declare the formal portion of this meeting terminated. Do I have a motion?

So moved.

I declare this meeting is terminated. And I turn the meeting over to Don Lindsay, your President and CEO, who will make a few remarks on the business of the meeting.

Thank you very much, Sheila. And first, I'd like to start by officially congratulating Sheila Murray on taking on the role of Chair of our Board. Thank you, Sheila, for your leadership and wisdom during what's turned out to be quite a challenging period not just for Teck, but I guess, for the whole world. We look forward to working with you in much calmer times. I'd also like to take this opportunity to formally thank Laura Dottori for her service on Teck's Board. Laura was not able to stand for reelection due to new assignment at CIBC with increased responsibility, and she's made a great contribution to our Board, and we very much appreciate all that she contributed, and we wish her all the best in her new role. Before we begin, I would like to draw your attention to the caution regarding forward-looking statements on Slide 2. This presentation contains forward-looking statements regarding our business. This slide describes the assumptions underlying those statements, and various risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward-looking statement. So these are unusual times we find ourselves in, with the challenge of COVID-19 affecting every aspect of both our business and our personal lives. And that is reflected, as Sheila said, in the somewhat unusual format for our annual meeting. And in keeping with the focus in our communities and Teck's own sites on health and safety, we are conducting a shortened meeting with a very limited number of people in the room, and we are keeping with strict physical distancing guidelines and other preventative measures. Sticking with the theme of health and safety, I wanted to highlight our performance in this area over 2019. We made positive progress on our safety metrics. As you can see on the slide here, we have achieved a nearly 1/3 reduction in high-potential incident frequency over the last 4 years. However, we were saddened by 1 fatality at our QB2 project in November. A full investigation was undertaken, and measures have been put in place to prevent a reoccurrence. Turning to our response to COVID-19 on Slide 4. Nothing is more important than the health and the safety of our employees and our contractors and the communities where we operate. As the scale of the COVID-19 challenge became clear, one of our first steps was to establish a COVID-19 response team with senior representation from across our operating jurisdictions and all our business units. We also moved quickly to put in place comprehensive preventative measures at every one of our sites. And these measures include reducing on-site crew sizes, enhanced cleaning and disinfecting protocols, eliminating group meetings and promoting physical distancing and requiring anyone with symptoms not to come to work, and, of course, promoting preventative measures like frequent hand washing. We are also following the most up-to-date direction from governments and public health authorities in each jurisdiction where we operate. And all of the Teck-managed sites continue to operate, some of them at reduced production, and we are working closely in collaboration with employee unions, such as the United Steelworkers. We have also created a $20 million fund to provide direct support to critical services in areas where we operate. And this includes procuring and donating essential medical supplies, supporting local health and social services affected by COVID-19, and contributing to relief efforts. While, in the near term, our focus is clearly on managing the risks around COVID-19, we are also continuing to advance our 4 key priorities to generate long-term value for shareholders as shown on Slide 5: the QB2 project; RACE21, our innovation-driven business transformation program; the Neptune terminal upgrade project; and our company-wide CRP, that is a cost reduction program. And I'll provide a brief update on each of these. First, QB2. QB2 is a world-class copper project in Chile. And it is a key component of Teck's future growth. Prior to the escalation of the COVID-19 situation late in the first quarter this year, we completed an updated capital cost estimate. At sanction in December 2018, the estimated escalated capital cost of the project was USD 5.2 billion, and the updated estimate remains at USD 5.2 billion. To protect the health and safety of our employees and to support Chilean efforts to limit transmission of COVID-19, we did temporarily suspend construction activities last month. Our focus now is on being ready to restart as quickly as possible once it is safe to do so. Next is RACE21, our innovation-driven business transformation program. Our original target was to generate annualized EBITDA improvements, totaling $1 billion by the end of 2021. The challenges of COVID-19 have required us to be adaptable and our RACE21 team is now focused on locking in the improvements already implemented in 2019, and on preparing and planning for additional improvement projects planned for 2020 and 2021 to generate additional value in our business. And we remain optimistic that RACE21 will have a very significant positive impact in the transformation of the business. The upgrade of our Neptune Terminal facility is our third key priority. Neptune upgrade project will secure a long-term, low-cost and reliable supply chain solution for our steelmaking coal business unit. And it is strategically important to Teck. To date, COVID-19-related issues have not substantially affected works on the critical path and the project and major equipment deliveries remain on track. Although the pandemic may still affect construction progress or deliveries of key equipment, completion of construction is still expected in the first quarter of 2021 with the new double dumper expected to be commissioned in second quarter of 2021. And now cost reduction. Our fourth key priority is, as I mentioned, the company-wide cost reduction program, CRP, as we describe it, that was first announced in October 2019 in response to declining prices and global economic uncertainties. In the context of COVID-19, we have intensified the focus on our CRP across the organization. And we are increasing our total targeted reductions to $1 billion of previously planned spending through to the end of 2020. The strength of Teck's balance sheet is key as we navigate the challenges to the global economy posed by COVID-19. Our liquidity remains strong at $5.8 billion, including $525 million in cash as of yesterday. We have no significant debt maturities prior to 2035, and we have investment-grade credit ratings from all 4 credit rating agencies. And for our QB2 project, we have a prudent funding and financing plan in place and no contributions to project capital are expected from Teck until Q1 of 2021. Turning to Slide 7. As always, sustainability underpins everything we do. And I'm proud to say that our efforts on sustainability have been recognized by a number of organizations. In 2019, Teck was named to the Dow Jones Sustainability World Index for the tenth consecutive time. And for the first time, we were the top-ranked mining company on the world and the North American indices. And in 2020, we were the only mining company named to the Global 100 Most Sustainable Corporations List. Our focus is on managing the risks around COVID-19 in order to safeguard the health of our employees and our local communities while continuing to operate safely. We continue to progress our 4 key priorities: QB2, RACE21, Neptune and our company-wide cost reduction program. And we have a strong financial position and are well positioned to weather the challenges around COVID-19. We have faced adversity before, and each time, we are focused on controlling the controllable, advancing our key projects, staying resilient, and we have emerged stronger. And I am confident the same will be true with COVID-19. With that, I will turn it back to the operator. I will be happy to answer your questions.

[Operator Instructions] Our first question is from [ Chad Pederson ].

I had a question about Teck's coal operations. Can you provide more detail on the reason for the plant expansion project at Elkview Operations and what it means for the company's coal business?

Hey, I'll give an overview, and then I may call upon Robin Sheremeta to give further detail. First of all, we have an excellent resource and reserve at Elkview and it's high-quality coal that our customers certainly have a strong demand for, and it achieves a higher revenue per tonne. We saw the opportunity to -- for moderate capital to be able to expand the wash plant there and take capacity from 7 million tonnes to 9 million tonnes. And this would help to replace the upcoming closure of Cardinal River, which was a good mine that ran for quite a number of years, but at a little bit lower quality coal and certainly a higher cost operation. And it was producing about 1.4 million tonnes last year. So it would increase our production overall of higher quality coal. And I'll turn it over to Robin just to talk about a little bit more of the details. Well, it looks like -- we confirm that Robin is not on the line. But just a couple of other points on that. We did invest $135 million to do the plant expansion. And with the lower cost coal from Elkview, which is around CAD 60 cost at the mine site and replacing coal at Cardinal River that was between $110 and $120 cash cost and with the increased revenue, we estimate that if you assumed USD 150 coal price at current exchange rates, that the net benefit would be about $160 million a year of EBITDA to Teck from that $135 million investment. So a very good return on capital.

[Operator Instructions] Our next question is from Bob Bishop.

I guess I had a question in terms of the dual share structure. Over the last 10 years, the company has invested about $6 billion in the oil sands. And they've had to take about $3 billion of write-offs in the last several months. And this year, unfortunately, it looks like it could lose about $500 million of cash just on an operating basis. Many of the people on this Board, and we're here for those decisions and certainly, Don, you were there, too. And I guess, I'm just trying to understand, and maybe my question is, this dual share structure kind of has enabled this to happen without accountability or consequences for the oil sands project. And what -- I guess, what benefit do you see to having this dual share structure today?

Thank you, Bob, for your question. I think there's a couple of parts to it. One is the Fort Hills oil sands investment itself, and the other is the dual share structure, and the...

Right, more of the dual share structure, depends.

And what looking forward. Well, I'll address the second part first, but I do want to come back to the oil sands. So on dual share structure, it has been in place for several decades. I guess the benefits are that it allows companies to take a longer-term view, which I think is directly related to your question. And then, of course, the cons in these shares are that it prevents takeovers during the down cycles and those kind of things. The Board -- neither the Board nor management has the ability to change the dual share structure. It would really be up to a vote of each of the classes of the shares for that to happen. And so it's something that you want to call, in my understanding, is that in terms of [indiscernible] holdings [indiscernible] it is likely to stay in place. If I could just comment on the oil sands because certainly, it's going to be a very tough year ahead as you described. And the world has changed quite significantly from when we went into the business. If I go back in time to when Teck first went into the oil sands business, at that time we had quite a number of reasons why we thought it was appealing. First, 4 of the 10 largest market-valued companies in Canada were oil sands companies. Oil was trading consistently above $100. And the theory of the day was peak oil. It was a mining business that we were going into. We weren't going into the oil business to explore for and drill for oil. It was all about large open pit mining, shovel truck operations, which we had a lot of expertise in. In fact, we had over 5,000 people probably within an hour's drive of the Alberta border that were known to be very strong operators for the open pit mining. It was in Alberta, and as geopolitical jurisdictions go, that was a pretty good jurisdiction. If you sit in my seat and you have a choice between some of the much higher risk jurisdictions around the world, Alberta looked like a pretty good place. It had a very long reserve life, 50 years, which meant that you'd be able to catch several economic cycles, probably 5 or 6 cycles. And as we all know, in the commodities business, whether it be copper, zinc, oil or whatever, you tend to do very well for 2, 3 years, get all your capital back. And if you can do that 5 or 6 times during the course of the mine life, then your IRR will have turned out very well. It didn't have particular technology risk. It had technology upside and that was proven technology that was already in operation. And we did benefit from the upside when we moved to paraffinic froth treatment, and that allowed us to produce a barrel of oil that's much lower carbon emissions than the industry. In fact, less than half of the industry average and Alberta at the midpoint for all the oil in North America. So that was a plus. Also, oil is a commodity you could hedge as long as 15 years out. You certainly can't do that with coal or even copper and zinc. So that was a benefit. And by getting into oil, it would hedge our diesel costs as you know and large open pit mines are a big consumer of diesel. And then, it turns out at that time, and for most of the last 10 years, the oil sands industry tended to trade at a higher multiple of EBITDA, between 8 and 9, possibly 10, whereas the base metals companies tended to trade between 5 and 6. So by adding it to our portfolio, it would strengthen the portfolio overall, and we hoped for maybe a 0.5 point increase on the multiple. So those are all the reasons why we went into the business. Clearly, over the last 10 years, the world has changed and changed quite dramatically. And ESG factors and just general perception of oil and carbon, in particular, are a very, very big issue in society today, an issue with investors. And I can tell you that for my part anyway, if I had known back in 2006 that the world would be like this in 2020, I don't think I would have done it. But we can't all go back in time and redo it. So we have to then make decisions in today's situation to do the best of it. What we have said is that Fort Hills has been tremendous operating and engineering success. Suncor did a very good job bringing it online. And in fact, 80% of projects of this scope never hit design capacity. Fort Hills, when it brought the third train on in May of 2018, it actually hit design capacity for a few days within 3 weeks. And by the end of the year, in fact, the last month that Fort Hills was able to operate at full capacity was December of 2018 and it ran at 104% of capacity with cash cost of CAD 23. We know that there are debottlenecking opportunities. Suncor has highlighted that it could take production up another 20% with a targeted cash cost of CAD 20 or below. And so we look forward to that occurring. But of course, Alberta ended up shutting in oil given the lack of pipeline capacity. And so that has had a big effect on the operation. It hasn't been able to run at full capacity since then. But we do know that the operation itself runs very well. Our position was that we would wait out for a couple of years to see the pipelines get built and the differentials stabilize at lower levels and to see debottlenecking occur. It may be that, that's not the right approach. And so the Board is reviewing the situation. And we are in discussions with Suncor and Total, our partners, as to what the operating profile will be going forward. As the presentation in our investor call this morning talked about, it has been reduced to one train at this stage, and we are looking at other options. So we look forward to better days in terms of the energy sector, in particular. Everybody has been hit in the energy sector. No one's seen volatility like yesterday ever before in the history of those markets. And we will continue to focus intensely on this asset to try to make the best decision for shareholders.

We have no further questions registered at this time. I would now like to turn the meeting back over to Don Lindsay.

Okay. Well, thank you very much for attending today. It is an unusual circumstance for an annual meeting. And as Sheila said earlier, we do hope that next year, we'll be able to see you in person and that the world will fix itself. It always does, and we do see encouraging signs in different countries around the world where the countries are getting their arms around the COVID-19 challenge, and we're looking forward to better days. As I say, at the end of every meeting we have at Teck, stay healthy, keep the faith, this too shall pass and all will be well. Thank you very much.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.