Teck Resources Limited (TECKB) Earnings Call Transcript & Summary

Good day, everyone. I want to welcome Teck Resources. This is Timna Tanners. I am the America's, Metals & Mining Analyst with BofA. It is my distinct pleasure to welcome Don Lindsay back to the conference. Teck and Don have been a strong supporter of this conference over the years. We wish to thank them for continuing to support it in this new and hopefully Only Virtual Conference. And with that, I will hand the call over to Don. He will go through slides. Keep in mind, that the slides are not controlled by anyone. You can look to them at your own leisure. And with that, I will hand over to Don.

Well, thank you, Timna. And thank you to Bank of America Securities for the opportunity to speak with you this morning. I am going to do something a bit different today and not actually speak to slides, though we have our IR presentation that people can refer through a delay. I will note though that this presentation contains forward-looking statements regarding our business, with a range of assumptions underlying those statements. Various risks and uncertainties may cause actual results to vary. And Teck does not assume the obligation to update any forward-looking statement. We also use various non-GAAP measures in this presentation, and you can find explanations and reconciliations regarding these measures in the appendix of our latest IR presentation, which is available on our website. So at Teck, before we begin every meeting, we take time to focus on health and safety. And clearly, the most pressing issue in this area, facing all of us and the whole world right now is COVID-19. At Teck, we have a comprehensive approach to managing the risks and the impacts of COVID-19. And they are based around 5 pillars: first, prevention; then employee support; aid for communities and public health organizations; communications; and business continuity. At our sites, we've implemented comprehensive preventative measures that are in line with the guidance from health authorities. And these include, reducing on-site crew sizes, enhanced cleaning and disinfecting protocols, eliminating group meetings and promoting physical distancing, requiring anyone with symptoms not to come to work, ensuring adequate supplies of personal protective equipment, including masks and promoting measures of frequent handwashing, which the World health Organization says is one of the most critical prevention steps. And our people and our unions are working extremely hard to ensure that the measures are being diligently implemented. And in fact, at just our steelmaking coal operations, we've conducted over 17,000 audits and achieved an impressive 97.5% compliance rate. To date, we have not had a case of COVID in these operations, so we know that strong protocols can be successful. We're also providing employees and their families with additional supports, including access to specialized health resources. And we've 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, such as 1 million KN95 masks for health care providers in BC and also supporting local health and social services affected by COVID-19 and contributing to relief efforts. Mining as an industry has stepped up to this challenge in a major way. I know many of our peers have made similar donations both regionally and internationally. All Teck-managed mines continue to operate, and we are working closely in collaboration with our employee units. And I want to recognize and thank all the frontline workers at Teck and across the mining sector and beyond, who are working to safely maintain critical services to provide necessary supplies and preserve jobs and economic opportunity. So I want to keep things simple today. And I'm going to start by talking about the changes that we've seen over the last year, where we are today and where we're going. So why start with a look back, and there's 2 reasons, really. First, to provide context on the factors that have affected where we are today; and second, to talk about Teck's track record, the underlying strength of our business and our future potential. Let's take a look at the last year, which has been a critical one for Teck, both in terms of executing on important initiatives that have positioned us for the future and as the beginning of a turning point in the markets. When I spoke at this conference this time last year, we had just come off a year of record revenues, record EBITDA and record profit attributable to shareholders. And we had just announced first quarter EBITDA of $1.4 billion. Our steelmaking coal operations had achieved an all-time quarterly production record in the fourth quarter and set an annual record for total material move. Antamina achieved record annual combined copper and zinc concentrate production. We sanctioned our QB2 copper project, and we derisked it substantially. We entered into a partnership agreement that dramatically reduced our funding requirements for the project, and we secured a USD 2.5 billion project financing that won an award, and it relieved us of any further funding requirement until mid-2021. And we made very good progress on construction of QB2. We regained our investment-grade credit rating, having significantly strengthened our balance sheet by reducing net debt by USD 4 billion over the 4 years prior. And we returned more value to shareholders, totaling $1.4 billion in the form of buybacks and dividends from 2018. And we also launched RACE21, our innovation-driven business transformation program that is targeting $1 billion in ongoing annualized EBITDA gains at a very low capital cost. Finally, with the rising focus on ESG performance, Teck was and remains strongly positioned. We launched our updated sustainability strategy with ambitious targets, and we were named the top mining company globally on the Dow Jones Sustainability Index. We are also proudly an ICMM member company and will be fully aligned with the enhanced ESG performance expectations recently launched by ICMM. I think this look back provides meaningful context for assessing Teck's future earnings potential based on the innate strength of our company and the quality of our assets and not where the world sits today, with the global economy on its knees and our key commodity prices at their lowest in years. The world is facing a time of unprecedented challenge, and COVID-19 is like nothing any of us have seen in our lifetime. And as mentioned, we have implemented stringent measures across Teck sites to keep our people safe and working and to keep essential production moving. Where that wasn't possible, such as the QB2 project, we temporarily suspended construction and are working to ensure that we can quickly resume once public health authorities say, it is safe to do so. Now those are things that we can control. What we can't control is the impact on global commodity prices from global trade disputes, the oil price war and the collapse in economic activity caused by the global pandemic. We can't control these factors, but we certainly can quantify the impact. As most of you are likely aware, since January 1 of last year, we've seen steelmaking coal prices fall by 53%. Zinc prices have fallen by 20%. Copper has fallen by 12%, and Western Canada Select oil prices have fallen by 41%. So these price drops on their own are definitely significant. But when you do the math, you see that the impact they have on our margins is even more dramatic. In that same time frame at spot prices, our coal margins actually declined 93%, zinc margins are down 50%, copper margins are down 28%, and energy has gone from [Technical Difficulty] positive contribution per barrel contribution of [Technical Difficulty] Further, we're also amongst the lowest carbon-intensity producers for steelmaking coal in the world, positioning us well, as we are with copper for the transition to a low-carbon economy. We also have a world-class zinc business. With our flagship Red Dog mine, one of the largest and highest grade zinc producers in the world, has located firmly near the bottom of the industry cost curve year after year. We regularly evaluate the asset balance within our portfolio, some people call this as strategic review. We believe it's management and the Board's obligation and responsibility to continually look at our asset balance. And one of the assets that we've been clear about is our interest in the Fort Hills oil sands mine. Looking back with the benefit of 2020 hindsight, the fact is, we very likely would have made a different decision back in 2006, when we first entered the business. But the world has changed quite significantly from then in the last 14 years. And at that time, though, we had quite a number of reasons why we thought it was appealing. At that time, peak oil was the theory, and oil was trading consistently above $100. 4 of the 10 largest market value companies in Canada were oil sands companies. And it was also a mining business. We weren't getting into the drill for an explore for oil business. It was large open pit mining, shovel truck operations, and we had a lot of expertise in that. It had a very long reserve life of about 50 years, which meant, that you'd be able to catch several economic cycles, probably 5 or 6 cycles during that time. It was also in a very stable geopolitical jurisdiction and in the mining business that's becoming more and more rare. And then for most of the last 10 years, the oil industry tended to trade at a higher multiple of EBITDA between 8 and 9, possibly 10x, whereas the base metals companies tended to trade between 5 and 6x. So in balancing our portfolio, we hope that overall, we would have slightly higher multiple of EBITDA. I also note that it was a pretty good hedge on the diesel consumption that we have structurally built into our company. And the Fort Hills project itself was amongst the lowest carbon intensity oil production in the oil sands, and it's lower than half the oil is refined in all of the U.S. today. The project feature proven technology and a very experienced operator with Suncor. And in fact, it had technology upside, which when parafinic froth treatment was influenced as a process, helped lower the carbon intensity per barrel of oil. And then once the project was built, we were very impressed with the performance. 80% of projects of this scope never actually hit design capacity. This one within 3 weeks of the third train starting up hit design capacity for a day or 2 and by the end of the year, it operated in December of 2018 at 104% of capacity that month with an adjusted operating cost of CAD 23 per barrel. So it was a tremendous engineering and operating success. Unfortunately, then Alberta moved in with the shut-in program, and it has not been able to run at capacity since then. But we have been very clear, that if we can't see the value of Fort Hills reflected in our share price, we will not hesitate to pursue other options for realizing value, including divestment at the appropriate time. And we have been saying this for over a year now. I should say that these are our physical assets. It's a lot easier, said than done. It's a lot easier probably to dispose of a share position in the company than it is to sell a physical asset. So overall, as I said, our operating margins have fallen dramatically over the last 12 months due to commodity price declines and the impact of that is clear. But the underlying strength and longevity of the world-class assets in our portfolio has not changed, and it represents significant upside potential, once we emerge from this period. So that's where we've been and where we are. The real question for investors, of course, is where do we go from here? Our approach is actually very straightforward. Teck is implementing a copper growth strategy, financed by the strong cash flows from steelmaking coal and zinc. We are focused on rebalancing our portfolio to ultimately make our copper business larger than our coal business, beginning with the building of QB2, which will double our copper production on a consolidated basis, and we expect that growth to coincide with rising global demand for copper. The technology and infrastructure needed for a low-carbon economy will require significant amounts of copper from electric vehicles to clean power generation and transmission. And we are also seeing increasing awareness of the role that copper's antimicrobial properties can play in fighting transmission of infections like COVID-19. And in fact, a new story from last week, about the reopening of a Toyota factory in Canada, noted that they're now using copper to coat handrails as part of their preventative measures to fight COVID-19. So we could see a new demand growth for copper, for health-related applications, such as creating infection resistance services. And in fact, Teck has sponsored the installation of copper in high touch surfaces, in intensive care units and several hospitals in Canada. Our focus for steelmaking coal is not to increase volumes, but rather increase our margins and our overall competitiveness. That business generates billions in free cash flow, providing capital for returns to shareholders and to fund our copper growth. And as a result, and in contrast to many of our peers, Teck does not just aspire to growing its copper business at some point in the future, we are in execution right now, with a world-class mine, that is planned to begin production in 2022. And as I've said, we can't control the global economy or pandemics or commodity prices, but we can execute on the right strategy to ensure that we are well positioned to generate shareholder value in the near term and the long term. We are focused on 4 key value-creating capital priorities in support of our strategy. First, we're executing on QB2, a long-life, low-cost operation with an enormous orebody, providing major expansion potential, which could put it among the 5 largest copper producers in the world in the second half of the 2020s. Second is investing in our Neptune Terminal to optimize margins and our optimized performance in our steelmaking coal business by securing a long-term, much lower cost reliable supply chain. And we're on track to complete the upgrades of Neptune in the first quarter of 2021. And in a similar vein, we've just completed the expansion of our Elkview plant. We're very pleased we've been able to do that during COVID-19. And this replaces high cost tonnes from Cardinal River, with lower cost, higher-margin production. And at USD 150-tonne coal prices, that switch will add CAD 160 million in annualized EBITDA. Third, we are driving towards $1 billion and ongoing annualized EBITDA improvements for low, onetime capital costs through the RACE21 business transformation initiative. And of that total, $500 million was originally targeted by the end of 2020 and another $500 million in 2021. Though, COVID-19 may affect our timing, our teams are still focused on achieving those targeted EBITDA improvements. And fourth, we are advancing our cost reduction program to reduce costs across our business by a total of $1 billion of previously planned spending to the end of 2020, of which, we've achieved about $450 million to date since starting the program in the fourth quarter of 2019. And we are also continuing to review our cost reduction measures with an eye to identifying further savings. What is most important to remember is that we are in an investment cycle. We are deploying the capital necessary to maximize the value of our steelmaking coal business and to execute on our copper growth strategy. And we know, that investors tend to be cautious during these phases, and they take a wait-and-see attitude. And in fact, we've seen something very similar before during the financing and construction of another high-altitude copper mine, and that was Antamina, which also coincided with a significant downturn in the market. Teck's share price was in the penalty box throughout that development period, but our then CEO and now Chairman Emeritus, Dr. Keevil, he had the vision and the tenacity to see it through. And once completed, and once the market cycle turned, as it always does, Antamina was a crown jewel operation that has generated exceptional returns for close to 2 decades and still has many years to run. The same will be true again. Once Teck's current investment cycle is completed, we will be transitioning to a period of significant free cash flow, underpinning strong cash returns to shareholders. We are moving towards significantly reduced CapEx, lower costs, reduced execution risk, a better portfolio mix and increased cash flow. And we expect -- and we expect to see that reflected in our share price. We are executing on these priorities to create value, and position Teck for decades to come, including and especially, in an environment of increasing focus on ESG factors, where our strong performance and leadership will earn a premium. We have a very capable, highly engaged, battle-tested management team that is working hard to keep our people and communities safe, while continuing to execute on our strategic priorities. By contrast with the last down cycle, which ended in 2016, we are in much stronger position with the reduced debt profile, strong liquidity and secured QB2 funding. And most importantly, we are advancing a copper growth strategy that is funded and is being implemented, and we are confident that, that strategy will drive significant value over the long term, as the world recovers from COVID-19. So thank you for your time. And I'm now happy to take any questions.

All right, Don, thank you for that presentation. A lot of ground to cover, and we have 6 minutes before we need to make time for the next presenter.

So I would like to know more about Neptune. I would like to know about QB2. I would like to know about your various initiatives, but I'm going to steer my questions to those who have sent in questions, I have 8 and 2 already on QB2. So could you please give us an update on when construction could restart? Remind us about the changes that were made there and the timing and the investment needs? And is there -- is this dependent on COVID-19 responses or copper prices or anything else?

Okay. So QB2, first of all, has no COVID-19 positive cases. So that's good, and everybody coming back in, will be tested. We're working closely with the health authorities and the government to develop the plan. Currently, we've already gone back from a low of 400 employees. Recall, we went from 7,500 down to 400 when we demobilized. And we're back up by over 1,000 employees now, about 1,100. And they are working on phases of the project where physical distancing is kind of a natural and easy do, such as laying of pipelines and translating the transmission lines and mobilizing the second contractor at the port area to be able to gain some time there, and also moving heavy oversized equipment from the port to the mine site. Our intention is to go to another phase of 2,500 employees shortly. And then there's a phase after that of 4,000, then 7,500 and ultimately the peak of 11,000. One of the limiting factors, of course is, camp capacity and whether you can put 2 to a room again or whether it's got to be 1 to a room. And if we are restricted to 1 to a room, which might be the case, where we're not sure yet, do you then just stretch out the schedule of construction, or do you bring in more camps, what are the cost effects and that sort of thing. But if we do these phases then we'll learn a bit more on how we can operate and work with the government to open up as we can. So that's as much as we know for now, but we are making a little bit of progress, while we figured it out.

Great. And then, if we look a little bit more at coal, I know coal has been a topic on this call -- on this conference. It's still going to be definitely in need, it certainly faces ESG pushback, and the prices seem to have hit a floor recently and seem to be stabilizing, maybe moving up. I know on your last presentation, you reminded us that coal has been a $180 over the year's average. And it's well below that now. But of course, it's been well above that in the past. Would you think there's anything changed in the coal market that can divert the historical price into a new normal that's a bit lower? Or can you talk a little bit more about what you're seeing in that?

Yes. We think the next 10 years should be as good or better than the last 10 years for the following reasons. You're quite right that, the ESG focus has caused less investment in coal generally. And so we think there'll be fewer capital dollars available for new capacity. But at the same time, we still see growth in steel. Population of the world is increasing from 7 billion to 9 billion, most of that is in emerging markets. They don't really have a lot of sources of scrap to use electric arc furnaces. So the steel for the infrastructure and what degree probably some will come from blast furnaces. We know that people are looking at new technologies for blast furnaces, but our customers tell us that there's at least 20 years away. So we think that the next 10 years should be positive. On the shorter term, while we -- in our conference call for the quarter, we did highlight that we thought Q2 was going to be a pretty tough quarter and customers were looking at deferring shipments, to reflect when everybody stopped buying cars and steel plants cut capacity and so on. We had seen a turn in the last week or 10 days. We've started to make some spot sales, which spot market had dried up, completely for a while there. So that's quite encouraging. We've seen the price move up about $8. And we've seen a long list of car companies announced restarts. And China's car sales in April were higher than they were in April last year. So that is encouraging in the short term.

Okay. We'll see over the next 10 to 20 years, the last speaker said that mini mills would take share, and you're saying that integrated will still have a key role, and maybe both will be right. But the last question I wanted to ask you as we wrap up here is, one that came in from one of the attendees remotely, asking about the dual voting structure. And I think it's probably appropriate to address that, given the concerns lately. Do you have any comments about if that still an appropriate way to have Teck's dual voting structure going forward?

Yes. So the dual share structure has been in place since 1969. It has its advantages and disadvantages. The advantage is obviously, it allows you to invest for the long term, the disadvantage is that, the company can't be taken over very easily. And then so that sort of level of accountability is an issue. The fact is that, neither management nor the Board can change the dual credit cost structure. The only way it can change is, if the class of shares -- shareholders itself bodes for that change and the A shares are controlled by Temagami, which is the partnership between Keevil family and Sumitomo Metal Mining. So it's really up to them. There's nothing the Board or management can do about it. And so I believe it will remain in place for the foreseeable future.

Okay. That's a great reminder. Well, I want to thank, Teck, very much, and I want to thank Don for your continued support. Thanks for joining us in this virtual. And like I said, hopefully, last virtual conference of this sort. But thank you, everyone, on the line. And thanks again to Don and Teck. Appreciate it.

Thank you, Timna. Hope to see you all in Barcelona next year.

Great.