Teck Resources Limited (TECKB) Earnings Call Transcript & Summary

Good morning, everyone, good afternoon, good evening, depending where you are joining us. Thank you for being present in this virtual version of the Laguna Conference. And thank you, Don, and the rest of the Teck team for also participating in this fireside chat. Before we begin, I need to read some disclosures. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. All right. Well, Don, thank you very much for joining. Everyone knows, I guess that Don Lindsay is President and CEO of Teck Resources. It's a pleasure to have you with us in the conference. Thank you for doing this conversation, this chat with us. I hope everything is going well for you, your family as well as the Teck employees around the world.

Thank you.

So perhaps maybe, Don, if we could start with giving us an update, if possible, of recent management changes or upcoming changes, if you could recap those for us and maybe emphasize the opportunity, to emphasize the priorities for Teck going forward as well as maybe a little bit of an update on Teck business portfolio, where do you want to -- where the company is going, just for the benefit of the audience to be -- everyone on the same page.

Okay. Well, thank you, Carlos, we're delighted to be here. So I'll start with the senior management appointments that we announced recently and 2 of whom have already started with us as of September 1. So the Board goes through succession planning on a constant basis, really, but there's a major session we have each November, where we go through every single senior appointment from superintendent of operations all the way up to the CEO, of course. We looked at the structure of our management team. And over the years, we've had Chief Operating Officers on 2 different occasions, once a while back, Peter Kukielski was CEO. I had known him at Noranda and Falconbridge and brought him on when I joined. And then later on, we had Ian Kilgour for 5 or 6 years, who did an excellent job and who was really focused on running the operations well with less amount of time spent on projects. Today, as we look at the needs for the corporation, the projects, obviously, are a key swing factor in driving value for the company. And the management structure we've had, it was very appropriate at the time we put it together. But with all these things, they tend to evolve over time, the individuals themselves developed new skills and new interests and over time, the needs of the corporation changed. So when we made that assessment in November, at the February Board meeting, we decided to go back to Chief Operating Officer role. We're very lucky to have Red Conger from Freeport, he was President and Chief Operating Officer of Freeport Americas, to join us. And Red, he's already here in Vancouver, he's finishing his quarantine. And he has sort of 3 priorities as he starts, in addition to the broad responsibilities of having 5 senior VPs report to him, the base metals, coal, energy, innovation and transformation, the RACE21 program and project development, technical services will all report to Red. He has 3 priorities in his first 6 to 24 months. The first is projects related. Getting Neptune over the line, 6 months to go till we'll be completing mechanical completion of that and ramping up throughput through Neptune. Re-ramping up QB2, of course, which we're in the midst of doing right now. We have almost 6,000 people on-site there, and I'll come back to that. Red, of course, has direct experience with project expansions of that nature, having led the tremendous expansion at Cerro Verde in Peru, where it went up to 400,000 tonnes a day and also Morenci in the U.S. And so these are very similar situations to what we have at QB, where we have an enormous resource. And while we're developing QB2 now, we do know that down the road, there'll be a QB3 or QB4. So to have Red there to oversee that is a terrific addition. In terms of CFO, Ron Millos is on the line with us today, just an absolute class act, and he's let me know about his plans more than a couple of years ago. So we've been looking around and finally did a formal search where we had an incredible talent that we're very interested, but we chose Jonathan Price, who had been at BHP as Chief Transformation Officer. Earlier in his career, he had been VP Finance, reporting to the CFO. VP, Investor Relations. He's been in the marketing side with steelmaking materials, which, of course, is a direct fit with our business. He's also been in business developed on the iron ore side. He's worked in Singapore and Melbourne, Perth, London. And so he will join us on October 1 as CFO. And then Andrew Golding decided to retire as well. And while he'll be with us till -- until March 1, technically as an employee, given the nature of the role and the confidential information and different relationships that we decided to move ahead, and we're delighted that Nick Hooper from Rothschild who joined us. Nick is the easiest integration that I've ever had. He's worked with us for about 10 years already and on many assignments ranging from the Antamina royalty to the sale of 30% of QB2 to Sumitomo Metal Mining, the Sumitomo Corporation, the $2.5 billion project finance. So he knows everybody. He was the first choice. We did do a full search and had 30 candidates and so on, but we're delighted to have Nick join us. So we also have Amber Johnston-Billings, who's joined us in the sustainability area, and she'll be joining on October 15 as well. So some new talent, very strong talent joining the team, and really designed to address core priorities going forward. Maybe I'll stop there for a moment just to see if there's any questions related to management or I'll then move on to your second question.

Yes. No further questions on this from the audience. I don't see any. So yes, why don't we move?

Okay. So which question did you want now?

Yes. Maybe probably good to talk about updates on QB2, given what you just mentioned on the management team.

Yes. Absolutely. So QB2, as you know, in March, pre-COVID had really just hit a stride. It was on track to have 3% to 4% project completion per month. We had 7,500 people on site and things were going very well. We just finished the definitive estimate on capital, which we went through in detail at our Investor Day on April 1, $5.2 billion. So things were looking pretty good. COVID, of course, was a real hit to it. There's no way you could keep going because with 7,500 people shifting out every 2 weeks going to all parts of the country as a potential spreader of disease, that was pretty risky. So we shut it down to about 400 people in terms of care and maintenance. And since that time, we've been working very closely with the health authorities to develop a very safe way to re-ramp up. And I'm pleased to say that -- it was a 4-phase program that we developed, I'm pleased to say that we're on Phase 3 of that now, and we're close to 6,000 people on-site with a target of getting to full strength of 8,000 by the end of October. So far, it's been going very well. And while we have had COVID cases from time to time on -- there's very few relative to size of workforce and certainly one of the lowest levels in the country. So the systems seem to be working. The key transition is being able to go from one to a room to two to a room with all the barriers being put in place into the rooms and the design of the workforce and their assignments and so on. So, so far, it seems to be working, but this is a very crucial couple of months as we re-ramp up. We have been able to continue some work during the shutdown, ranging from additional permitting, engineering closeout, procurement, manufacturing of equipment off-site, a substantial amount of material transport and delivery. You'll recall that during the social unrest period, we were unable to move the oversized equipment from the port of entry to the site because you needed a police escort. Of course, that wasn't available as the police were otherwise engaged and rightly so. During the shutdown, we were able to move a lot of things. So we have a bit of an advantage as we restarted that everything that people will need is certainly there. We were also able to get through a lot of the archeological deliberations of areas that had been roped off. You recall that, that type of permitting has been very slow, but we had very good support during the shutdown. And so we feel that we're in a really good place from that point of view. We have had additional chance finds in the archeological category, but we'll deal with those one-by-one as they come up. And so far, it seems to be working out. We also were able to get ahead of road construction and some low-density field construction activities, such as trenching and laying of pipe, transmission lines and so on. So we've actually made a small amount of progress so that we're at the roughly 30% completion. Our target is to get to a 40% by year-end and to hit full stride of that 3% or 4% completion per month. And that would then give us a target of ramping up production in the -- likely in the third quarter of 2022. So key time right now, but so far, so good. We've had COVID costs, of course. We said at the time of the shutdown that it would be $25 million to $50 million a month as well as a starting point. And we'll report on where those total costs are in our -- I think it's the third week of October in our Q3 report. And we'll report them separately so that you can see what are COVID costs and what are directly related to the definitive estimate of $5.2 billion. So you can measure our progress that way. And that, of course, is the approach that's been worked out with Pricewaterhouse, our auditors. I'll stop there.

Yes, right. Looking forward to that update. And sticking with copper, there is a question about Schaft Creek, someone suggesting that there is -- he's asking about what are your plans on that North American copper asset. The perception is that it's a very good asset. And if you could comment about what is the time line or any updates on that other potential copper project.

Right. So Schaft Creek is part of what we call Project Satellite, where we have 5 copper projects within that. And I should say that the change in the gold price from $1,200 to $1,300, up to closer to $2,000, can make a big difference to a number of these properties. NuevaUnion is one example where we have the 50-50 joint venture with Newmont, that's not actually part of Project Satellite, but it certainly has an awful lot of gold. And Galore Creek, which is right next to Schaft Creek -- Schaft is also very rich in gold content. So those 2 projects are a lot more valuable today than they were 6 or 12 months ago. I don't have an update for you on Schaft Creek at the moment because it is very early stage. There has been work done year-in and year-out, but maybe I'll ask Fraser, if he might have any update on that.

No. Sorry, Don. I actually don't. As you said, obviously, early stage. It is certainly -- investors should think of it very much as a longer-dated opportunity or option, I suppose, but unfortunately, no, I apologize, I don't have an update on exactly what is going on. But fairly minor for the time being.

Yes, we have been asked that before.

All right. Sounds good. And then just sticking to projects but now shifting to coal. Any update on Neptune? How is that going? And also, as you talk about Neptune, would you comment on the rationale to renew and extend the contract with Westshore?

Yes, sure. So Neptune there remains on track for mechanical completion in March of 2021, so it's about 6 months to go. We're very pleased with a number of important steps in our progress, not least of which is the ship loader, that has loaded on the ship in Vietnam and on its way. So -- and that's going to come within the day of schedule. So, so far, so good. It's been stable in terms of capital estimates for probably 7 or 8 months now. So we anticipate mechanical completion on schedule at the end of Q1 and the ramp-up of the remaining sort of capacity in Q2. And just to recall, the key reasons behind making that investment were that -- first, the cost at Neptune is by far the lowest cost of the 3 ports, Westshore and Ridley being the others. And a very significant -- almost about 1/3 the cost of what we have been paying. So for every tonne that we can move to Neptune, it's very big savings. It also won't have any thermal coal at the port, so we won't have any risk of contamination of our product, which had become a quite serious issue at Westshore, although they've improved on that dramatically now. And also, we'll have a much better control over being able to deliver to our customers on time. And you recall that in 5 out of 8 quarters, we had missed our guidance in the coal business because thermal coal was getting priority at Westshore over our coal. In 1 quarter alone, we lost $200 million of EBITDA when we were 1 million tonnes short and margins were $200 a tonne. So the payback on the investment will be very good and it will structurally lower our costs in that business for decades to come. So we're looking forward to getting complete there. In terms of the Westshore contract, we've always said that if you were starting with a clean page of paper and designing your logistics system that you would have coal go through each of the 3 ports. You probably have 5 million tonnes go through Ridley, 5 million tonnes through Westshore and 20 million tonnes go through your lowest cost port, Neptune. So the contract with Westshore is consistent with that principle. And it's also designed with flexibility on both sides, so that we could go up to 7 million tonnes, if need be in any given year. It's actually for a total number of 32.5 million tonnes. So the length of the contract is really dependent on the length of time it takes for us to choose to ship that much through Westshore. So now it puts us in a very good position with excess port capacity and the flexibility to go one direction or the other. If we get hit with any operating issues, whether they be landslides or avalanches or strikes or whatever it might be, blockades as we saw earlier in this year, we have very good flexibility capacity. And this also puts us in a position to finish the negotiation with Canadian Pacific Railway on the contract, their contract expires at the same time as the Westshore one at March 31, 2021. So now that we know how much will be going where, we can have a good discussion with them. And then we have a very good working relationship with CP, I should say so. We've been very pleased with them. I think that covers that.