Teck Resources Limited (TECKB) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. Welcome to the Citi Basic Materials Conference, discussion with Teck Resources. Very happy to be joined today by Don Lindsay, the CEO, several members of the management team, including Ron Millos, CFO; Fraser Phillips, SVP, Investor Relations and Strategic Analysis. [Operator Instructions] I'm sure you will know, but for those that don't, Teck is a diversified miner based in Canada, the largest non-gold mining company left in Canada. The company has 3 main products: copper, zinc, metallurgical coal. Has also added a minority stake in Canadian oil sands. Mines are all in very friendly jurisdictions, Canada, U.S., Chile being the largest. Company's in the middle of a major project at the moment, the QB2 copper mine in Chile. It's a true Tier 1 asset, going to have roughly 300,000 tonnes of copper. And that's all under construction and start ramping up in 2022 and sort of significantly rebalanced Teck's portfolio towards base metals.

So with that, Don, let me ask about the market first. Copper price is at the highest levels that we've seen in several years. I guess how are you thinking about copper heading into 2021? And in particular, are you having -- getting any sense about how physical demand is progressing post-COVID? Or I guess during COVID still?

Great. Well, thank you, Alex, for hosting today, and thank you for that good review of the company. So when it comes to copper, obviously, on a long-term basis, we have a positive constructive view, which is one of the reasons why for our big picture strategy of the company, we are rebalancing the portfolio towards base metals overall, but copper, in particular. And we're using the cash flows from our coal business and our zinc business to invest in copper, starting with QB2, and then we have several other projects. We have enormous resources in copper that could be developed to market that warrants it. We do think that the macro trends in the economy of decarbonization and electrification will continue and will, in fact, accelerate. I think COVID-19 is going to be a factor there in getting people to look at things. We've seen additional focus on ESG issues and moving ahead on the forward-facing metals as you've heard other companies describe as well, and we believe in that as well. In terms of the short term, obviously, copper inventories are relatively tight. China's imports this year have been very strong. The V-shape recovery, in a pretty narrow view, I might add, of China's economy has been extraordinarily strong. And so that's been a good demand pull. There has been talk about stockpiling as being a balancing factor to weaker demand in the rest of the world outside of China. I guess we won't really know that until later on in the cycle as things develop. But for now, we remain very positive. And I think that you're seeing more investors, generalist investors, instead of just the normal commodity players, the weight of money is starting to turn towards copper, Dr. Copper, as we call it, which is a good indicator of global recovery. Vaccines are going to help all this and the news -- even today's news on just how fast the vaccination could roll out in the U.S. is yet one more tailwind for long-term global growth and consumption of copper.

And maybe you could give us a quick update on how QB2 is coming along? And I guess how does that leave your portfolio of metals once QB2 is developed? Or would you -- are you still looking to continue to rebalance more into copper and base metals? You mentioned some of the other projects that you have potential.

Yes, indeed, we are. But for the moment, QB2 is the highest priority, and we don't want to be distracted, executing that as well as we possibly can is the highest priority. So far, so good. We developed a restart plan early last summer, and we are on track with that restart plan. There's 4 phases to it. We're essentially through Phase 3, and it is just slightly ahead of schedule. So we're targeting to be 40% complete overall for the project by the end of this month and to get to a point where we're completing 3% to 4% each month, hopefully 1% per week. So that means as we hit January, some months would be a 4% completion. We actually have some months that have 5%. We have over 8,300 people on site, and we're starting to steer the market away from just headcount on-site because we are able to do some work off-site that we'd originally planned to do on-site. But they -- the good news is our safety protocols are working extremely well that with that number on site, that means by definition that we have two to a room in the camp accommodations, and we're actually trialing three to a room in a couple of areas. And we've been very pleased to see that the number of COVID positives have been kept to a bare minimum. In fact, as of yesterday, it was 0. Normally, we have sort of 1 to 3, and it has been as high as 8 sometimes. But in cumulative, it's a small number, and everyone's fully recovered that has gone through it. So this is one of the safest sites -- safest construction sites in all of Chile. It is the largest construction site in Chile, so going pretty well. In terms of the cost, we're looking at -- I guess, from when we closed down in the middle of March, which we believe was the right thing to do because I think in the end, that would have saved hundreds of lives. If you can imagine 7,500 people on-site at the time, that means there's 15,000 employees, all changing every 2 weeks, that would have been a real spreader of disease. So I think it was, although very costly, the only decision that we could make. But we gave guidance on what the cost of the shutdown would be at that time per month. We didn't know how many months it's going to be. It looks like it's going to be about 8 months from when we shut down to when we're back at what we would call full strength and progressing. Though we have had some progress during that 8 months, so we're really probably about a 6-month delay. So we're looking at completion in the second half of 2022. In terms of costs, we did disclose in our Q3 report that the costs were in the $350 million to $400 million range so far that we disclosed, so we're not quite complete. And then on top of that, there's another USD 45 million that we elected to spend to build more camp accommodation because we know that will help our productivity and getting it finished sooner is always cheaper. So we'll be able to update that number in -- with the Q4 report. And then our plan if -- and working with Pricewaterhouse, our auditors, is that we will then seal off the COVID costs, you'll know what that -- is in that bucket. And going forward, we would then just report the projects -- progress against the definitive estimate that we published on April 1, the $5.2 billion. And just a reminder, of that, there was $3.9 billion to go, which contained $3.5 billion on actual construction and $400 million of contingency. And we have pretty much most of all that contingency still available. So these next 4, 5, 6 weeks are really crucial. And if we get up to that 3%, 4% a month -- percent completion, we'll be very pleased. So far, so good.

All right. Glad to hear it.

The second part of your question, I just recalled, you talked about would we go further? We have so many options. As you will know, we have Project Satellite, which has 5 different copper projects and huge resources. Two of them are at a point where other parties are very interested in approaching us. And they're clearly more valuable today than they were pre-COVID. We had started a process on Zafranal because it is -- finished its feasibility and through the first phase of permitting and we had a number of parties quite interested. We got through the first round, but then COVID prevented anybody from being able to visit the sites and so on. And really, they're still not quite prepared to visit the site. So we would revisit these things again sometime, I'd say, I'm looking at about 6 months as -- and we think that the copper market will continue to strengthen then. Now what we actually do, there's obviously a range of options. We could sell it outright for cash. We could contribute it to another company, take back shares, let them develop and use their money and ride the cycle. Or we could have a joint venture partner come in, do the same thing. And we'll make those decisions at that time. We also have 2 properties I should highlight, NuevaUnión and Galore Creek, both 50-50 joint ventures with Newmont, a very strong partner. Both of those properties have a lot of gold. So with gold having gone from $1,200 to $1,800, $1,900, they are a lot more valuable today than they were 6 to 12 months ago. And so with our partner, we're looking at the options there. So there's quite a bit there. Of course, there's always QB3. What I should say is QB overall is getting better and better. We're heading towards 10 billion tonnes in resources. The project itself in terms of operating -- like production and C1 costs are also getting better. We'll be able to announce those numbers with our Q4 results as well. So QB3 will be on the table at some time. But I want to be clear that the earliest that, that could be permitted is really in mid-2024 or 2025. And then with our deal with Sumitomo, if we were sanctioned in that time, then they put up the equity first based on the deal we already have, then the project finance. So Teck wouldn't have to come up with any equity for that project until probably 2027. So when we finish QB2, we'll be going into a phase of 3 years or so that it's just clear cash flow and good time for distribution to shareholders.

Okay. Just turning to met coal. Could you maybe give a little overview on how demand has recovered there? And in particular, the impacts on Teck of the Chinese semi-ban, I don't know what to call it, on Australian coal [ coming in ]?

Yes. So it's quite an interesting situation. We haven't seen one like this before. But if you go back to September, and as the rest of the world outside of China was starting to recover, we saw that the coal price move from a low of about [ $106 up to $139 ] quite quickly all within the month. And that was reflecting that there had been 100 million tonnes of steel capacity shut down due to COVID outside of China, and it was starting to come back, about 60 million tonnes was either restarted or announced to restart. And then in early October, all of a sudden, coal from Australia was not allowed to unload at Chinese ports. Now always remember that there hasn't been an official announcement about that, but it certainly did start to occur. And there's as many as 75 or 80 cargoes on the water there waiting for decisions. Now that caused the Australian FOB price to decline quite rapidly, got all the way down to $98 at 1 stage because the world is literally awash in coal that needs to be redistributed. It's come back a bit to about $102 today. But the Chinese steel industry is still going flat out. It's important to note that nothing's changed in terms of steel production globally. So demand per steelmaking coal is still the same, but it now needs to be recirculated because Australian coal is not able at this point to get into China. Now we've seen different versions of port restrictions in the last couple of years. And I think people initially decided to view this as another one of those. But that once port restrictions started to lighten up as they got to the New Year, to 2021, that this issue would all be behind us. But it doesn't look like that now. We've seen China strengthen their message to Australia of -- like through additional import blocks and other products, in wine and lobster and copper concentrate and so on. So just looking from a distance, the geopolitical issue, it looks like there's a fair bit of [ tension ]. So perhaps this issue goes on longer than people thought. And certainly, that's reflected in the Chinese CFR price. CFR price, meaning the delivered price including freight. So that initially jumped into the [ $135, $140 ] range. We were able to sell some cargoes of our Canadian coal, obviously, at that stage, and then it kept moving up, and we sold 3 more cargoes in the [ $160 to $165 ]. Now you have to understand that when this situation started to unfold, we would have been already sold out through the end of November, when only a few cargoes left in Q4. We always have some spot tonnage available, but there wouldn't have been that much left. We did what we could. We did sell 3 more cargoes in the [ $160 to $165 ] range. Since then, the prices continued to rise. The China CFR price is now at [ $173 ] or so. What that means is if you deduct the freight, which is about $13 today. It does move around, but that's [ for the week ]. So the equivalent price to Australian FOB is [ $160 ] versus the [ $102 ] that we see in the trade journals, Platts and the like that are being quoted now. There was a fair bit of misinformation in the market from the various analysts, not yourself, about what freight is. But -- so the premium for selling China CFR right now is over USD 50. It's about USD 58. Now so we said, well, we should restructure our sales book to the extent that we can. We do want to continue, as always, to honor the volume contracts that we have with our good customers in Japan and Korea and Europe and elsewhere because this is a long-term game and we help each other. But to the extent that we always have some part of our book available for spot sales, to the extent that we can redirect that and related to -- and remember, all these products have their own specifications, you have to work through your mine plan and logistics to do it. So it doesn't happen on a dime, so to speak. But we determined that we could do as much as 7.5 million tonnes over the course of the year. That's not equally split in each quarter. It has to ramp up in the first quarter a bit. But if you took that amount -- if this situation between Australia and China existed the whole year -- and we offer no opinion, but it could stop next week, and that would be great, too. But if it did, 7.5 million tonnes could be delivered. That times current premium of USD 55 times the exchange rate is worth more than CAD 500 million of additional revenue to us. So we thought we better go for it. We called it a target because we just don't know how the geopolitics will work out. So if we get 1 million tonnes done, if -- we have said we got 20% of our Q4 done and our guidance for Q4 is still the same, 5.8 to 6.2, and we'd like to try to get to about 30% going forward, ramping up in Q1. So we have made additional sales in -- over that [ $170 ] range now and going into Q1, and we'll carry on with that. The best news of all would still be for China and Australia to sort out the issue and the 75 vessels clear because it's very clear that the demand globally is still very strong, it has not been hit one bit, and supply is actually even tighter because these oil prices have tightened up a bit. And so to the extent that we saw a very fast move from [ $106 to $139 ] last time, I think we'd see even more than that this time. And vaccines, of course, are only going to help that because as people are able to drive and travel and so on again, the balance of the steel production that had been shut down, I think, will continue to reopen. And we see another 5 million tonnes supposed to open in Q1 already. And that, again, will just tighten up demand and balance the market quite nicely. So a long answer, but a pretty important question.

Yes -- no, Don. And I'm going to actually slip in an investor question here like someone just e-mailed to me because it's on this topic. The question is effectively, is this shift to selling coal in China structural in a sense that Chinese mills are going to want to diversify, even if their relation with Australia improves, they don't want to run into this again, right, next year or year after because it's so unpredictable? So do you see kind of a structural shift there where you're going to just be selling more coal into China? And then the second part of that question is, will this change the supply demand dynamic in North America at all?

Yes. It's an interesting question. We've been asked it in a different form. Does this make a Canadian coal permanently more valuable than Australian coal? And look, the reality is we don't know. It started as we think a geopolitical issue. And who's to say -- I mean China and Canada aren't getting along that well either right now, so who's to say how that could develop? And China and the U.S. aren't getting well, and the U.S. had -- also has met coal to export. So I don't think anybody can really predict that. We have very strong relationships with China. China Investment Corporation is still our largest shareholder, and we have tremendous Chinese customers. And I think it's one of these things -- the market evolves and you got to evolve with it. But I said earlier, it's a long-term game. Long-term relationships are important. And to the extent that our core customers that we've been selling to for years, we're going to be very careful to maintain those relationships as well.

Okay. Great. Let me ask something on, I guess, capital allocation. How do you think about what is appropriate leverage post-QB2? And how does Teck holistically think about its capital allocation through the cycle, balancing shareholder returns versus reinvestment and growth?

Okay. I'm going to take the latter part of that question. And then we have Justine Fisher, our Vice President and Treasurer, on the call today, and I'll ask her to speak to the first part. So I just want to remind people, we do have a capital allocation framework that has been Board-approved for a couple of years. It is in the IR presentation. And it shows the waterfall of where the Board allocates cash out from free cash flow each year once you've done the calculation. As we look forward, we should look forward and backwards on this. Of course, we just completed a $1.2 billion buyback. We were able to buy back 9.2% of the company when prices was significantly lower than where it is today. And remember, what that means, that's 9.2% of everything, of Highland Valley, Red Dog, QB2, Antamina, Fording River, Elkview. And that may have been one of our best moves in the last 2 or 3 years. I'd love to be able to do that again. But as you look forward, this next year is big CapEx for QB2. And depending on what your commodity price assumptions, if we were looking at this 6 weeks ago, you would do the calculation with coal down where it is, and copper, zinc hadn't quite performed as well as yet, there wouldn't have been an additional above our base dividend to distribute. Now with copper and zinc having done so well, if the scenario that I just described could happen with coal, then maybe it changes. But I'm not counting on anything in 2021. But once you get to 2022 as QB2 is behind us and Neptune is behind us and the Elkview SRF and the Fording River Water Treatment, all that capital is behind us, we should go into a phase, for 3 years or more, of very significant free cash flow. And then that capital allocation framework will kick out. And whether it's supplemental dividends or buybacks, we survey the shareholders before the Board makes that decision. If I could turn to Justine then on our balance sheet goals. Justine, over to you.

So yes, we target a mid-BBB rating. And part of that is because we're asking the same question that you're asking, which is what is the right level of leverage through the cycle for us after QB2? And so we think about mid-BBB because we do want that cushion, such that in a good market, we're mid-BBB. And in a weaker market, we're BBB-. We are aiming to move away from being a perennial fallen angel candidate and moving towards [ being ] solidly investment grade. And so when you think about the level of leverage that, that means from the agencies, it's probably in the 2, maybe 2.5x range or probably closer to 2x. And so that's what we're focused on after QB2. There is amortization. There are amortization payments on our project finance facility. So you will see some natural deleveraging there as we take care of those amortization payments. But beyond that, part of our capital allocation strategy is towards the capital structure, and that will involve repaying drawings on our revolver after QB2. But the target is mid-BBB.

Okay.

Justine joined us in May from a successful career at Goldman Sachs. And in her first 2 months, she did $1 billion side car financing with 20 banks, a $550 million bond deal, a tender offer of premier term securities, all without ever setting foot in the office.

[ They go -- remote work, everybody. ]

I'm impressed. So let me just wrap up with a question on ESG and I have an investor question on ESG as well that's been e-mailed in. Could you describe how Teck is approaching ESG? What are the priorities and opportunities there? And then I guess sort of wrapped into that, how do oil sands and met coal ultimately fit in there given Scope 3-type targets?

Right. No, that's a core question that you can be sure that the Board is intensely focused on, and it's a 2-part answer. So on the broader question of ESG, not just carbon in your portfolio, but ESG and all that that encompasses in terms of everything from human rights and tailings dams and water and air, safety and the like. We are ranked #1 in the industry globally by the Dow Jones Sustainable Index, also by Sustainalytics, also by Corporate Knights. We're the only mining and metals company in the Global 100 Most Sustainable companies list. That comes as a result of the fact that back in 2010, we started setting formal goals and reporting on them every quarter and every year and 5-year and 15-year goals. And these were goals that I spent a lot of time making sure they weren't just goals that were thrown out there to have them in your annual report, they were realistic, stretched to the extent that we could, the goals that we could achieve. We reset them again in 2015. And then this year, we reset them again for 5-year goals for 2025, 15 for 2035. And we also made the overarching goal of carbon neutral by 2050. And you will see the backdrop behind me are solar panels. That's in recognition that we recently announced at another one of our operating sites, Carmen De Andacollo in Chile, will be going to all clean power, again, and this is from solar panels at 14,000 feet. QB2, by the way, we've already done deals to take them to 50% clean power. And when we announced that, which was at the same time as our 2050 goal, we thought it might take us 5 years to get to 100%. Now I think we'll be able to do it within a year or 2. So we're making good progress on there, and that's the attitude of the company. Now to the second part of the question, to the extent that we have carbon in our portfolio through both steelmaking coal and oil sands. So there are 2 slightly different approaches. On oil sands, we have said publicly for more than 1 year now, that when Fort Hills is back at full capacity, full production, if we are not -- and call it energy prices having normalized a bit. If we do not feel that we're being paid for that asset in Teck Resources' share price, then the Board would consider a transaction. Now whether that's an outright sale for cash or whether that's contributing it to another company that becomes a consolidator or whether it's a spinout remains to be seen. But we've had very strong feedback from our largest shareholders that they wouldn't want us to act now when the asset, which did so well in its start-up and in the seventh month of start-up in December of 2018, the last month that it had been allowed to run at full capacity, it ran at 104% of capacity, 201,000 barrels a day at cash cost of CAD 23 per barrel. And with energy prices now much higher than here, that becomes our third best asset. It hasn't been allowed to run since then. Suncor announced a couple of days ago their ramp-up plan for 2021. It was down at 80,000 barrels a day. It's up at about 120 now. There's a plan to get it from between 120, 155. We now it's run a few days at 170 recently, but they're really targeting probably the end of the year to get to full capacity. We need that to be able to demonstrate the value of the business. Along the way, we think construction will continue at TMX and also at Line 3. And the vaccines will likely put more people on the road and more people in the air. And half the supply demand gap in oil is actually jet fuel. So more people in the air would be good for that, and that could affect energy prices. So we are watching it very closely. I do actually think something will happen myself, but we need to get that running at full capacity first.

Okay. So I have 2 more questions here from investors, and then we'll wrap up. I guess unless anyone wants to e-mail me another one. The first one is tied to ESG. Can you say confidently that your current water management practices are environmentally safe? And unlikely to face any negative sanctions, either in the Canada or the U.S.?

Well, let me put it this way. It's -- the question -- we'd have to drill deeper into the question on certain specifics, but I'll put it this way. That we have a deal with the British Columbia government called the Elk Valley Water Quality Plan that is based on all the science that is available to resolve the selenium issue, problem with selenium and nitrates. And we have committed hundreds of millions of dollars, like literally more than $1 million per fish. And the early results show that it is working. We need to finish that program. The next few months are crucial in that the Elkview Saturated Rock Fill will be finished. It's effectively finished now and come online, and the Fording River Active Water Treatment Plant as well at the end of March, first couple of weeks of April. Now those 2 facilities will increase our water treatment capacity from currently 7.5 million liters per day to 47.5 million liters per day. The plan is that -- which is obviously a huge increment and will serve -- the plan is to take that then to the 90-million liters a day level and I've mentioned, to 120-million liters [ a day level ]. So all that is coming. Combine that with the fact that we changed the blasting practices, more than [ 2 years on ] that is eliminating 99% of the nitrates. And the science looks like that without the nitrates, the selenium doesn't leach out, but it takes about 8 years for that to flow through the system. So all of these things are happening, and we are completely committed to spending that capital, spending that money, taking all of the leading science wherever it might be, we have developed a lot of the science on our own to control this issue. So we think it's going to work. We think there's a lot of evidence it works, but it does take time to get done. And there are bumps along the road as there has been. But really looking forward to these next, literally, 4 months as these 2 new facilities come online and we are confident they are going to work, for sure, and that's going to make a big difference.

Okay. And then the final question here is, I guess, back on to met coal again. To summarize the question, I think effectively, the question is, have the Australian restrictions been a net positive for Teck? I have the CFR sales offset the weakness in the FOB price. Or is it more of a net neutral or net negative?

No, no. Not even close. That's why I said the best thing that could happen is -- for Australia and China is to resolve their differences, and normal supply-and-demand fundamental to take over, and you see the coal price back to [ $139 ] where it was when this started and probably increase from there. Bear in mind that we are getting the Australian FOB price, too, for most of our coal. In Q4, we can only sell a few cargoes because that's all that was left in the quarter. We are going to do as much as we can. Going forward, we've given the market analysts and shareholders the numbers that kind of define that, but we don't know what China, Australia is going to do. But no, the decline that came as a result of this tension between China far outweighs the benefit that we're getting from China CFR.

Okay. Thanks, Don. So that's all the questions that we have. So again, let me thank Teck and yourself, Justine, Fraser, Ron, for participating. And best of luck to Teck next year. It seems like it's setting up very well, given where prices are at. And very excited to see the progress, especially on QB2. So thank you again.

Thank you, Alex. And just a summary comment, others in our sector may have benefited when the iron ore price went really high or gold, of course, and copper. But in our portfolio, as the vaccine comes in and allows the global economy outside of China to recover, we're a better play on that recovery as people get out and drive or fly more. So we're looking forward to that result from the vaccine. So thank you very much for hosting.

Thanks, Don.

Thanks. Bye.