Teck Resources Limited (TECKB) Earnings Call Transcript & Summary

Good day, everyone. It's Timna Tanners again, BofA metals and mining analyst for the Americas. At this point, I'm delighted to welcome Don Lindsay from Teck to join us. This presentation will be more of a hybrid, and there will be slides, after which we will have some time for questions. With that, I want to thank Don for your support of our conference over the years. Sorry, we're not seeing you live in Barcelona. And look forward to hearing your comments. I'll hand off now. Thank you.

Great. Well, thank you very much, Timna. And thank you to Bank of America for the opportunity to speak to everyone today. And before I begin, I would like to draw your attention to the forward-looking statement slides on Slide 2 and 3. This presentation does contain forward-looking statements regarding our business, and this slide describes the assumptions underlying those statements. There are some risks and uncertainties that may cause actual results to vary, and we do not assume the obligation to update any forward-looking statement. So I'm going to begin with an overview of Teck and our positioning in a decarbonizing world and then our industry-leading growth profile. I'll also discuss our strategy, the exciting promise of QB2 and our portfolio of copper growth options as well as our focus on technology and innovation, our capital allocation framework and then leadership and sustainability. So starting with Slide 5. Teck, as most of you know, is one of Canada's leading mining companies headquartered in Vancouver. We are amongst the world's lowest carbon intensity producers of copper, zinc and steelmaking coal. We have very high-quality assets in all of our operations and major projects are in the Americas. Our strategy is focused on prudent growth in what are now called green metals and, in particular, growth in copper. In the near term, we expect to double our consolidated copper production by 2023 through our QB2 project, but we also have significant value potential from our copper growth portfolio. At the same time, Teck has strong safety performance and is a recognized industry leader in environmental, social and governance, or ESG, performance. And as part of that focus, we have set long-term ESG targets, including being carbon-neutral by 2050. And what you see in the virtual background behind me is a part of that program. We also have a strong balance sheet and a rigorous capital allocation framework, which is in our presentation. So turning to Slide 6. I've got to say, it is certainly a very exciting time to be in the mining business. The unprecedented global monetary and fiscal stimulus that governments have launched in response to the COVID-19 pandemic has increased demand for the metals and minerals that are essential for a low-carbon world, including our copper, zinc and seaborne steelmaking coal. And the forecast near-term economic recovery, as vaccines are rolled out, is expected to even further increase that demand at a time when inventories of many of these metals and minerals are at historically low levels. At the same time, long-term demand forecasts are strong, driven by decarbonization, population growth and a rising middle class. So we believe that demand for copper and zinc could more than double by 2050 as a result of the development of various green technologies, electrification and the need to galvanize the steel that is required for the infrastructure to support decarbonization. Let me remind you that every windmill takes 170 tonnes of high-quality steelmaking coal. And we believe that high-quality seaborne steelmaking coal will continue to be a key resource for production of steel that is required to build the infrastructure needed for the low carbon transition. Now the steel industry has an important role to play in reducing global greenhouse gas emissions because currently, it represents approximately 7% to 10% of total emissions worldwide. We've done a lot of work on this issue, and we feel that the steel industry is unlikely to converge on any one single emission abatement technology. In order to meet the world's goals for decarbonization, we think a whole range of steelmaking decarbonization technologies will need to be deployed as they become commercially viable. One of them, blast furnace plus carbon capture, utilization and storage, or CCUS, is very likely to be the most cost competitive and commercially viable solution for large-scale adoption. Blast furnace plus CCUS is also right now the only abatement technology capable of decarbonizing the steelmaking industry at the rate and the scale that is required by 2050. People of the world want to see progress on this fast and some of the other technologies, as exciting as they are, will take a long, long time to come to fruition. So as a result, we believe that blast furnace plus CCUS steelmaking will drive continued demand for Teck's high-quality seaborne hard coking coal. As I said, we've done a great deal of work on the resilience of the steelmaking coal industry, both internally and with third-party experts. And you can find a summary of that work in the appendix to our marketing document for this conference, which is available in the Investors section of our website. Overall, Teck is well positioned to benefit from this transition to a low-carbon world. First, we expect to double our copper production by 2023 on a consolidated basis with the start-up of QB2. We are the largest net miner of zinc in the world, and we are the second largest seaborne steelmaking coal supplier and one of the lowest carbon intensity suppliers of seaborne steelmaking coal globally. On Slide 7, we believe that Teck's strategy will assure that we remain well positioned now and in the future for the transition to a low-carbon world. In the near term, our copper growth focus will rebalance our portfolio and make Teck a major producer, as I said, of what are now referred to as green metals. At the same time, it will reduce the proportion of our total business that is derived from carbon, including steelmaking coal. In the medium term, we plan to prudently grow the copper portfolio in areas essential to the transition to a low-carbon world. And in that process, we expect to further reduce carbon as a proportion of our total business while continuing to produce high-quality steelmaking coal required for that low carbon transition. We've set a target to be carbon neutral by 2050 with interim goals for 2030. We intend to continue to progress carbon reduction initiatives that are already underway in our operations to achieve our carbon neutrality goals by avoiding, eliminating and minimizing emissions. These include transitioning to renewable power sources such as we've announced for Carmen de Andacollo in Chile and so far for 50% of the power required for QB2, also by switching to low emissions mining fleets and implementing efficiency improvements amongst other measures. We believe Teck is one of the best positioned companies on the globe to capitalize on the strong demand growth that we see for copper. We're already a major copper producer from our 4 existing mines. More importantly, as shown on Slide 8, we have one of the very best copper production growth profiles in the industry. As I've already noted, by 2023, we'll have doubled our consolidated copper production through QB2. And this compares to average copper production growth of just 21% from our diversified mining peers and only 11% growth from our copper peers. And this is all according to Wood Mackenzie. So Teck provides investors with strong copper growth exposure at a time when copper demand is set to increase significantly. Turning now to our growth strategy starting on Slide 10. Accelerating copper growth is the cornerstone of our strategy in rebalancing our portfolio. We're going to make steelmaking coal a much smaller overall proportion of our business as we rebalance. So by the time QB2 comes on, it will be approximately 2/3 what are referred to as green metals and 1/3 steelmaking coal. And then as copper continues to grow, the carbon part of the portfolio will continue to reduce. We're also continuing to strengthen our existing assets through our RACE21 innovation program, which is harnessing cutting-edge technologies, including artificial intelligence and automation to drive step change improvements in productivity, efficiency, safety and sustainability. And everything we do is underpinned by a focus on disciplined capital allocation through our capital allocation framework. Any future opportunities for copper growth will be rigorously assessed and balanced with providing cash returns to shareholders, all underpinned by keeping our balance sheet strong. And of course, we will remain committed to leadership in ESG performance. In the near term, we're maintaining a laser-like focus on successful execution of our flagship QB2 project. Slide 11 shows how from a solid base of current copper operations, including Highland Valley, Quebrada Blanca 1, Antamina and Carmen de Andacollo, QB2 is expected to double our consolidated copper production by 2023. But there's also significant longer-term growth potential at QB. We currently have a little over 8 billion tonnes of reserves and resources, which we have reported. And that represents an increase of 20% in the past year, but we know that the vast long life deposit is large enough to support a doubling of throughput or even more. QB2 -- the QB resource is headed to over 10 billion tonnes. Right now, QB2 only uses around 80% of the 8 billion tonne 2020 reserve and resource, and the orebody is open in multiple directions for future potential increases. In addition to the size of the deposit and the potential for longer-term growth, QB2 will be a low-cost operation. And one of the keys to the economics of the orebody is the very low strip ratio is expected to be sustained for many decades. And this is the key competitive advantage that QB2 has over many of the other major [ well nougat ] (00:00:46) and copper deposits in the world, as shown on Slide 12. Once in production, QB2 is expected to be a top 15 copper producer with the potential to increase to a top 5 copper producer as we further augment our production capacity. Construction is progressing well across all project areas. I'm very happy to see that despite the significant challenges posed by COVID-19. As you all know, Chile has been hit hard, just as many regions of the world, by a third wave. And that has certainly had its effect. But we're managing through it and making good progress. And in fact, April was the best month so far to date in terms of construction completion. Overall, completion passed the halfway point a little while ago, and first production of QB2 is certainly still expected in the second half of 2022. And you can find a video and a referral gallery of our most recent progress of QB2 in the Investors section of our website. In addition to QB2, our resource base gives us multiple copper growth options, as illustrated on Slide 13. And these are high-quality resources in well-established mineral districts. We've been working on some of this for more than 20 years. And I should say as well that our copper growth options include approximately 22 million ounces of measured and indicated gold resources and a further 10 million ounces of gold in inferred resources. We're making prudent investments in these cases to further define the path to value for each asset, leveraging our exploration development commercial expertise with a strong sustainability and community focus. Teck is positioned to realize value from a robust pipeline of copper projects, and we can realize that value through production or through select divestitures. On Slide 14, our approach to the development of QB2 illustrates how we are thinking about our copper growth pipeline. I think QB2 is a really good case study that would give people an understanding on how we think about this project-by-project. Because if you go back in time and take a look in the lead up to the QB2 sanction decision, we returned $1.9 billion to shareholders in the form of dividends and share buybacks. We rightsized our balance sheet through the repayment of USD 4 billion of debt. We derisked the development decision from a technical permitting and social and environmental perspective, making sure we have the permits and that a very high percentage of the engineering was complete. We reduced our equity funding exposure by doing the $1.2 billion party transaction with Sumitomo Metal Mining and Sumitomo Corporation and also a very competitively priced USD 2.5 billion project financing. So that was a pretty good development model that gave us the ability to both return capital to shareholders while sanctioning a very important growth project. And that's the current model that we use with these other projects in what has to date been called Project Satellite. So we will seek to reduce tax equity requirements even further as we look at growth through partnering or streams or infrastructure carve-outs is a good one and then project financing, of course. Slide 15 shows our portfolio of copper growth options from a relative risk and return perspective. As you see, we have a suite of copper project, which vary by orebody type and scale and jurisdiction and the stage of advancement. QB2 on the far right, of course, is in execution now and set to deliver value fairly soon. Then Zafranal and San Nicolás are the next ones up, and they're nearing the point where value can be realized. And -- but we still need to see the COVID constraints removed in Peru and get through the election before we would look to make a decision on whether to restart the sales process for Zafranal or not. At San Nicolás, and we are releasing today some information on our completed prefeasibility study. You'll see in the slides in the appendix that San Nicolás is a very attractive project with high grades, very low cash costs and very low capital intensity. And we've had a lot of calls on this one. So we're in discussions with a number of parties. So we're now at the point of deciding whether we're going to sell or partner or develop the assets ourselves. QB3 and Galore Creek are attractive medium-term options, which we'll be systematically advancing in the coming years. And then in Nue or NuevaUnión, Schaft Creek and Mesaba are also very large future options that we have in our portfolio. Slide 16 shows a summary of the key metrics for our portfolio of copper growth options. And in addition to this summary, I want to point out that there are fact sheets now included on each of these assets in the appendix to our marketing document or the conference, which you can find in the Investors section of our website. And for those who we were able, we've included IRRs and NAVs for those as well. So that will allow you to make your own assessment on whether the $3 billion target that we set out 2, 3 years ago is actually in the books. I think you'll see that it is. So turning to Slide 17. We aim to maximize cash flows from our operations, our current operations to fund that copper growth. In our copper business unit, we have a foundation of stable operations from 4 existing operating mines that have a 10-year average gross profit margin of 47%. And we are amongst the lowest carbon intensity copper producers. Zinc, as I said, is also a green metal. It has an important role to play in the low carbon world because galvanizing steel extends the life of the important infrastructure that supports decarbonization. Red Dog is the crown jewel of our zinc business unit. It's one of the largest high-grade, low-cost zinc mines in the world, having generated a 10-year average gross profit margin of 53%. We also have significant long-term optionality for future resource development in the Red Dog area. In our steelmaking coal business, we have a foundation of stable operations with 4 operating mines in the Elk Valley, British Columbia. And we are one of the lowest carbon intensity producers of high-quality hard coking coal. Again, the focus of the steelmaking coal business is not to increase volumes, but rather to increase our margins and our overall competitiveness. The business generates free cash flow to fund our copper growth, and it has generated a 10-year average gross profit margin of 49%. I'm very pleased to report that the ramp-up of our expanded Neptune port is continuing as planned. You can find a video, in fact, of the new double dumper in action at Neptune in the Investors section of our website. Neptune gives us a very long-term, low-cost and reliable part of the steelmaking coal supply chain. And with that lower cost base and strength in supply chain, our steelmaking coal business is well positioned for the future. At the same time, we're continuing to strengthen our existing assets through RACE21's innovation program. It's harnessing cutting-edge technologies, including artificial intelligence and automation, driving a step change in improvements in safety, sustainability, efficiency, productivity and, most important of all, margins. And despite the challenges of COVID-19, Teck's RACE21 transformation has had significant positive impacts across our operations this year in 2020 and last year, as shown on Slide 18. For example, at Highland Valley Copper, advanced analytic tools in the plant, together with drill to mill optimization and blasting improvements, resulted in an overall improvement of approximately 7% in throughput and approximately 2% in copper recovery, and that adds up to quite a significant amount. And across all Teck sites with major trucks and shovel fleets, including all 4 steelmaking coal operations in Highland Valley, RACE21 has contributed to what has just been recorded as record all truck productivity. RACE21 is driving operational improvements and transforming our business through technology and innovation. Now in terms of capital allocation, everything we do is underpinned and balanced with our capital allocation framework, where we balance future opportunities for growth against providing cash returns to shareholders. And as I said, that was a classic example was what we did in the lead up to QB2. It's a very transparent framework outlined on Slide 19. It seeks to balance investments in our business with cash returns to shareholders while maintaining a strong balance sheet. Cash flow from operations and asset sales is first used to fund sustaining capital, which includes capitalized stripping, the committed growth capital and our annual base dividend, minimum dividend of $0.20 a share. We then ensure that we maintain our target capital structure. And our target capital structure is based on maintaining investment-grade credit metrics throughout the cycle and maintaining strong liquidity. After those priorities are taken care of, at least 30% of the remaining cash flow is returned to shareholders. And finally, what's left we optimize, deploying that remaining between additional cash to shareholders or investing in further growth in green metal. So you could see some circumstances in some years where 100% of the remaining cash flow could go back to shareholders. Teck has a strong track record of returning cash to shareholders, as you see on the slide, with $6.8 billion of dividends and buybacks since 2003. A very high percentage of our free cash flow has been returned. We have over $6 billion of liquidity as of April 27, including cash and the amounts that are available on our 2 committed revolving credit facilities totaling USD 5 billion. And we have no significant note maturities prior to the year 2030 and investment-grade credit ratings from all 4 credit rating agencies. On Slide 20, our strong sustainability performance continues to place Teck at the top of ESG rankings by the major ratings firms. We are the top-ranked mining and metals company on both the S&P Dow Jones Sustainability World Index and Sustainalytics. We have an A rating or in the top quartile for mining on MSCI, and we were recently named the Global 100 Most Sustainable Corporations list by Corporate Knights. And then earlier this year, Teck was named for the fourth consecutive year to the Bloomberg Gender-Equality Index. And while these third-party rankings of ESG performance are encouraging, we do know that we still need to continue to build on our strong ESG track record to ensure that we meet the expectations of our shareholders, the communities and society more broadly. And that's why Teck has in place a sustainability strategy that sets out both short- and long-term targets in critical areas. That includes setting a goal to be carbon-neutral across our operations by 2050, a goal transitioning to seawater or low-quality water in water scarce regions like Chile by 2040 and strengthening our safety performance and relationships with communities and indigenous people. Finally, in closing, on Slide 22, this is indeed a very exciting time for our industry and for Teck. There are opportunities ahead as global growth and the transition to a lower carbon economy drive demand for green metals and copper in particular. We have an industry-leading copper growth profile and a very attractive portfolio of copper growth options. We're strengthening how we operate, both through cutting-edge innovation to improve productivity as well as leading ESG performance. And we have a leadership team with the right mix of skills and experience to deliver on our strategy. So thank you. And with that, Timna, back to you. Happy to answer any questions.

I think we have about 8 minutes or so for questions. And so if you have any, please feel free to send them over through the Veracast system. I have a couple, Don. First off, I think as you laid out, I like that Slide 15, if I got it correctly, of the portfolio of projects. And I just wondered a lot of comments here at this conference about how there aren't a lot of shovel-ready projects. But it does look like you have quite a few. So maybe if you could just clarify how shovel-ready or not they might be? And also, I know in the past, you and others have said, you can only really focus on one at a time. So what does that mean for Teck since you're focused on QB2 and QB3? Can you just remind us how you think about allocating the other ones?

Sure. So the first one, off the ranks, so to speak, is Zafranal, and we own 80% of it. The final feasibility is complete, and it's moving into the permitting process that SEIA filed and so on. And as I would have said before, we did start a sales process on Zafranal before COVID hit. We got through the first round, and we received bids that we were comfortable with in the context of the market at that time. But then COVID hit. And of course, nobody was able to visit site, and that's still the case. And so we put it on hold. Now COVID has structurally changed the copper market. It's accelerated decarbonization and demand growth in copper seems to have increased from what we used to think of as about 2% to probably 3% to 3.5%. I think Wood Mackenzie says 3.2% to 3.5%. And if you look out to 2030, if you run the numbers at that rate, that would leave us with quite a gap in the world between supply and demand with as much as 4.5 million tonnes. So the world would need like 15 QB2s. And while we do see about 5 projects coming on in 2022 and 2023, after that, we don't see much. So these projects are now more valuable today than they were before COVID. And likewise, strategically, our Board -- some of the Board members would have a different view. So I've had one Board member say, "Why would you sell any of these projects, given the outlook for copper. So many other companies don't have these. They want them. They have to go and pay for them. We've already got them." But I think the way we see it and to the core of your question about how many projects can you do at the same time, what we don't want to do is get distracted on QB2, the execution of QB2 or on the good work of the prefeasibility on QB3. And so to the extent that on Zafranal and San Nicolás, we could do a transaction with a partner where they build it with their people and their money, and we end up with half of mine for free while still staying totally focused on QB2. That might not be a bad approach. And likewise, that leaves us with lots of room from a capital point of view to return capital to shareholders. Because remember, QB2 finishes next year, but the earliest that we can sanction QB3 is probably beginning of 2026. So there's going to be 3 -- and even when we sanction it, the first equity capital comes from Sumitomo Metal Mining or Sumitomo Corp. and there's a project finance. So we don't have to come up with any significant equity capital for QB3 for a long time. So if we take that partnering approach with Zafranal and San Nic, like we did with QB2, exactly saying, we'd have a lot of room for that free cash flow, very significant free cash flow coming -- starting 2023 to return capital to shareholders. And I think that's a really important message for shareholders.

So you could do, at the same time, Zafranal and QB3, but then the other projects could be considered for spin-off or could be in the holding pattern? Or how do we think about that?

Well, we would still advance Galore Creek and NuevaUnión. They're partners with Newmont 50-50 there. And we're working on the studies for them right now as we speak. But they're more on a 2- or 3-year time line for making any decisions, whereas Zafranal and San Nicolás decisions could make much sooner. You'll see in the appendix that we just released today, the numbers on San Nicolás is pretty exciting, very high IRR, very low cost, low capital. So that's why we've taken so many calls on it and we're having discussions.

Okay. That makes a lot of sense. Don, I can't let you off the hook. We only have a few minutes, but certainly a big topic with the other mining CEOs today has been the circumstances in the Americas and the South American market. And you are an Americas producer. You have a sizable presence with QB2 in Chile and some presence, of course, and a JV in Peru. I know that you have stability agreements. Can you talk about those and also address how your level of confidence, given that the significant changes in the Chilean market in particular and the potential, of course, in Peru?

Sure. So we have a tax stability agreement for QB2 that's 15 years from commercial production. So you can assume that, that would go out to about 2037. We also have one for NuevaUnión with 15 years, the same thing, but of course, commercial production would start later. And then the tax stability agreement at Carmen de Andacollo, that it's operating under currently goes out to 2027. Now we understand that the bill that has been passed by the Chamber of Deputies that will start discussion this week in the Senate of Chile does not include any reference, just tax stability agreements that are in place in the country. And we trust the Chilean institutions. The stability agreements were offered on a transparent and uniform basis under Chilean law, and therefore, they are theoretically not negotiable. We understand that the final project to be defined on mining taxes in Chile with respect to -- tax in Chile will respect the agreements and the legitimacy of those tax stability agreements. But we also understand the social challenges that affect Chile and especially the difficulties that COVID-19 has imposed on a very important part of the country's population. We think the mining industry has played a very important role in contributing to the solution of the country's social challenges in recent years, and we know that it can play an increasing role in the future if the country continues to attract new investment and develop mining operations. So this is a long-term approach. And if you take the long-term approach, not only does it assure greater tax revenues in the end, but it also provides additional high paying jobs that do not exist today. So if you think about QB2 itself, we've hired 20,000 people. 20,000 jobs in Chile is very important. It's the largest construction project in the country. We've had great support from the government. And as we look towards the future in QB3 to do that again, I think that too will be important. So we have good faith in the tax stability agreements there. In Peru, of course, we've seen all the rhetoric and the elections coming, I think, first week of June, if I'm not mistaken. And we'll just have to wait and see what the result is and then what policies come with that. But we have seen situations in the past in Peru where things -- the pendulum can move to the left and there's been big threat of significant policy changes, and then in the end, something more rational ends up occurring. But in this case, nobody knows for sure. So we can't really comment definitively. So we'll just have to wait and see.

Fair enough. Thanks for answering that, and that's a difficult situation. And it does look like Castillo is losing the its lead. So we'll see how that plays out in the next couple of weeks. Don, as always, we appreciate your support for our conference. Thanks so much for joining us. Hopefully, we'll see you in person in Miami next year and all the best. Thank you.

Thanks very much, Timna. Appreciate it.