Teck Resources Limited (TECKB) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to day 2 of BofA's 39th Annual Global Metals Mining and Steel Conference. I'm Pleased to have with me Teck Resources kicking things off today. And joining me from Teck is none other than President and CEO, Don Lindsay. Don, it's very, very nice to see you. The podium is all yours.

Great. Well, thanks very much to Bank of America for hosting us once again this year. Delighted to see you all. So Teck has just finished its third record quarter in a row in Q1 with adjusted EBITDA of $3 billion, which is more than triple last year. Net earnings of $1.6 billion. We're a little bit past halfway through Q2 and it's certainly shaping up to be the fourth record quarter in a row, if prices stay anywhere near where they are today. We're making tremendous progress at QB2. We announced in our quarterly that we passed 82% completion. Going forward, we'll probably be emphasizing more about the milestones that we achieve when water goes into the desal plant and in the pipelines and mills start turning over, it becomes more important than just a percent completion. We are still on target to have first copper produced from line 1 before the end of the year. I should note that Line 1 is 8 weeks ahead of Line 2, that's always been the design. So Line 2, we hope to do that a little faster since It's identical to Line 1, but coming shortly after that, and then scaling up to full production towards middle of next year. We have recently announced our Zinc Satellite initiative, and this is complementary to the satellite project that we had over the last 4 or 5 years. In the copper satellite, we took 5 projects and moved them along through the different milestones of scoping study, pre-feasibility, feasibility to get to a point where value decisions can be made, and that's worked out very well. So we now have 3 different projects that are what in the mining industry we would refer to as near-term, meaning they could be in production by 2026, then we have 2 more that are mid-term and 2 longer-dated options as well. So we have tremendous growth optionality within copper. And it's also capital-light growth optionality because with QBME, which is the QB mill expansion, we've called it before I had QB3, but we've renamed it. So that falls under the current taxability agreement. But QBME is an additional 150,000 tonnes of copper and concentrate by just adding 1 SAG line or 2 ball mills and taking advantage of the capital that we've already invested in the port, the desalination plant, the pipeline, the transmission lines and the tailings management facility. So that's a capital efficient expansion and vent [ training ] material. The Zafranal in Peru is a project that we own 80% of, and MMC has the other 20%. We would likely take on another partner or MMC increase their interest to make it again capital light for us. And that's moving along nicely in the permitting phase. I was in Lima at the end of March and was able to see the public hearings, which was a very impressive, very well organized hearing in the next days. And actually, the regulator did announce that it was one of the highest calling hearings that has taken place in Peru. So we are very pleased with that. And then San Nicolas in Mexico. We are in detailed discussions with potential partners there. And again, to use the same model we did with QB2, we're bringing in a partner means that Teck has to put up moderate to as much as 0 equity to get the project built. So all of that gives us very high percentage growth in copper, not just starting this year with QB2, but thereafter, as we head towards 2026. In ESG, we continue to get very high rankings, #1 in the industry and several of them, and it is a full commitment culture of Teck. And we've recently upgraded our climate change action plan. And the key I want to point out there is that we have set a target of net 0 Scope 2 emissions by 2025. And I believe, and I'm looking at the guy who's doing it, I believe that we will get it much sooner than that. So that would be, I think, a first for the industry and setting the bar high for everyone. Lots of work to do at Scope 1 though. We already are amongst the lowest carbon intensity for our copper, zinc and steelmaking coal businesses. And the big reason for that is because we have a hydroelectric power for everything in British Columbia. So that's a good starting point. Now we have made a commitment similar to what BHP does an ambition for net zero and Scope 3 and working closely with our customers on that goal. So 2022 is off to a good start, certainly from a financial point of view. We've returned a lot of capital to shareholders, paid $337 million in dividends in Q1. We bought back $100 million worth of stock and we announced an upgrade of another $500 million. The buybacks are well underway on that as well. And what we've said is that we would review the buyback regularly depending on cash flows, and that doesn't necessarily mean it's quarterly, it could be faster like we just did or it could be 4 or 5 months, but regularly is the term and the Board will be actively looking at that because we're very conscious that if we didn't do something, we forecast the end of the year, we'd be sitting on, pick a number, $8 billion in cash and generally cash on the balance sheet doesn't show up in the share price. So either buyback stocks, special dividends, reducing debt, using our cash to further strengthen the balance sheet and to return to shareholders seems to make sense. So why don't I stop there and go to questions.

Thank you very much, Don. Please take a seat. Get comfortable. I'd love to start with QBME and kind of get your thoughts on assuming the fiscal environment in Chile is conducive, and I think we'll have a lot of more clarity on that later this year. I think we're expecting a vote on the referendum in September. I mean, could -- this is an asset that could start up before 2026? I'd also like to get your thoughts on whether or not Teck would require a stability agreement similar to the one that you have for QB2 for this particular asset? And then is there anything that you would say is kind of a nonstarter in terms of regulatory, sort of, environmental regulation?

Okay. So winding the clock back a bit. We looked at 3 different expansion options for QB. QB is already 8 billion tonnes, and by the end of the year, we'll cross 10 billion tonnes in resources. So clearly, it has the capacity to become a very large copper mine. We looked at doubling of QB2, so just completely replicating what we've already done or even going to 6 SAG mills, to triple it something like what Freeport did with Cerro Verde. But in the end, fitting under the current permit and the current tax stability agreement seem to make sense and taking advantage of the capital that we're deploying right now in the port, the desalination plant, the pipelines, the transmission lines, camp facilities, the tailings management facility, all of that, leveraging that capital by just adding 1 line, 1 SAG mill, 2 ball mills, and that increases capacity by 50%. There will be some optimization needed to those, the other infrastructure, additional pumping stations and so on but pretty light -- capital light for that amount of capacity will be another 150,000 tonnes. So that's the objective. Now we haven't got that cleared through the government yet, and we'll have to do that. If for some reason that doesn't work, then we'll probably look at other models, because once you're going into the CA process, that takes longer, another couple of years probably, and then maybe it makes more sense to do something bigger to justify through the larger effort that you're doing. In terms of the -- so we're assuming that it will fit under the current taxability agreement. And so a lot of the activity or like the last part of your question wouldn't apply. We were encouraged to see the decisions in Chile last week, but they're still in process. As you say, the vote on the constitutional amendments will be in September. And so we'll wait to see that. QBME, and we're deliberately not calling it QB3 anymore to indicate to people it's a QB Mill Expansion. So it's not a whole new project. And so it's quite straightforward, so that's why we changed the name. But QBME, we wouldn't actually sanction that till January of 2024. So by that time, we'll get to see what the Chilean government has chosen to do, and we'll make our decision based on that. But currently, if it fits under the current 15-year taxability agreement, then that wouldn't be an issue.

Also wanted to get your thoughts on the satellite copper project, so both Zafranal and San Nicolas, particularly San Nicolas. Would you take the approach of starting the process towards construction without a partner, but with the idea that you would eventually find a partner?

Yes. Certainly, we could. And in fact, I would because I do want that to come on in 2026. And the thing about San Nicolas, I did a visit there not too long ago with one of the potential partners and visited some of their sites too, because it truly is an interview process to choose the partner that brings the right skills and experience in Mexico to build an operation like that. But I'd tell you, compared to so many other sites that I go to, to be able to drive to this site on a decent road and to see the transmission lines right beside, water availability is relatively flat -- was quite flat actually. And it's not at 14,000 feet elevation. This is such a doable project. Again, not huge capital, $840 million. And for us, you see, if we bring in the partner and they pay the entry fee, that's essentially paying part of our half of the capital. So it's a very capital-light project for us, and it's a faster construction time period, smaller operation, higher grade. So there's a whole bunch of reasons why we would continue ourselves if we needed to. But we've had a lot of positive feedback from shareholders that the model for development that we did with QB2, where we brought in Sumitomo Metal Mining and Sumitomo Corp. that, that made a lot of sense certainly to boost your return on equity, [ tax ] valuable equity capital and strengthens partnership for construction as well, brings customer base, brings financing JBIC from Japan as part of the project financing. So there are huge advantages to that. So using that model if we can, for both San Nic and Zafranal. I got to tell you about Zafranal permitting because here's the difference, when you look at countries assess geopolitical risk, you usually start looking at the top, like who is the President or who's the Prime Minister? Are they left or right? And is it stable? And Peru has had some bumps in the road, no question about it. They've had all sorts of blockades and different mines shut down and 4 Prime Ministers in 7 months and so on, so it looks pretty challenging. But then there I am witnessing the permitting process. And I'm in Lima, on a Saturday afternoon. And it's at the Westin hotel, the Western business center there, and there's 2 ballrooms. And I go into the first ballroom and they didn't know I was coming, so it was kind of fun because it was a surprise to drop in on the team there. Everyone is excited for that day anyway. But we've got all the resource people in the 1 ballroom working away. They've got all the information. There's thousands and thousands of pages of the application. And then in the other ballroom, it's also -- there's a huge screen on the wall, because it's a virtual hearing, and then there's a horseshoe of tables, 14 subject experts there with [ Mario ], the Project Director sitting in the middle, and he's like an orchestra conductor. The question would come in, he'll say, you start, then you come in afterwards and they answered roughly 480 questions from 7 a.m. till 10:30 p.m. from 360 people from all of the communities around the mine site, right? And so thorough, so professional, everybody calm, distinct detailed answers. And the next day we get this announcement, what a high-quality hearing it was, one of the highest quality improved. So I was pretty impressed with what they're doing there, and it gave me a lot of optimism that in less than a year, we'd have the actual permit and be able to sanction if we chose to. So pretty excited about that.

Yes. It sounds like you're very excited about Zafranal. That's intriguing. I wanted to touch on QB2, and then I'll give the audience a chance to ask some questions. But -- I mean, clearly, the market is very focused on QB2 and how that ramp-up is proceeding. One, what would be your confidence level at this point, a month later from your Q1 results, that you will hit initial production in Q4, first of all? And then second of all, getting the odd question about cost being probably a little bit higher than the technical study. But how do you think about, sort of, the cost pressures for that project as it starts up?

Sure. Well, I'm highly confident that we'll have first copper. Remember, we've -- we talked about first copper, that's first copper from Line 1. The 1 SAG mill, 2 ball mills and right beside it is Line 2. Line 2 is, as I said, designed 8 weeks behind Line 1. Hopefully, we can do it a week or so faster, we'll see, right? But in terms of Line 1 in Q4, we're highly confident. In fact, Red Conger is here and in fact, he's in the room, and I think he would stand up and support me on that. So -- and then in terms of costs, like we announced a definitive estimate in April of 2020, just as the pandemic hit, $5.26 billion. And we said that we're going to be within 5% of that number. And we remain in that position that the project is so far along and with all the materials and supplies and equipment already on site. And now we have labor at full strength where we wanted to be well over 12,000 people on-site now and the COVID wave having passed through. So -- and the exchange rate is in the right place for us. So all that looks very good relative to definitive estimate. On the COVID cost bucket that we've said between $900 million and $1.1 billion, and we're still in that range. We don't know if there'll be another wave of COVID. Let me describe what happens. Like in December, we were just finishing the best construction quarter we had in Q4. And I think we had 3 days in a row, maybe as many as 5 days in a row with 0 COVID cases. So the protocols are working, everything is great. And then within 3 weeks when Omicron hits, we had 800 people in isolation and over 2,000 people absent, right? That's what's called COVID costs ,because when you have 800 people in isolation, basically you take over all these hotels and they turn them into almost hospital wards, right? Clearly, those costs have nothing to do with the project. You're dealing with people's health and safety. So right now, that's not occurring. So we're making good progress week-to-week. This carries on, yes, no -- no question we'll be producing first copper and then ramping up next year. If we get another COVID wave, who knows, but so far so good.

That's exciting. Did anybody in the audience have a question? Okay. So if there's no hands up. I wanted to ask -- there you go. There's a question.

Don, as Teck gets bigger, how do you change your view on ,sort of ,projects that are material to Teck, right? So you've -- you're going to have this monster copper mine down in Chile. And yet you're still talking about farming down Zafranal, but Zafranal really isn't that big to begin with. So how do you think about the right size project for Teck, as it continues to evolve?

Yes. I know, it's a fair question. Zafranal is $1.2 billion, $1.3 billion capital costs. And clearly, we're generating that in about a month or 6 weeks or something, but -- and so we could do it ourselves. But I really do think that partnering makes the project stronger, it leaves capital available to return to shareholders. Like, if you look at how the company is designed right now, we are designed for a continued growth in copper which the world is clearly going to need. Decarbonization is all about electrification, which is all about copper, right? So we have continued growth in copper for very little capital which gives us the opportunity to return that much more capital to shareholders. The company is designed to be that way for the next 4, 5, 6 years. And whereas if we try to do all the projects ourselves, both the pool of skills available, mining industry is pretty tight on that, and the capital available, then you start to get up against various limits. So I just think it makes it stronger. We have a very, very good feedback from shareholders doing it with Sumitomo. If you look over the history of Teck, I think 80% of the mines we've been involved in ,have been partnerships. So it's kind of consistent with who we are. Let's just talk about the skills for a second since I kind of hedged into that. We've got this great team at QB2. Bechtel named QB2, their project of the year worldwide. So very, very pleased with that, maybe it's got a lot of good people. As those people finish the job next year, we'll have -- some of them will stay on QBME, but some of them will be available for San Nic and Zafranal. So we're -- and plus, we've been making some outside hires. We just hired a new senior executive in copper growth. Tyler Mitchelson is coming across from Anglo. And so continuing to strengthen the team and then part of the team is currently deployed will be freed up as well. So good capability there to carry on with that growth.

There's so much that I would like to continue talking about, but I think we're just a little short on time. So I apologize to anybody else that had any questions. Maybe we could schedule another one of these for later this afternoon.

Sure. Absolutely.

Okay. Thanks for being here, Don.

Thanks, everybody.