Teck Resources Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teck's Third Quarter 2023 Earnings Release Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. This conference is being recorded on Tuesday, October 24, 2023.

Operator

I would now like to turn the conference over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead.

Speaker 1

Thanks, Charisse. Good morning, everyone, and thank you for joining us for Teck's Q3 2023 conference call. Please note today's call contains forward looking statements. Various risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward looking statements.

Speaker 1

Please refer to Slide 2 for the assumptions underlying our forward looking statements. In addition, we will reference various non GAAP measures throughout this call. Explanations and reconciliations regarding these measures can be found in our MD and A and the latest press release on our website. Jonathan Price, our CEO, will begin today's call with highlights from our Q3 results. Crystal Prestai, our CFO will follow with additional color on the quarter.

Speaker 1

Jonathan will conclude today's session with a brief update on our value creation strategy before we open the lines to questions. With that, I'll turn the call over to Jonathan.

Speaker 2

Thank you, Fraser, and good morning, everyone. I'm speaking to you today from Akike in the Tarapaca region of Northern Chile, where we're gathering this week to celebrate the opening of our flagship QB2 operation. This is a momentous event for Teck with Cribrada Blanca as the cornerstone of our copper growth strategy. More on that later. So starting on Slide 4.

Speaker 2

Our positive financial performance in the Q3 reflects continued strong pricing for copper and steelmaking coal, In addition to higher base metal sales volumes, adjusted EBITDA of $1,200,000,000 reflects lower than expected steelmaking coal sales in the quarter and a localized geotechnical event at Highland Valley in August. During the quarter, we made significant progress to unlock the value of our industry leading copper portfolio. Our QB2 project continues to ramp up and is expected to achieve design throughput and recovery rates by year end. The assets are performing well and we are pleased with the strong operational performance we have seen to date. We have a line of sight to double our consolidated copper production when QB2 reaches full capacity and we continue to advance our actionable portfolio development options to position Teck for our next phase of copper growth.

Speaker 2

Importantly, we ended the quarter in a strong financial position with $7,000,000,000 of liquidity included $1,500,000,000 in cash, and we returned $65,000,000 to shareholders through the In the Q3, we continue to make steady progress against our sustainability goals. We announced an agreement with Norden to reduce emissions in our steelmaking coal supply chain. The agreement is expected to reduce annual emissions from tech shipments Handled by Norden by 25 percent. And our reported high potential incident frequency remained low at a rate of 0.13. Now turning to QB2 on Slide 5.

Speaker 2

We made solid progress on the ramp up during the quarter. And as I just mentioned, we're seeing strong asset performance with the QB2 plant performing well. At the end of the third quarter, it had been Operating consistently at 70% of design capacity. Both Line 1 and Line 2 are operating well. Success so far with Line 2 reflects a faster and more effective commissioning as a result of leveraging the learnings from Line 1.

Speaker 2

As a result, we generated our 1st quarterly gross operating profit at QB2. Though modest, it is a key milestone in the development of the project. While we are pleased with the performance of the assets so far, we are not pleased with what we have had to increase capital guidance to US8.6 dollars to US8.8 $1,000,000,000 from US8 $1,000,000,000 to US8.2 $1,000,000,000 previously. The increase was driven by delays in construction of both the molybdenum plant and the port offshore facilities as well as costs associated with contract claims and slower than planned demobilization. The last two outstanding pieces of construction at QB2 are the moly plant and the port offshore facilities.

Speaker 2

The moly plant will be completed by the end of the Q4 and the port will be complete in the Q1 of 2024. And significant efforts are ongoing to mitigate risks and cost pressures. Importantly, we continue to expect to be operating design throughput and recovery rates by year end. Although we expect to be near the lower end of QB2's 2023 Annual copper production guidance range of 80,000 to 100,000 tonnes. Turning to Slide 6, where we outline a summary of our key 2023 operational guidance updates.

Speaker 2

In our copper business unit, We decreased our annual production guidance for Highland Valley by 10,000 tonnes to reflect the impact of the localized geotechnical event in August. We do not expect any impact of this event to carry beyond 2023 and our unit cost guidance remains unchanged. Copper Capitalized stripping guidance was revised to $395,000,000 up from $295,000,000 The increase reflects additional stripping at QB2 while the concentrator was in ramp up as well as additional stripping at Antamina And the change in the mine plan at Highland Valley due to the localized geotechnical event. And in steelmakingcoal, We lowered our 2023 production guidance to 23,500,000 tonnes, down from 24,000,000 to 26,000,000 tonnes to reflect the intermittent plant challenges we've experienced this year. Our unit cost guidance remains unchanged.

Speaker 2

With major maintenance activities completed and the implementation of our plant improvement initiative, we saw an improvement in plant reliability in the 3rd quarter relative to the first half of this year. Our steelmaking coal operations are well positioned in the Q4 and into 2024. Strong raw coal inventories are also expected to provide additional product flexibility and optionality going forward. Across our businesses, we remain laser focused on execution. We intently manage our key business drivers And continuously enhance our operating practices, while rigorously managing our controllable costs.

Speaker 2

For external risks outside of our control, We have solid mitigation plans such as supply chain recovery and strategic sourcing to mitigate inflationary cost pressures. As ever, our focus is to drive reliable operational performance and maintain our competitive low cost position. With that, I will now hand it over to Crystal for additional color on the quarter.

Speaker 3

Thank you, Jonathan. Starting with an overview of our Q3 financial results on Slide 8. We generated $1,200,000,000 in adjusted EBITDA or $0.76 of adjusted diluted EPS with contributions from each of our business units. However, We fell short of consensus analyst estimates for adjusted EBITDA and EPS in the quarter. The variance was primarily driven by the localized geotechnical event at Highland Valley, consensus expectations for QBQ's ramp up profile, the impact of lower steelmaking coal sales volume and higher than consensus corporate costs.

Speaker 3

This is partially offset by strong sales at Red Dog in the quarter. Looking forward, we are well positioned for strong 4th quarter results for a number of reasons. 1st, Steelmaking coal prices remain robust, driven by supply constraints and strong demand, particularly from India and China. Prices rose through the Q3 and into October and FOB premium spot prices currently stand at US343 dollars per tonne. As a result of pricing, flat reliability improvements and inventory levels, our high margin steelmakingcoal business unit is well positioned to deliver strong financial performance in Q4.

Speaker 3

And at current copper prices, we expect QB2 to generate a gross profit in the 4th quarter as we ramp up continue as the ramp up continues in production rates. Turning to the key drivers for our financial performance on Slide 9. Adjusted EBITDA in the 3rd quarter decreased compared to the same period last year, primarily driven by considerably lower commodity prices for steelmakingcoalandzinc, reduced sales volumes of steelmakingcoal as well as copper at Highland Valley and higher operating costs. These items were partially offset by higher copper prices, positive pricing adjustments and a weaker Canadian dollar. We continue to experience inflationary pressures in the cost of key supplies, including mining equipment, tires, labor and contractors despite the decline in diesel and other fuel costs compared to the same period last year.

Speaker 3

This is reflected in our sustaining capital expenditures and full year unit cost guidance ranges, which are both unchanged. Our underlying mining drivers remain relatively stable, and we remain highly focused on managing our controllable operating expenditures. Turning to each of our business units in more detail and starting with copper on Slide 11. Copper prices were up 8% year over year. Copper production volumes in the Q3, including QB2, increased by 8%, while sales volumes, and Q2 increased by 3% compared to last year.

Speaker 3

At QB2, we produced 18,300 tonnes of copper and concentrate, more than half of which was produced in the month of September. Sales volumes of 14,300 tonnes drove our first Quarterly gross profit before depreciation and amortization for QB2 of $19,000,000 in line with our expectations. However, as mentioned earlier, production at Highland Valley was impacted by a localized geotechnical event in the south end of the valley pit in August, which required processing of lower grade stockpiled ore for the remainder of the quarter. In early October, the valley pit was safely reopened and mining of higher grade ore recommenced. A complete analysis of the failure resulted in a revised mine plan to mitigate production losses for the 4th quarter.

Speaker 3

Production at Andacollo was also impacted by a 14 day unplanned shutdown in August, which was due to a conveyor failure. Copper net cash unit costs increased as a result of lower production at Highland Valley and Carmen de Andacollo, an overall increase in maintenance and repair costs, as well as lower zinc and moly cash margins for byproducts. Despite this, our full year operating cost guidance for our copper business unit is unchanged. Looking forward, we decreased our 2023 copper production guidance for Highland Valley to 100,000 tonnes to 108,000 tonnes to reflect the impact of the localized geotechnical event in August. QB2 production guidance is unchanged at 80,000 tonnes to 100,000 tonnes, although we expect to be at the lower end of this range.

Speaker 3

We have also lowered our total molybdenum production guidance for the full year due to the delay in construction of the QB2 moly plant. For QB2, as a result of recent changes to IFRS, We are required to recognize sales proceeds and related costs associated with products sold during the ramp up and commissioning phase through our earnings, rather than capitalizing these amounts. In addition, as QB2 continues to ramp up production, we incur costs that are capitalized because they relate to bringing the asset to its design capacity operating level. These costs are referred to as capitalized ramp up costs. We have capitalized $561,000,000 of these costs as of September 30.

Speaker 3

For the Q4, we expect capitalized ramp up costs to be lower than those capitalized in the Q3. As mentioned earlier, we expect QB2 to generate a gross profit in the 4th quarter as ramp up continues and at current copper prices. Moving to zinc on Slide 11. Profitability was impacted by zinc prices, which were 26% lower compared with the same period last year. This was partially offset by higher zinc premiums on our contracted refined zinc sales.

Speaker 3

Red Dog has had a strong Shipping season this year and zinc and concentrate sales increased 14% year over year to 269,700 tonnes, which was within our guidance range. However, Red Dog Zinc Concentrate production was driven by reduced mill throughput as a result of equipment failure. At Trail Operations, refined zinc production was impacted by reduced concentrate supply and refined lead production continues to be impacted by the CubeSat furnace that is nearing the end of its life. A replacement is slated for 2024. Looking forward, we expect Red Dog Q4 Zinc Sales of 130,000 to 150,000 tonnes, reflecting the normal seasonal pattern.

Speaker 3

And while our overall full year zinc production guidance remains unchanged, we made minor revisions to our site guidance. A 5,000 tonne decrease in Red Dog's guidance due to production issues is offset by a corresponding increase in Antamina's guidance due to higher than expected zinc production. Turning now to steelmaking coal on Slide 12. While prices for the quarter were lower than that particularly strong Q3 last year, prices remain robust and are well above historical averages. Production was impacted by planned maintenance outages at 2 of our operations, including Fording River, our largest operation.

Speaker 3

Sales of 5,200,000 tonnes were below our guidance range of 5,600,000 to 6,000,000 tonnes due to a slower than anticipated supply chain recovery following the impact of BC wildfires, the labor disruptions at BC ports and intermittent plant challenges. Adjusted site cash cost of sales per tonne was impacted by lower sales volume and increased maintenance activities associated with the planned outages, while transportation costs reflect higher demurrage and port charges related to lingering impacts from the labor disruptions at BC Ports and the BC Wildfires. Looking forward, we expect Q4 sales to be between 5,800,000 to 6,200,000 tonnes, maximizing use of available inventories. And as mentioned earlier, we lowered our annual coal production guidance to 23,000,000 to 23,500,000 tonnes for the remainder of the year. This lower level of production is expected to put upward pressure on our adjusted site cost of sales and transportation unit costs, and we now expect both to be at the upper end of our guidance ranges for the full year.

Speaker 3

Overall, our steelmaking coal business is well positioned to continue delivering strong financial performance for the remainder of the year, With average steelmakingcoalpricesabove US3.55 dollars per tonne month to date, plant reliability improvements and current inventory levels. Our financial position remains strong as shown on Slide 13. Our liquidity is currently $7,000,000,000 including $1,500,000,000 of cash and we continue to maintain investment grade credit ratings from S We have no note maturities due until 2,030. In the Q3, we paid our quarterly base dividend of at $0.125 per share. Year to date and in accordance with our capital allocation framework, we have paid $451,000,000 in dividends, purchased $85,000,000 in Class B shares and advanced our ongoing deleveraging with debt repayment of $457,000,000 We remain focused on balancing our investment in growth against returning capital to shareholders, while maintaining a strong balance sheet.

Speaker 3

With that, I'll turn it back over to Jonahole.

Speaker 2

Thanks, Crystal. Before I wrap up, I want to provide an update on separation. With responsible value creation as our North Star, we continue to engage with a number of parties that have expressed interest in our steelmaking coal business. We're evaluating a range of potential options guided by several objectives. Based on extensive shareholder feedback throughout this process, One of our core objectives is to achieve a full separation of our base metals and steelmaking coal businesses.

Speaker 2

This is Key to unlocking the value of our unrivaled copper growth portfolio. We will ensure Teck is well capitalized and positioned to pursue our copper growth potential And deliver strong returns to shareholders, while maintaining a strong balance sheet. At the same time, we aim to realize the Full value of our steelmaking coal business for our shareholders. An important consideration will be the certainty of achieving separation, including receipt of the required regulatory approvals. And it is also critical that the transaction allows us to maintain social and environmental commitments Stakeholders in the Elk Valley.

Speaker 2

Overall, the Board and Special Committee are pleased with the progress we have been making. Separation remains a priority and we are moving through the process as expeditiously as possible. Driving organic growth through development of our copper project pipeline remains central to our value creation journey. Looking at Slide 16, we have made meaningful progress on our near term development projects during the quarter. We furthered the feasibility studies for San Nicolas and the Quebrada Blanca Mill Expansion Project.

Speaker 2

And we completed the feasibility study for HVC-two thousand and forty in Q3 with the submission of the project environmental assessment in October. Looking forward, we are targeting key milestones for these projects in the Q4, including completion of the feasibility study for QBME, submission of the MiAR permit application for San Nicolas and commencement of detailed engineering for Zafranal. As shown on Slide 17, we have an unrivaled suite of copper growth opportunities, Diversified by geography, scale and time to development. There is significant work underway to advance development of each of these projects, including resource definition, engineering and design, permitting and stakeholder engagement. And we have de risked product delivery Financially and operationally through a partnership approach, such as in the case of San Nicolas.

Speaker 2

The projects we have in place Double our copper production in the near term with the potential to deliver 1,000,000 tonnes of annual production by the end of the decade to drive substantial new intrinsic value. In prioritizing our growth options, we take into consideration multiple investment criteria, including strong financial returns, balance sheet capacity and financing options, project readiness, project development capacity and the social, political and environmental context. And importantly, each of these projects will have to compete for capital with the rest of the business and generate strong returns. While permitting is a major gating factor in determining potential sanction dates, we are largely in control of project timing And we will continue to apply our disciplined capital allocation framework that balances growth with returns to shareholders. In closing, on Slide 18, this is a very exciting time for Teck as we continue our pursuit of responsible value creation for our shareholders.

Speaker 2

We are continuing to evaluate options for a separation that would realize fair value for our world class steelmaking coal business and unlock the full potential of our base metals business. And we continue to make significant progress against our copper growth strategy with the ramp up of QB2 and advancements in our near term development projects. Guided by our capital allocation framework, We are committed to balancing our opportunities for growth with financial resilience, while providing cash returns to shareholders. At the same time, we are focused on execution and ensuring we pursue responsible value creation for shareholders. Thank you.

Speaker 2

Operator, please open the line for questions.

Operator

Certainly. The first question comes from Orest Wowkodaw with Scotiabank. Please go ahead.

Speaker 4

Hi, good morning. Jonathan, some follow-up questions if I could on the planned coal separation. I mean, obviously, this Been going on now for some time. Can you give us a better idea of where you are in that process? Like are we close to the finish line?

Speaker 4

Or do you think this could Just take a lot longer given more interested parties coming to the table and could it spill into next year?

Speaker 2

Yes. Hi, Orest. Thanks for the question. Look, we're making very good progress here. I'm very happy as to where we are at present.

Speaker 2

We have a competitive process, which is the most important thing here to ensure we have options ahead of us to realize a good outcome. As I've mentioned a couple of times recently, I believe we'll be in a position to make a decision before the end of the year. That hasn't changed. The key thing for us is to ensure we make the best decision here possible rather than rush the process. But as I said, we're well positioned right now.

Speaker 2

We're happy With the level of competition we have and I'm confident we can get a good outcome for shareholders.

Speaker 4

Okay. And just as a follow-up, You spoke to the fact that certainty of achieving separation is a key criteria here, including regulatory approval. Do you think that a partial sale would be easier from a regulatory approval perspective than a full sale?

Speaker 2

Look, I think every different option here has its unique characteristics In terms of what that means from an approvals perspective, the overarching focus here is on the delivery of shareholder value. That has to come first Foremost, in considering that delivery of shareholder value, of course, we have to consider the certainty of execution and the risks associated With any transaction, the requirement for regulatory or other approvals is a function Of the nature of any transaction and ultimately we will do what we believe is in the best interest of our shareholders having regard for Those regulatory and approval requirements.

Speaker 4

Okay. Thank you. And one more if I could squeeze it in. Just if you decide to do the partial sale option, Would it be your goal to put control of EVR into the public market or control with an owner?

Speaker 2

Look, I won't be specific on that, Orest, at this point in time. I mean, I think, We've discussed the range of options that we have before us here with a full sale at one end of The spectrum and a partial sale and a spin at the other end of the spectrum with the latter providing ongoing exposure To our shareholders, in respect of both the steelmaking coal market, the fundamentals of which look very attractive going forward. And of course, a quality high margin business like EVR. Ultimately, the specifics of any transaction will be a subject The conclusion of this process. So I won't say more on that now other than as I mentioned before, we're happy with the options in front of us And we believe we're well set to drive a competitive outcome.

Speaker 4

Thank you very much.

Speaker 2

Thanks, Orest.

Operator

The next question comes from Liam Fitzpatrick with Deutsche Bank. Please go ahead.

Speaker 5

Good morning, Jonathan. Just a couple on QB2. It's clearly a hefty CapEx increase given You only re guided earlier this year, and we're only talking about a 3 month delay for 2 parts of the project. So The question is were these issues not largely loan known about earlier in the year? And then can you outline what the major component is behind this increase.

Speaker 5

And the follow-up kind of links to that and your future growth strategy because clearly a lot of it is based around the next Crop of copper projects. So what sort of changes are you making or have you made to ensure that we're not going to be faced with similar issues in the future? Thank you.

Speaker 2

Thanks for the questions, Liam. I'll come back to the second question in a moment and I'll hand off The first question to Red Conga, our President and Chief Operating Officer. Just to preface that, I will say The issues that have caused us to reguide the QB2 CapEx as we have done today are issues that arose in the Q3 and there are issues that created impacts to both schedule and costs, but I'll hand over to Red to unpack that in greater detail.

Speaker 6

Yes. Good morning, Liam. We are focusing on delivering reliable and robust Copper circuit, I mean that is first and foremost in our actions and several unknowns presented themselves during the 3rd Let me give you a couple of examples of those and what we had to do to address them. We commissioned the tailings return water Facility early in Q3 and we found that all 16 of these huge tailing water return pumps Had an internal manufacturing defect that evidenced only when they were operating at full load, all of the pre ops testing, etcetera, Was unable to detect this default. So once we got them up and running at full load, they were overheating.

Speaker 6

So we had to do discovery work to understand what that was. We had two responses there. We had to run them At lower rated capacity to prevent the overheating. And then Once we discovered what the defect was in the original casing, we had to take out each pump, Send it down to a machine shop, have it modified per design specs, then bring it back up to the site, get them installed again. And I'm happy to say they're all running appropriately now.

Speaker 6

So that fits has cured the problem. But there's a major system where you essentially had to build it twice and Some of the manufacturing on the pumps that should have arrived to us in working order and ready to go. So that was A major unplanned piece of work for us. And of course, you take resources off of other planned work that you had during the quarter to do that rework. So that's one example of something that we discovered and addressed and Successfully completed.

Speaker 6

Additionally, the blast jetty pile that we're drilling out in the port The area that the drill bit failed subsurface in the ocean floor took us 2 months To get that unit out of the ground and out of our way, we were unable to drill The pile in an alternate location because of the critical nature of the load bearing requirements there. So That was just something that you had to power through and get done. No way we Could forecast that or know that that was going to occur and that has delayed the pork From completion from the end of this Q4 into the end of Q1 of next year, we've hired 2 additional contractors to work on completion of other offshore areas, mooring buoys, etcetera, offshore. So those again, those are Schedule delays, overhead continues, you have to hire more contractors to cover in behind and significant Cost increases associated with that. And then we have a variety of claims that contractors have submitted that are associated with costs that they believe they've incurred due to owner directed changes in work plans.

Speaker 6

So we've got a significant amount of work that we need to do to review all of those claims, reconcile those and Determine what settlements are appropriate in order for us to The complete and truly assess the full impact of that. We've put all of those claim Figures into the forecast now, even though we know some of them may not be settled for exactly what was applied for. This is all of this rework, etcetera, has intentionally delayed the Moly plan. So that Again, in preference to the reliability of the copper circuit and That approach has served us very well. We're seeing substantial improvements month to month in plant throughput and performance and Really very excited about how the plan is performing, what the future holds for the performance of that plan.

Speaker 2

Yes. Thanks, Fred. And just to sort of reiterate there, Liam, as we said, the only major areas of Construction outstanding now with the moly plant and the port. In the guidance that we provided today, we have included all known risks, As Red has said and we've included those risks pre any mitigation. And of course we've included Some allowance in here for unknown risks.

Speaker 2

So we do believe that the guidance we put forward today will capture all remaining CapEx Through to the completion of the project at this stage. To your second question on future growth and implications here. Firstly, of course, we will undertake a detailed lessons learned process from the QB2 Experience and make sure that those lessons and assumptions are carried forward to future projects, both in terms of the capital assumptions we make, But also the how those projects are delivered. One example we've referenced many times through the course of this project The challenges we've had with labor productivity. Now some of that, of course, could be a function of COVID and the hangover from COVID and some of that, course, could be a function of the environment in which this project has been built in at 4,400 meters.

Speaker 2

It's challenging place to deliver a major project, but we will take those assumptions forward and make sure that they're reflected in future projects. Otherwise, I think if you look at the projects in our portfolio, it's worth noting that they are an order of magnitude simpler In terms of their complexity, in terms of their scale and in terms of their scope, when you look at QB2 and the full scope of that, It's really 5 or 6 major projects rolled into 1, with port, desal, pipelines, mine, concentrated tailings, All at world class scale. The other projects you see in the pipeline here, some of them with capital costs closer to $1,000,000,000 Reflect a very different proposition for the company. But that said, there's a lot to learn for QB2. We'll make sure We understand those lessons well before we sanction our next project.

Speaker 5

Thank you for the color. If I'm allowed, a very brief follow-up just on your EVR comments. I just wanted to make sure I'm understanding it correctly because you mentioned Execution risk was key. It's kind of what's being implied here is that a kind of I guess a spin of some form is the lower execution routes or are you just kind of outlining that it's basically a call between The execution risk on a spin versus a sale to a single party.

Speaker 2

No, look, I think, Liam, it's intended to be a general comment. It's not intended To point at anything specific here, when assessing the correction of value for shareholders, you've got to sort of Look at that in the broader sense and of course the certainty or the risk to delivery of that value is a key consideration Risks and approvals and those sorts of things can manifest in a number of ways. So it's not intended to be A direct comment to favor one option over another just to sort of give some color to the thought process here that Headline price and headline value is important, but as is the certainty of the delivery of that value. Understood. Thank you.

Speaker 2

Thanks, Liam.

Operator

And the next Question comes from Dalton Baretto with Canaccord Genuity. Please go ahead.

Speaker 7

Thank you. Good morning, Jonathan and team. I wanted to stay on that separation topic of conversation there. And I guess my first question, Jonathan, is given where coal prices are As well as the implied valuation on the BHP Whitehaven deal. Has the thinking on valuation between you and your potential buyers changed at all relative to what was on the table earlier this year?

Speaker 2

Thanks for the question, Dalton. Look, I mean, Fair to say that I think the view of the market has evolved since February when we announced our prior separation. The outlook for steelmaking coal has definitely improved. So I think a recognition here of the favorable structure for that market Going forward with now I think a greater understanding of the long term need for the role of blast furnaces in the production of steel and limited New met coal supply expected to come to the market and of course the growth of blast furnace capacity in India as well is something That is particularly interesting for those structural dynamics. So I think the view of the market has changed long term.

Speaker 2

Whilst the spot price is very encouraging Right now, we look through that and we look to the long term assumptions here that underpin the business. I think as well, Post the discussions we had earlier in the year regarding separation, the appreciation for EVR as a long life, High margin producer of very high quality hard coking coal has increased in the market as well. So look, I think there has been a move in expectations Over the last 6 or 8 months as a result of those two factors. And of course, in discussions with our Shareholders which have been ongoing throughout that period, they convey to us their expectations here as well. And that's something, of course, we take on board As we think through the options in front of us.

Speaker 7

Great. Thanks for that, Jonathan. And then just maybe as a follow-up. In terms of getting a Deal done before year end. If you do offer a partial sale as well as a SpinCo, do you anticipate those happening together?

Speaker 7

Or could We see an announcement on a partial sale by year end and then just some sort of a lag on the spinco that will allow you to recoup some of These high coal prices.

Speaker 2

Look, I think, Dalton, our proposal here is If and when we step forward with a transaction, we would expect to step forward with a complete solution for the separation of EVR from the base metals Business.

Speaker 7

Great. Thanks for that. And just maybe one last one on QB2. As you wrap it up, do you where is the bottleneck currently? Is it at the mine?

Speaker 7

Is it at the mill? Is it at the supporting infrastructure? And What is the primary hurdle to get to full design capacity?

Speaker 2

Yes. Dalton, I'll hand you over to Shazad Barmal, our VP, the copper business unit here who is responsible for the ramp up and future operation of QB2.

Speaker 8

Thanks, Jonathan. As Rhett mentioned, we are very pleased with the plant design and the robustness of the design and the performance so far. And The insights and lessons from Line 1, we translated that to Line 2. And as we started treating Line 2 in August, We were up at making copper within in less than a month. So very excited about that part.

Speaker 8

And as part of the commissioning, when we took Line 2 down to retorque the mills, Check the gap and the air settings on the motors. We also took the opportunity to make some adjustments to the plant, you know, in our conveyors and chutes and everything else. And It's that reliability of the little things that has been our focus, not the design and the throughput of each of the units in the plant. So We don't see anything that prevents us from getting to design rates. And in fact, after we started up, after that shutdown, We have hit above design rates on each of the lines and of the plants together, over 140,000, 143,000 tonnes a day.

Speaker 8

We have achieved that. And so really to answer your question, it is The reliability and making sure that the small shutdowns are avoided and we are making great progress on that. With respect to mine operations, We have hit our target numbers regularly. So really, the autonomous fleet is operating really well. The crusher is not a bottleneck at all.

Speaker 8

And as Rhett mentioned on the tailings side, the return water system, which is part of the water recovery and the dilution water for sands is operating really well. The sand quality, quantity is within spec and we're that's been derisked as well. So the team is really energized, we're hitting records every regularly. We make another record on our journey towards full ramp up And it's this reliable delivery that we hope to achieve by year end.

Speaker 7

Great. Thank you for taking my questions.

Speaker 2

Thanks, Dalton.

Operator

The next question comes from Chris Lefamino with Jefferies. Please go ahead.

Speaker 9

Hi. Thanks for taking my question. I just wanted to ask about sort of back on QB2 on the CapEx budget there. So the $8,600,000,000 to $8,200,000,000 CapEx guidance is for the project. And then you have this ramp up CapEx and then you also have the operating costs and presumably the Capital sales that you're making in the normal course of business, the offsetting costs there are expensed and not capitalized.

Speaker 9

So I'm trying to first understand Exactly what is included in the ramp up CapEx? And secondly, do you have a guidance for what that ramp up CapEx will be before All the costs are ultimately expensed because I'm not sure if that ramp up CapEx was ever guided to earlier on in the project. It seems like that sort of It came out of nowhere and it's adding to the overall CapEx to the project. So just trying to understand what comprises that and what that number should ultimately get to before it ends? Thank you.

Speaker 2

Yes. Thanks for the question, Chris. I'm going to hand you over to Crystal on this one given the relation to the IFRS Treatment of these costs during ramp up. So over to you, Crystal.

Speaker 3

Thanks, Chris. I think maybe I'll take your question in a couple Pieces as you sort of framed it, I think the first just being the change in IFRS that now requires us to obviously recognize Costs through earnings as we sell products, so we've done that in the Q3 as we've had sales volume come through. So those amounts are in the P and L and you can see what our margins are and you can see the breakdown in our mine operations reporting that we've included in the MD and A. And then in the context of the ramp up capital, during the time where we're ramping up operational rates to designed capacity. We're trying to get to a minimum threshold and at that time we're incurring costs to operate the assets.

Speaker 3

But we aren't producing at the levels where we expect to be producing. And so during that time, we capitalize those costs. If we were producing at higher levels, those costs would be going into inventory and then going through the P and L. We haven't guided to that amount just Given that obviously the ramp up is ongoing and it's a hard number to predict. But I can say that as we get to higher levels of production, the amounts that we capitalize in that ramp up capital bucket are lower.

Speaker 3

And so I expect them to come down in the 4th quarter compared to what was capitalized in the Q3. And as we get to the end of the year and we're at full production rates, we won't be seeing any further amounts capitalized in that bucket. So that amount has peaked and I expect it's going to come down over the rest of the year. Does that answer your question?

Speaker 9

So if you're operating the asset and you're selling copper, I'm not sure why. So I'm a little bit confused as to why expenses would then be capitalized if they're not if they're associated with actually operating the asset and selling copper. I mean, what exactly That CapEx, is it stripping? Is it an investment in the infrastructure? What exactly is going to that bucket?

Speaker 3

It's all the cost of operating those assets until you reach a minimum operational threshold. So any cost associated with the products being sold is going into your cost of sales number.

Speaker 9

So none of the costs associated with the sales are going sorry, so the costs associated with the sales are going into expense Going into CapEx?

Speaker 3

They're going into expense. That's right, into cost of sales on the income statement.

Speaker 9

Okay. Thanks. I'll just could you just follow-up offline? I appreciate

Speaker 2

it. Okay. Thanks, Chris. Yes, the answer is accounting, I think. So we'll take the next question please.

Operator

The next question comes from Bryce Adams with CIBC. Please go ahead.

Speaker 10

Good morning and thanks for taking my question. It's one more on the ramp up. So the low end of QB2 guidance For the concentrator 80,000 tonnes of copper and we are guided to the low end. So that implies Q4 production of just under 60,000 tonnes. What from the ramp up so far gives you confidence that that's possible?

Speaker 10

$60,000 per quarter is not the full run rate, but it's getting closer to it. So Just looking for some more color on your Q4 expectations for the ramp up.

Speaker 2

Yes. Thanks, Bryce. Back to just add on that one.

Speaker 8

Thanks, Bryce. So as I mentioned in early in Q4, we did the modifications and we have been Well since then. And really it's a ramp up from October, getting closer in November and then finally getting to Pretty much full range by the end of the year. And one is the throughput aspect, which we are relatively bullish on. And then the other is the recovery.

Speaker 8

Our recoveries have been pretty strong as well. And as we ramp up all our analyzers and our control systems now, Which is we're in the process of doing actually this week and then moving forward, we are looking at some good gains on recovery as well. And of course, the last factor being grade. Based on our mine sequence, we're looking in good shape there. And so with those three things, We think we'll be able to hit that 59,000 tonnes.

Speaker 2

Yes. I think it's also worth noting that it won't be a straight line Through the next 2 months here that sort of week on this, we'd be expecting production rates to improve into the end of the year. Yes.

Speaker 10

Got it. Okay. Thanks for that. Looking forward to the Q4 update. So I think if you get that 59,000,000, 60,000 tonnes in Q4, that's a good setup For next year.

Speaker 10

So the rest of my questions are answered. That's it for me. Thanks so much.

Speaker 2

Thanks, Bryce.

Operator

The next question comes from Bill Peterson with JPMorgan. Please go ahead.

Speaker 4

Yes. Hi, good morning. Thanks for taking my questions. A lot of questions on CV2 and Elk Valley have been answered. But wanted to talk more about near term Development projects.

Speaker 4

So I guess first, when do you expect the project environmental assessment for the mine extension for Highland Valley to be approved? And Hoping to get a bit more color on the expectations for the permitting and feasibility studies for the near term growth projects

Speaker 2

Yes. Thanks for that question, Bill. I'll just start with Shazad on the HPC And then I'll hand you over to Tyler Mitchelson, our SVP of responsible for copper growth to talk a bit more about the other projects in the portfolio and their status.

Speaker 8

So Bill, on Highland Valley, as we said, we were able to submit our EA. It was a long process and it was really quite robust. And we do expect approval by the end of 2024 before the end of 2024. And then of course, that will be a decision

Speaker 2

Okay. Thanks, Shahzad. Tyler, Can you handle the balance of the question, please?

Speaker 4

Sure. Thanks. Look, I think the key near term projects, if Starting with Sam Nicholas, down in Mexico, working through the feasibility study as we speak and we're targeting Gamershot in the first half of twenty 24. The permit paperwork and everything has been prepared. We're just doing a lot of stakeholder engagement right now, Ensuring that we've got the right things lined up before we submit the permit, we do anticipate putting that permit in Q4 of 2023.

Speaker 4

On Daffronelle, working through the CapEx and OpEx update with a little bit more engineering, we should have that done in the 1st part of 2024. We do have the permit in place for that one. We got that in May of 'twenty three. Next step from a permanent perspective is that Canal Peru would be the Construction permit, which we need to do a bit of engineering for and the intent is we would apply for that mid-twenty 24. And then the other near term one is QBME progressing the feasibility study.

Speaker 4

We should be done that in the Q4 of this year. And still working through the permitting process there as well. So a lot of the other longer dated projects, we're doing some of the early work on Baseline work and working through some of the technical aspects of the early stage study work on that. Those are the key near term projects we're working through. Does that answer the question?

Speaker 9

Yes. Thanks for the update.

Speaker 4

I guess more on the near term working capital. So how should we think about the cadence through the remainder of this year and then the next year as QB2 ramps more meaningfully. I guess, are you still expecting to build for the year?

Speaker 2

Crystal, can you pick up that one please on working capital for QB2?

Speaker 3

Yes, sure. Thanks, Bill. I think we are at the working capital levels we expect to be. Obviously, we're building as some inventories on-site as we produce and we move things into sales. But I don't expect there to be a material change in working capital outside of our normal sort of timing of sales and accounts payable.

Speaker 3

I I think we're looking to kind of achieve about a $400,000,000 level there.

Speaker 8

Okay. Yes, thanks for that.

Speaker 2

Thanks, Bill.

Operator

The next question comes from Brian MacArthur with Raymond James. Please go ahead.

Speaker 11

Good morning. My two questions, I apologize, are in QB as well. So just my first one was sort of the last question. Just, Crystal, that Increase in CapEx through all the accounting. Does that include some of that working capital?

Speaker 11

Because originally there was Capital cost investment and it was going to be this $400,000,000 working capital. Is that working capital on top of the new Guidance or how do I think about that? And I guess it gets a

Speaker 4

little bit back to Chris' question.

Speaker 3

So the $400,000,000 of working capital is not included in ramp up capital. And it's always in the amount that we've communicated. So there isn't a change in that amount, based on what we've communicated today.

Speaker 11

Okay, great. Thanks. And my second question was back. Jonathan, you talked about permitting being a challenge, and we talked

Speaker 4

a little bit about QBEMI

Speaker 11

expansion. There was a report, I think, earlier this week in the Tarapaca region sort of recommending against the expansion. Does that Can that impact the timing of your feasibility for that expected in Q4? Or I don't know what you can comment on that situation?

Speaker 2

Yes. Thanks for that question, Brian. Yes, there was a report issued recently with respect to the permitting process. That process is ongoing. There hasn't been a decision taken yet.

Speaker 2

I would say that, as I've mentioned before, is sort of the normal course of the permitting of major projects. Your question around the feasibility, no, it won't impact that. We continue to progress the feasibility study and expect to have that done in the current quarter.

Speaker 11

Great. Thanks very much.

Speaker 2

Thanks, Brian.

Operator

I will now hand the call back over to Jonathan Price for closing remarks.

Speaker 2

Thank you, operator, and thanks to everyone for joining us on the call today. As I mentioned, we're thrilled to be in Chile and officially opening QB2 this week, which is a momentous event for Teck. We look forward to Doubling our consolidated copper production as it ramps up to design throughput and recovery rates as well as to our next phase of copper growth beyond QB2. As always, please reach out to Fraser and our IR team if you have any further questions. Thank you all very much and have a good day.

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Key Takeaways

  • Teck reported Q3 adjusted EBITDA of $1.2 billion on robust copper and steelmaking coal prices, ended the quarter with $7 billion in liquidity and returned $65 million to shareholders.
  • The QB2 flagship copper project reached about 70 percent of design capacity, delivered its first quarterly operating profit, and is on track for full throughput and recovery by year end despite a CapEx increase to US$8.6–8.8 billion driven by port and moly-plant delays and contractual claims.
  • 2023 operational guidance was updated to reflect a 10 000-tonne reduction at Highland Valley, a lowered coal production range of 23.0–23.5 million tonnes, and higher stripping capital, while full-year unit-cost targets remain unchanged.
  • Teck is actively pursuing a full separation of its steelmaking coal and base metals businesses to unlock copper-growth value, with a preferred transaction structure and regulatory certainty under review and a decision expected by year-end.
  • Looking ahead, Q4 is set for strong performance with continued robust steelmaking coal prices, improved plant reliability, and anticipated gross profits from QB2 as ramp-up continues and working capital stabilizes.
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Earnings Conference Call
Teck Resources Q3 2023
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