Teck Resources Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 15 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teck's Q2 20 24 Earnings Release and Investors Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. This conference call is being recorded on Wednesday, July 24, 2024.

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, Kaitlyn. Good morning, everyone, and thank you for joining us for Teck's 2nd quarter 2024 conference call. Please note today's call contains forward looking statements. Various risks and uncertainties may cause actual results to vary. ACT does not assume the response the obligation, excuse me, to update any forward looking statements.

Speaker 1

Please refer to Slide 2 for the assumptions underlying forward looking statements. In addition, we will reference various non GAAP measures throughout this call. Explanations and reconciliations regarding these measures be found in our MD and A and the latest press release on our website. Turning to the agenda on Slide 3. Jonathan Price, our CEO, will begin today's call with highlights from our Q2 results.

Speaker 1

Crystal Prestai, our CFO, will follow with additional color on

Speaker 2

the quarter as well as

Speaker 1

the sale of our steelmaking coal business and the use of proceeds from that transaction. Jonathan will then discuss the transformation of our portfolio and our value creation strategy. We will then take your questions. With that, over to you, Trundman.

Speaker 3

Thank you, Fraser, and good morning, everyone. Starting with the highlights from our Q2 on Slide 5. At the very top of our list of highlights is the close of the sale of the remaining interest in the steelmaking coal business on July 11. It's not every day that we receive $7,300,000,000 in cash proceeds, and this transaction marks an exciting new era for Teck as a company focused entirely on providing metals that are essential to global development and the energy transition. We believe that the copper market has strong fundamentals, and we continue to see ongoing urbanization and population growth, driving increased copper intensity with additional demand driven by power generation, technology, data and increased electrification.

Speaker 3

Long term outlook for copper is highly resilient. And with the significant proceeds from this transaction, Teck is strongly positioned to capitalize on the growing demand for copper in our new era. With substantial funding retained for our near term value accretive projects, which provide us with a pathway to increase total copper production once QB is at full capacity by a further 30% starting as early as 2028, with significant debt reductions further Crystal will speak to the use of proceeds in greater detail shortly. Crystal will speak to the use of proceeds in greater detail shortly. Beyond the transaction, there were several highlights from our strong operational and financial performance in the Q2.

Speaker 3

We generated $1,700,000,000 of adjusted EBITDA, a 13% increase from the same period last year, reflecting record quarterly copper production, driven primarily by the ramp up of Quebrada Blanca or QB. It was also another strong quarter at Red Dog, and we had very strong production in the steelmaking coal business despite 2 major planned maintenance shutdowns. At the same time, we advanced our industry leading copper growth portfolio, having achieved several milestones in the permitting processes of the Highland Valley Mine Life Extension and for Sanddeklas. And we continue to focus on sustainability leadership, including improved safety performance. Our high potential incident frequency rate of 0.11 for the first half of the year, which is a 46% reduction in HPIs from the same period last year.

Speaker 3

I'm turning to the highlights from Qb on Slide 6. We continue to advance the ramp up during the Q2. QB copper production increased quarter over quarter to 51,300 tons from 43,300 tons. Robust design and construction of the plant supports debottlenecking, and we remain focused on recovery and throughput. We achieved 1st production and sales of molybdenum as planned, and ramp up of the molybdenum plant is progressing.

Speaker 3

And our QB net cash unit costs were in line with our expectations. QB is already starting to contribute to our strong financial results. There's $284,000,000 in gross profit before depreciation and amortization generated in the first half of the year, while still in ramp up. Turning now to the outlook for QB on Slide 7. We are seeing continuous improvements in throughput, which is now close to design rates.

Speaker 3

While we had recurring failures with a pulley in a key overland conveyor, these have now largely been mitigated. At the same time, recoveries have improved as we adjust the place in the transition ores and improve plant stability. Our focus is on driving recoveries to design levels, and we are confident that we will achieve our target recoveries by year end. And most importantly, we continue to expect to reach full throughput rates at QB by year end. However, slightly lower than planned ore grades in the second half of the year due to short term mine access issues related to pit dewatering and a localized geotechnical issue have resulted in an update to our 2024 production guidance for copper and molybdenum.

Speaker 3

We've revised our full year QB copper production guidance to 200,000 to 235,000 tonnes, 230,000 to 275,000 tonnes and revised our full year QB melindinib production guidance to 1,800,000 to 2,400 tonnes from 2,900,000 to 3,600 tonnes. In line with our production guidance changes, we've revised our full year net cash unit cost guidance for QB to US2.25 dollars to US2.55 dollars per pound from US1.95 dollars to US2.25 dollars per pound. And while 2nd quarter sales from QB were impacted by a temporary filter plant issue at the port in June, it was resolved by quarter end, and we expect to make up the sale of volumes over the balance of the year. Production guidance for QB for 2025 to 2027 is unchanged. Once at full capacity, QB will double our copper production, and we expect our base metals operations to generate significant EBITDA.

Speaker 3

As shown on the slide, we have the potential to generate more than $5,000,000,000 of annual EBITDA. And with sustaining capital and capitalized stripping expected to be in a range of $1,000,000,000 to $1,200,000,000 per year, Teck's free cash flow generation potential is compelling. I'll now hand the call over to Crystal to provide further details.

Speaker 4

Thanks, Jonathan. Good morning, everyone. I'm going to start on Slide 9 with our financial performance in the second quarter. Given final regulatory approval of the sale of Elk Valley Resources or EBR was not received until July 4, we continue to report EBR in our operating results in the Q2. Starting in the Q3 of 2024, EBR results will be presented as discontinued operations.

Speaker 4

There are a number of significant accounting and presentation items that impacted our Q1 results, and these continue to impact our results in the Q2. Consistent with our reporting in Q1, our Q2 financial statements reflect the 23% minority ownership in EBR by NSE and POSCO, and we continue to consolidate 100 percent of EBR's production and sales volumes, revenue, gross profit and EBITDA given our controlling shareholding position. Our profit attributable to shareholders is based on our 77% ownership of EBR with the remainder of EBR profit attributable to non controlling interest. This reduced our profit attributable to shareholders and related EPS compared to the same period last year. We continue to operate the steelmaking coal business in the Q2 and retain all cash flows from EBR until completion of the sale of our remaining 77% interest in EBR to Glencore on July 11, 2024.

Speaker 4

Our finance expense and depreciation and amortization expense have both increased compared to the same period last year as we are depreciating QB assets and no longer capitalizing interest on the project starting in 2024. Our solid financial performance in the 2nd quarter reflects record copper production and strong copper prices as well as strong steelmaking coal sales volumes, which were partially offset by higher depreciation, amortization and finance expense due to the QB ramp up and the non controlling interest resulting from the minority sale of EBR to NSE and POSCO, as I outlined earlier. We returned a total of $346,000,000 to shareholders in the quarter, including $282,000,000 in share buybacks executed under the $500,000,000 return previously authorized by the Board following receipt of the NSE proceeds. And we paid $664,000,000 of quarterly base dividends. Through the end of June, we had executed $363,000,000 of the Board authorized $500,000,000 share buyback.

Speaker 4

Slide 10 summarizes the key drivers of our financial performance in the quarter. The increase in adjusted EBITDA in the quarter compared to the same period last year was primarily driven by higher pricing adjustments, primarily for copper but also for zinc, increased sales volumes for copper with record quarterly production as well as steelmakingcoal sales volumes at the top end of our guidance range and the positive impact of a weaker Canadian dollar. These items were partially offset by higher operating costs across our business and lower steelmaking coal prices. We remain highly focused on managing our controllable operating costs. Higher overall operating costs in the quarter reflect elevated QB operating costs as well as inflation that is expected to persist throughout 2024 and was contemplated in our guidance for sustaining capital and unit costs.

Speaker 4

As expected, QB costs were elevated in the first half of the year due to alternative shipping arrangements, ramp up of the molybdenum plant and lower volumes as ramp up of production continues. Now turning to each of our business units in greater detail and starting with copper on Slide 11. Overall, our gross profit before depreciation and amortization in copper increased 118% in the quarter compared with the same period last year, reflecting a significant increase in the copper price in the quarter and substantially higher sales volumes, partially offset by elevated QB operating costs as production ramp up continues. Spot copper prices hit a record high of US4.92 dollars per pound at the end of May, and our realized copper price in the 2nd quarter was US4.44 dollars per pound, up 17% compared to the same period last year. The ramp up of QB drove our record quarterly copper production, up 71% from the same period last year.

Speaker 4

And we also had higher production at Highland Valley and Antonina. This was partially offset by lower production at Carmen de Andacollo due to water restrictions as a result of ongoing extreme drought conditions. The water restrictions improved during the Q2 and are expected to continue to improve in the second half of this year. As expected, our cost of sales was higher year over year as QB operations ramp up and we record depreciation of QB's operating assets. Excluding QB, our net cash unit costs were $1.82 per pound or $0.10 per pound lower than the same period last year as a result of lower U.

Speaker 4

S. Dollar denominated operating costs and lower smelter processing charges, partly offset by reducing byproduct credits from Argentina. Looking ahead, as Jonathan outlined, we have updated our 2024 annual copper and molybdenum production guidance and our unit cost guidance for the full year, reflecting changes to QB guidance. We've revised our copper production guidance to 435,000 to 500,000 tonnes from 465,000 to 540,000 tonnes, which still represents over 55% copper growth year over year at the midpoint. Our molybdenum production guidance is now 4,300,000 to 5,500 tonnes from 5,400,000 to 6,700,000 tons.

Speaker 4

And our net cash unit cost guidance has been revised to $1.90 to $2.30 per pound from $1.85 to $2.25 per pound, primarily as a result of lower molybdenum production as well as lower copper production volumes. Looking now at our Zinc business on Slide 12. We had another strong quarter at Red Dog with increased zinc and lead production, reflecting higher grade and recovery. Zinc sales of 53,000 tons were in line with guidance for the Q2. However, Red Dog's net cash unit costs were up US0.04 dollars per pound due to higher cost for consumables and an increase in smelter processing charges.

Speaker 4

At Trail, refined zinc production was impacted by unplanned maintenance and refined lead and byproduct production was significantly lower, reflecting the planned 70 day shutdown for the replacement of the Kibset boiler. The project was completed on time and on budget, and the boiler has been operating very well since the restart. Overall, our gross profit before depreciation and amortization in zinc decreased 53% in the quarter, primarily due to reduced refined metal sales and zinc premiums at Trail and lower zinc sales volumes for Red Dog compared to the same period last year. The shipping season at Red Dog commenced on July 12, and we expect Red Dog zinc and concentrate sales of 250,000 to 290,000 tonnes in the Q3, reflecting our normal seasonality of sales. Our 2024 annual zinc and concentrate production guidance of 565,000 to 630,000 tonnes and our net cash unit cost guidance of dollars to $0.65 per pound are both unchanged.

Speaker 4

At Trail operations, our 2024 annual refinancing production guidance is unchanged at 275,000 to 290,000 tonnes. Turning now to Steelmaking Coal on Slide 13. This marks our last full quarter of reporting on EBR, and we are finishing on a high note. Sales volumes in the quarter of 6 point 4,000,000 tonnes were at the top end of our guidance range and still making coal prices decline, but they remain strong. And despite 2 major planned maintenance shutdowns, we achieved very strong production across all of our plants.

Speaker 4

Adjusted site cash cost of sales per ton of CAD112 were higher than the same period last year, driven by higher spend on labor, contractors and diesel and less favorable mining drivers. Given the ongoing shortage of skilled trade labor, we continue to have increased reliance on contractors. Transportation costs were CAD1 per tonne lower than the same period last year due to lower demerits charges as a result of continued stable vessel queues. Overall, we generated CAD1.1 billion in gross profit before depreciation and amortization, reflecting lower realized ceiling and coal prices and higher unit operating costs, partially offset by higher sales volumes and the positive impact of a stronger U. S.

Speaker 4

Dollar. Turning now to the sale of EBR and our use of proceeds from the transaction. Starting on Slide 15, we completed the sale of the remaining 77% interest in EBR to Glencore on July 11 and received total transaction proceeds of US7.3 billion dollars subject to customary closing adjustments. This transaction is a catalyst to transform Teck into a pure play energy transition metals company. The proceeds position Teck for our next phase of responsible growth and value creation.

Speaker 4

And as always, we remain committed to our disciplined capital allocation framework on Slide deployment of capital, and we aim to balance our growth with cash returns to shareholders while maintaining a strong balance sheet through the cycle. Slide 17 summarizes how we are allocating transaction proceeds. We announced the largest return of cash to shareholders in tax history with approximately $3,500,000,000 in total share buybacks and dividends. The share buyback of up to 2 point $75,000,000,000 is in addition to the $500,000,000 share buyback previously authorized following the minority sale of EBR to Hennessy and Posto. And through the end of June, we had completed $363,000,000 of the $500,000,000 buyback.

Speaker 4

The Board also authorized a one time supplemental dividend of $0.50 per share for approximately $250,000,000 which will be paid on September 27, in addition to our quarterly base dividend of $0.125 per share. We announced a debt reduction program of up to $2,000,000,000 and launched a cash tender offer of $1,250,000,000 for our outstanding notes that was subsequently outsized. On July 15, we completed the purchase of approximately US1.4 billion dollars of our public notes, and we are assessing further debt reduction opportunities. We expect to pay costs and taxes related to the transaction of approximately US750 $1,000,000 in early 2025. The remaining net proceeds from the transaction will be retained to fund our near term copper growth.

Speaker 4

Once QB is at full capacity, we have a pathway to increase our copper production by a further 30% starting as early as 2028 through our near term projects. These include the mine life extension at HBC, Safranal, San Nicolas and QB Optimization and debottlenecking. Our attributable capital cost for these projects is estimated to be US3.3 dollars to US3.6 billion dollars Turning now to Slide 18 and our resilient balance sheet. Following the close of the EBR transaction, we are now in a net cash position, including $8,700,000,000 in cash as of today. With the purchase of US1.4 billion dollars of our public notes on July 15 through the cash tender offer, we have decreased our outstanding term notes to $1,100,000,000 Our total debt outstanding following the cash tender offer is 4 point $3,000,000,000 and our net cash position is currently CAD2.9 billion.

Speaker 4

We remain focused on maintaining our investment grade credit metrics supported by our resilient balance sheet. And going forward, we expect to generate higher interest income by the additional cash that we're holding on the balance sheet. At the same time, our annual requirements for sustaining capital and capitalized stripping have declined to $1,000,000,000 to $1,200,000,000 following the sale of EBR. PV is expected to generate significant additional EBITDA and free cash flow at full production, which will further build on the financial resilience. As demand for copper continues to rise and constraints on new supply persist, the value of high quality, low cost copper assets will only increase.

Speaker 4

Overall, Teck is strongly positioned to execute on our strategy for responsible growth and value creation. With that, I'll turn it back over to John.

Speaker 3

Thanks, Crystal. So going on to our portfolio transformation on Slide 20. As I said earlier, Teck is now entirely focused on providing metals that are essential to global developments and the energy transition. I would like to take a moment to reflect on some of the strategic developments that we executed on over the past couple of years to get to this point. Last year, we started to refocus our portfolio towards Energy Transition Metals through the sale of our interest in Fort Hills, marking our exit from the oil sands business.

Speaker 3

We also modernized our share structure with the introduction of a sunset for our Class A shares, reflecting our commitment to strong corporate governance and acting in the best interest of all shareholders. At the same time, we continue to advance the projects in our industry leading copper growth pipeline. 2 key milestones were entering into joint ventures at New Range in partnership with PolyMet and at San Nicolas in partnership with Agnico Eagle, which helped us to advance and derisk those projects. And this year, we completed construction at QB, which is the driver for our near term growth. QB is a transformational Tier 1 asset for Teck with a long life, hesitant cost position and meaningful expansion opportunities, and it will be a cornerstone of our copper portfolio for decades to come.

Speaker 3

And finally, we've completed the sale of our steelmaking coal business, transforming Teck into a pure play energy transition metals company. As Crystal has just discussed, with the significant transaction proceeds in hand, we've announced significant cash returns to shareholders and taken steps to ensure that Teck is strongly positioned to capitalize on the growing demand for copper. And we remain committed to balancing our growth with further cash returns to shareholders. All of this evidences our willingness to both set critically execute against it, always with a focus on value creation. Moving on to our current portfolio on Slide 21.

Speaker 3

With the strategic moves that we have made, our commodity mix is now 100% based metals. We have a solid foundation of long life producing copper and zinc assets that generate strong cash flow today, including Antamina in Peru, Island Valley Copper in British Columbia and Red Dog in Alaska and our cornerstone QB asset in Chile, which will generate strong cash flow at full production. We also have mine life extension opportunities to maintain this foundation, including at Highland Valley and Antamina in the near term. Importantly, while our portfolio mix has changed, our focus on maximizing long term value for shareholders has not. We remain committed to operational excellence, ensuring we deliver the full value from our premium base metals portfolio.

Speaker 3

Now turning to our industry leading copper growth on Slide 22. Over a decade ago, Teck recognized the value that could be created through a robust pipeline of copper projects. As a result, we have created a highly valuable portfolio of actionable copper growth projects diversified by jurisdiction and scale. Each of these will be a low cost operation with competitive capital intensities already derisked through strategic partnerships. Pek is now on track to becoming a top 10 global copper producer, doubling copper production with the ramp up of QB, with a pathway to further increase production by 30% starting as early in 2028.

Speaker 3

Our near term copper projects are high quality, capital efficient and low operating cost projects, which should enable us to move down the cost curve and generate strong returns. We are also exploring optimization of QB, increased production beyond design throughput capacity with minimal capital. And beyond this, by the end of the year, we will develop a definitive plan for near term low capital intensity debottlenecking at QB. We're progressing the life extension of Highland Valley to allow for continued production of this stable and profitable core asset for another 17 years. Next Board will be reviewing the Zafranal project for sanction as early as the second half of twenty twenty five.

Speaker 3

And this capital efficient growth project is expected to have a rapid payback driven by high grades in the early years. And at San Nicolas, we continue to progress feasibility study work in our permitting application to position us to deliver this low capital intensity project that we expect to generate industry leading returns. At the same time, we continue to progress on longer dated projects to ensure that we retain a pipeline of future growth opportunities. Turning to Slide 23. We are continuing to create value for shareholders by driving best in class, safe and sustainable operational performance from project delivery, including managing costs incorporating learnings from the completed independent review of QB2 into our future projects assessing value accretive opportunities to expand and optimize our high quality operating assets ensuring we continue our disciplined capital allocation to generate strong returns executing on our well funded capital efficient near term copper growth projects balancing growth with cash returns to shareholders.

Speaker 3

Overall, I believe that Teck is uniquely positioned as a pure play energy transition metals company with both a premium portfolio of long life cash generating assets in well understood jurisdictions and industry leading copper growth. We're working hard to unlock the full potential of growth with a focus on value creation. I believe that there is incredible value inherent within Teck, not just in terms of the quality of our assets and the depth of our copper growth pipeline, but also our responsible and ethical approach to resource development, which is critical to our ability to realize value. So to conclude on Slide 24. While we are entering an exciting new era as a pure play energy transition metals company, we remain strongly committed to our purpose and values, which remain personal to me and to all of us at Tech.

Speaker 3

As we pursue responsible growth, always focused on value creation. Our capital allocation framework continues to guide us in balancing that growth with cap return to shareholders. We are strongly positioned to capitalize on the growing demand for copper, and we look forward to continuing to unlock significant value upside for our shareholders. So with that, thank you. And operator, please open the line for

Operator

for Our first question is from Orest Wowkodaw with Scotiabank. Please go ahead.

Speaker 5

Hi, good morning. Nice to see the progress at QB2. I was wondering if you can give us some more color on this localized geotech issue and specifically what does it mean for grade profile for H2 on copper? And then I'm also wondering if it will impact 2025 grade?

Speaker 3

Yes. Thanks, Orest. We are very pleased with the ongoing progress at QB2. The quarter over quarter improvement, again, as we said, is very encouraging. What I'm going to do is hand over to Shahzad Barmal, our SVP of Operations.

Speaker 3

He'll give you a bit of an overview as to where we are now and the outlook for the second half in the yield.

Speaker 2

Thanks, Orson. Perhaps best if I give a broader overview of the status and the accomplishments of QB to date. As we published, QB continued to have month over month improvement in performance and copper production over the last quarter. April was at 14,600 tons, May came in at 17,300 and then June at 19,300 tons. And many of the operations design is robust and no critical issues have been identified.

Speaker 2

Throughput, recovery and head grades are of course the 3 factors that drive copper production. And we have continued to make excellent progress in throughput. And over the last while, we have run between 90% to 95% of design rates. So very confident of reaching full rates here over the next coming months. And focus here is really on stable operations with improved online time.

Speaker 2

On recovery, we are managing through higher amounts of clays that are in the transition ores between the supergene and hygogene mineralization and we are making good progress. And this has been done with selecting different reagents, fine tuning the dosing and of course modifying some other operating parameters. And as a result, we're a few points behind on recovery, but with the adjustments and more stable operations, which also contribute to our recovery issues, we expect to hit target rates in the months ahead. The final one, the head feed grade that you mentioned with this geotech issue, but generally the head feed grade is very consistent with our block model and that is really the key point and very reassuring. In the second half, we do expect to have lower than planned feed head grades.

Speaker 2

This temporary access issues was in access to the higher grade areas in the mine sequence as we had planned originally. And this localized geotechnical issue is for the access ramp to these areas. And what we are doing is we are working through reorienting the access ramp a little bit and additional support and buttressing and that's going to take several months. And we expect to complete this work late this year and have full access by early next year. And actually in December, we plan to have we expect to have access to this.

Speaker 2

The implications for 'twenty five, 'twenty six is very minimal. Some of this higher grade will bleed into 'twenty five and we'll change the mine sequence and the balance of it will feed into 2026 as well. So overall, really not a meaningful impact into 'twenty five, 'twenty six, but a meaningful impact in Q3, in particular, in Q4 as well.

Speaker 5

Thanks, Shazak. Can you actually give us a guide for the copper grade in H2?

Speaker 2

Yes. We'll follow-up with that with Fraser will follow-up with some of those details maybe offline.

Operator

The next question is from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 6

Thank you very much, operator. Good morning, everyone. My first question is on Slide 20 2, where you show your near term growth project. And I'm sure you're putting them into a funnel. And I wondered in which order would the project kind of come out of the funnel?

Speaker 6

And what are the key attributes you're screening for as you decide the ranking? Thank

Speaker 7

you very much.

Speaker 3

Lucas, and thanks very much for that question. Yes, I mean, we are managing this as a portfolio. These projects all have different risk return characteristics as you would expect. Of course, with QB and Highland Valley, these are both brownfield expansions. And at QB, in particular, there's a process there of optimization of the existing operation, debottlenecking that operation and then a potential expansion of that operation.

Speaker 3

San Fernando and San Nicolas, of course, are greenfield projects, both in jurisdictions where we don't currently operate. We have good experience in Peru, of course, through Antamina and at San Nicolas, bringing Agnico and Eagle into that joint venture with their experience with Mexico significantly derisks our entry there. So we evaluate all of these projects. We're progressing them in parallel through the completion of studies, through engineering and through the application for permits. We will evaluate the economics of each of these projects against the relative risk and make those decisions accordingly.

Speaker 3

The one project where, of course, we do have particular timing considerations is the Highland Value Mine Life Extension. The current mine comes to end of life there at around 2028, and we would like to see continuity of operations through the extension. So that's one that we very much expect to take forward to sanction next year, 2025. With Zafran Island and San Nicolas, as I said, of course, it will be dependent on the outcome of those studies in engineering. But in the case of zapronil, as you know, we already have a permit.

Speaker 3

And that's one again that we have some confidence we'll be ready for sanction within the second half of twenty twenty five. So it's great to have a portfolio like this, so we can think about the balance of risk and reward associated with each of these opportunities. And as I said, we continue to work very hard to progress all of these opportunities in parallel today.

Speaker 6

And a quick clarification question for Slide 7 and the higher level question as well. The capital requirements of $1,000,000,000 to $1,200,000,000 I believe that's Canadian in sustaining capital and capitalized stripping, I assume that would be too low for 2025 because there's always some spending on development CapEx. So if you kind of were to fully bake the capital spending for 2025, what would be a reasonable zip code? And then the higher level question is that from this side of the border, it appeared that the approval of the EBR sale was somewhat begrudging. And I wondered if you could maybe speak on the industry's reaction and general appetite to invest in Canada and if this could have any impact on future interest in tech?

Speaker 7

Thank you very much for your perspective.

Speaker 3

Thanks, Lucas. You've managed to sneak in a couple of questions there. Look, on the first one, the $1,000,000,000 to $1,200,000,000 is very much within our expectations for sustaining capital and capitalized stripping for the years ahead. With the development works that we're doing on the projects that we just discussed, of course, we are incurring spend on studies, on engineering and on permitting processes. This year, that's amounting to around $500,000,000 in aggregate.

Speaker 3

And of course, projects when they're in the advanced stages of feasibility study and engineering, it tends to be where the highest pre execution spend occurs. So while those projects remain at this phase, you could expect to see us spending at a similar rate through 2025 is probably the best way to articulate that at the moment. Look, in terms of the Canadian governments, we don't see any changes there from our perspective. There's nothing in there that prevents us from executing this organic project portfolio, which of course is the key element of our strategy. Fortecc, we continue to invest both within Canada and outside of Canada, as you see here, through commitments in Chile and then also the potential for major investments in Peru and Mexico.

Speaker 3

And I think the execution of that strategy and our focus on creating value for all shareholders remains at the front and center of what we do. So we don't see any immediate impacts of anything we've heard lately from the government here

Speaker 8

in Canada.

Operator

The next question is from Jackie Przybylowski with BMO Capital Markets. Please go ahead.

Speaker 9

Thanks very much. My first question, I think I'd like to follow-up on Orest's question about the geotechnical issues at QB2. Understand that you have just given us like pretty rough guidance on the impact. I mean, first of all, just a comment, I would also like if you could follow-up with me on those grade profiles for the second half as well. But my question is, do you expect this geotechnical issue is anything serious, faulting or anything that could impact mining operations going forward?

Speaker 9

Thanks.

Speaker 3

I'll pass that back to Shazad again. The high level answer is no, but I'll let Shazad provide a bit more color.

Speaker 2

Jackie, this instability has been a known instability, so it didn't come out of the blue. It's just too much a bit deeper in than what we had planned. And as we are operating around that with blasting, we are taking extra precaution to make sure that we do buttress it right and reorient it for the longer term. So really normal operations, these things fine and it's early in the mine plan. And if it was an advance and mature mine, we would have phases to be able to address this.

Speaker 2

These are pretty these are not abnormal instabilities that we have in

Speaker 9

it. Okay. I appreciate that. Thanks for that. And as a follow-up second question, maybe this one's for Crystal.

Speaker 9

On the share buyback plan, I understand you've got 2 plans on the go right now, the $500,000,000 that was approved in January and then the new $2,750,000,000 plan. Can you give us some color on when you expect the $500,000,000 buyback to be completed? Should we assume that's completed in the Q3 and then the new buyback starts in the Q4? And over so which period do you expect to do that $2,750,000,000 Is that like a multiyear program? Thanks.

Speaker 4

Thanks, Jackie. Welcome back. Nice to hear from you. Yes, good questions. I think just in relation to the buyback, we'll be back, obviously, executing on the $500,000,000 I'd expect us to close that in the 3rd quarter, obviously, subject to valuation considerations, which are always what drives us when we're considering our buyback approach.

Speaker 4

In regards to the $2,750,000,000 we're targeting 12 to 24 months to complete that. But again, depends on valuation and market conditions. So I think it's probably sooner than the Q4 in terms of us getting into starting to buy on that. And then obviously, we have to go through the ordinary course regulatory approval to renew our NCIB, which happens at the end of October.

Speaker 3

So I think, Jackie, just to add to that, don't need to think of those really as 2 separate authorizations anymore that it's the total capital that we have committed to buying back our shares, and we'll undertake that on a continuous basis.

Operator

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

Speaker 7

Good morning, everyone. First question is just on the independent review that's been completed now at the Q or regarding the QB project. Can you just share some of the key findings from that and how that's going to benefit project execution going forward? And do you think you've now got the right people in place across the organization to begin this next phase of growth that you're now talking about?

Speaker 3

Yes. Thanks very much for that, Liam. I'll just focus on the second question. The answer is yes, but we still will continue to build more depth and bench strength in the projects team here, of course, given the slate of activity we have ahead of us. We're going to be world class project managers.

Speaker 3

We have some of those today to sign to these projects, but we'll need more of them to execute the growth strategy going forward. But we're also building out other areas of the team that support those project managers. So we have world class people now assigned to the projects in the near term, but we'll continue to build that bench going forward. Talking of world class people, I'm going to hand you on to our Head of Projects, Carla Mills, who will talk a little bit about the results of the QB review and how we're applying those in here, Erin.

Speaker 10

Sure. Thank you, Jonathan. I think it's important to start with that the fact that from the outset, we knew that QB2 was a complex and challenging project, especially given the altitude and scale of the project. Along with those factors, the project review has highlighted additional areas for improvement and learnings and we are taking them forward in our project execution. In a number of cases, it validated learnings we'd already identified and have already been over the last several months.

Speaker 10

Perhaps to offer maybe a few examples, highlights from our findings. One is the need for increased geotechnical drilling. This impacted construction at the port, the tailings management facility and the pipeline. Also being more conservative in our assumptions around things like labor productivity estimates and inflationary pressures, which of course were exacerbated by COVID as supply chain globally became constrained. And of course, enhancing oversight from our tech owners team when we switch from a to a time and materials execution basis.

Speaker 10

We're taking a number of steps to ensure we are embedding all of the learnings and the best practices for our projects going forward. This includes what Jonathan has already highlighted. We do continue to build out our project teams with additional capacity and expertise. PEC's project team continues to grow and we are in fact attracting more and more world class talent that are really excited to work in and on our growth strategy. We're also upgrading our project management systems.

Speaker 10

This is to better identify trends and risks to proactively analyze and interpret information, boost our efficiencies. This will lead to more informed and faster decisions. And we're enhancing our project readiness and assurance practices in areas specifically around engineering design and capital cost estimates. I think collectively the improvement opportunities identified through this review will be baked into our projects moving forward and contribute to strengthening execution as we advance our copper growth strategy.

Speaker 7

Okay. Thank you. That was thank you for the detail there. Just as a quick follow-up on the debottlenecking at QB. Can you just remind us what additional permits you may need to get before you can progress with that?

Speaker 3

Yes. Again, I'll ask Shazad just to talk to sort of the 3 phases we see going forward here and the associated permitting strategies that we require.

Speaker 2

So as Jonathan mentioned, we have the 3 phases of optimization of debottlenecking and then we will consider later after after that a more robust expansion project. For the optimization, we do not expect to need any permits that would be within our permitted ranges and we're talking 5% to 15% and throughput increase, which would do things like increasing redundancies to get better online times and some minor modifications of some equipment that might need a little bit more throughput capacity. When we come to the debottleneck study, we will need to make some more meaningful modifications and some additional equipment And that is things like repowering conveyors and having bigger pumps as well to be able to handle higher capacities, whether it be of material flows or conveying systems. And this, of course, will be more capital, very low capital intensity because most of the major infrastructure like desal pipelines, transmission would not need any increases. And for that, we will need a permit and we are developing that permit right now and expect to submit it before the end of the year.

Speaker 2

And then once we receive that permit, we would continue with making those changes and achieve the higher throughput rates. And that for that, we're looking at somewhere between 10% to 15% increase further increase.

Operator

The next question is from Timna Tanners with Wolfe Research. Please go ahead.

Speaker 11

Hey, good morning. Thanks for the detail. I wanted to clarify please on the guided $3,000,000,000 to $3,600,000,000 for copper growth. What exactly is in that? Is that just FENIC and Zaffranal and Highland Valley expansion?

Speaker 11

And does that already include the revisiting of the total capital cost you had told us you were going to conduct for and then I guess along those same lines, when are we going to get updated costs, both on an operating basis and capital costs?

Speaker 3

Thanks. Yes. Thanks, Tim. Essentially, that range, it does capture the projects that you mentioned. There's some allowance in there for QB, some of the work that Shazad was just discussing as well.

Speaker 3

They are our best estimates, I would say, at the moment, and I don't use estimates in the rigor of a project organization, but our best understanding of the forward capital costs associated with those projects in aggregate, our attributable share, of course, taking account for the joint ventures that we have or partners that we have in these projects. Those capital costs will be finalized through the work we do in studies and engineering, of course, when we get to those definitive estimates. But we've done this with a view forward as to our best understanding today as to where those costs are likely to land.

Speaker 11

Okay. So thank you for that. And then I guess follow-up is when can we expect further detail on the adjusted go forward cost of production? And also, can you remind us what additional volumes and when you would expect as a result of those investments? Thanks again.

Speaker 4

Yes. Thanks, Timna. I think you're just asking you kind of mixed up maybe operating capital. So maybe can you just clarify whether you're referring to an update on operating costs or capital costs?

Speaker 11

I was asking for all of the above, so sorry for the confusion.

Speaker 4

No, it's okay. So like as part of our normal process, we'll provide our guidance update in January like we've done in recent years, and that will reflect our updated look at CapEx and OpEx for 2025, including a view on QEs, the cost once operations are ramped up at the end of the year. In regard to capital development capital updates to what Jonathan's noted already, where we've provided that range based on the best information we have available as of today, So the timing of that will depend on when the engineering and study work is completed.

Operator

The next question is from Carlos de Alba with Morgan Stanley. Please go ahead. Carlos Chalba with Morgan Stanley. Your line is open.

Speaker 8

Hi. Hello. Good morning. Can you hear me now? Yes.

Speaker 8

Great. Sorry, I was on mute. Yes, maybe a follow-up on the CapEx discussion. Do you have already a broad ballpark range of the CapEx per project, the 4 maybe that we have been discussing, QB expansion, Safranas and Inconvas and LBC Life Mine extension?

Speaker 3

Well, the tranche is yes, of course, that we use ranges associating with each of those projects to provide the range of aggregate guidance in terms of what we expect to spend over the years ahead. As said, we need to complete the work on studies, engineering and estimates, etcetera, to have more confidence in those ranges. But in aggregate, that is the best understanding of the capital profile today.

Speaker 8

Okay. Yes, we're looking forward to the breakdown when you can when you're ready to provide that. And then just on San Nicolas, have you received any confirmation or indication that this project, if you decide to go ahead, would be able to be built and brought on given the potential constitutional reform in the country that may ban open pit binding. So basically, the question is, yes, we are not sure if the ban would be on new operating concessions or but those that already have exploration permit and are on their development in a way would be okay?

Speaker 3

Yes. Look, we acknowledge the uncertainty, Carlos, with respect to San Nicolas and that permit. Our experience to date is that permit process continues to proceed as planned, and we got over a significant milestone recently with respect to that process. So indications at that level are good. We'll have to see how things evolve more broadly in terms of legislation, including changes in the judiciary perhaps in the country.

Speaker 3

So there's a few things at play there. But from what we can see on the ground today and our experience opposite the regulator, today did positive. So we continue to remain very engaged in that permitting process. We continue to work on closing out the studies and bottoming out the capital estimate associated with that. And we're hopeful we can bring that to a point where we achieve the permit and take it forward for sanction.

Operator

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

Speaker 12

Hi, good morning and thanks for taking the questions. I want to come back to QB2. So on this access issue, I guess can you provide a little bit extra color on the timeframe issue? Did this have any impact, I guess, quarter to date? And trying to think about the production rates through the remainder of the year, should we think of it actually taking a slight step down in the Q3 before, I guess, improving in the Q4 to what would appear to be I think you said earlier, you hope to be at full production still around 25 kilotons.

Speaker 12

Just trying to get a sense for the trajectory here.

Speaker 3

Yes. Look, just at a high level, we expect to continue to see the quarter over quarter improvement continue through this year. And by the end of the year, we expect be producing at full rates. But I'll, again, add to Shazad to give a little bit more detail on the underlying issues associated with the geotechnical fog with grade and with the transitionals.

Speaker 2

Like I mentioned before, this was a known area of instability and it was late in the quarter when we understood the implications for building a different access rather than just buttressing or reorienting the access and that would prevent access from these higher grade areas. And so really, it's a H2 issue mostly. And as Jonathan mentioned, it's not to take a step down. It's to continue the improvements that we've had and throughput to continue the throughput rates, continue to improve on grade and just compared to plan to have slightly lower grade.

Speaker 12

Okay. Okay. Thanks for that. So actually change the subject on the zinc, just trying to get a sense of what you're seeing in the zinc markets considering where TCRCs are, global smelter output, which appears to actually be contracting. And what are you assuming for supply demand balances in the back half of the year and into next year?

Speaker 3

Right. Thanks for that question. But I'll hand you over to Ian Anderson, our Chief Commercial Officer.

Speaker 13

Hi, Bill. Thank you for the question. So what we're seeing currently is that the zinc market is definitely in deficit. And the reason for that is, of course, you saw not only the mine shutdowns that occurred as a result of lower zinc pricing last year, but also some disruptions this year. There have been an initial start, for example, at Capushi.

Speaker 13

We're expecting over the medium term a restart of tar, for example, and of course, ozornoy is also predictive, but really those don't come on this year. And so the reflecting that you're seeing in the very low TCs for zinc is as a result of that deficit. And just an interesting fact there, concentrate imports in China, for example, are down significantly this year. And that is attributable to lack of available feed. So we are seeing, of course, support for pricing in the zinc market.

Speaker 13

We're seeing conditions in finished metal really coming along and stable premiums there. And so we do anticipate that it will remain in slight deficit for this year and are expecting the same thing for the first half of twenty twenty five as well. Thanks for the question.

Operator

And the last question we have time for today is from Brian MacArthur with Raymond James. Your line is open.

Speaker 5

Thank you and thank you for taking my questions. My first question just I appreciate all the guidance for EBITDA and ongoing CapEx. But as I think about the jurisdictions you're getting cash flow and earnings from in the future, can you give any guidance for 1, a, tax rates going forward and b, I guess, cash tax rates as I try and figure out free cash flow, which is kind of the missing part of taxes in this equation.

Speaker 3

I'll hand you up to Crystal.

Speaker 4

Thanks, Brian, for the question. I think 2024 is going to be a bit of an anomalous year. We expect our overall effective tax rate on a continuing operations basis to be in that 41% to 43% range. That obviously excludes the impact of the sale of the full business and the NAMI dividend. Beyond 2024, we still continue to think that 41% to 43% is a reasonable guideline, where we're profitable across all our business units and we have aggregate operating margins that are relatively large in comparison to corporate costs and finance costs.

Speaker 4

I think that doesn't necessarily build in our growth projects, and there'll be some work that we have to do in that regard. But I think I would just encourage you to continue to use 41 to 43, and we can provide more guidance when we have it. And obviously, Fraser can provide more and team can provide more support offline on the modeling aspects.

Speaker 5

Great. That's very helpful. And maybe if I just ask one more and maybe it's for Robin. Obviously, you highlighted the coal business did pretty well this quarter at your run rates with 2 maintenance big maintenance shutdowns. Can you maybe just go through what happened?

Speaker 5

And maybe a second question, are the operations down in the state that they'll run at the 26,000,000 tons a year? And I guess maybe a final question, I guess, with the coal being business being sold, what Robin's plans are next?

Speaker 3

Yes. Thanks, Brian. I'll hand you over to Robin in a moment. We won't give any forward looking guidance for the gold business as you might expect. I'm just going to quickly make a comment on Robin.

Speaker 3

Robin will be retiring from Teck in the coming months. Robin has been with us for 36 years, most recently as our President of Coal. He has quite literally delivered us truckloads of cash over many years through his role. And in addition to his leadership at the coal business, he's had a significant impact across all of tech, particularly in respect of his safety leadership and the safety programs that he's established here over many years. So we just want to recognize and thank Robin for his incredible contributions to the company over many, many years.

Speaker 3

And with that, Robin, I'll hand it over to you to discuss the quarter.

Speaker 14

Thanks, Jonathan, and thanks for your question. I didn't expect 1 this round. I think what I'd say about quarter is the coal business is operating as it was prepared to operate over many years and we had a strong quarter because all the operations combined are in extraordinary good shape right now. So we're seeing the best acre performance we've ever seen in history. We've got our water treatment plants are all performing well.

Speaker 14

All the plants run really well through the quarter. And this is really business as usual from my perspective. So I'm proud of the team that got us to the point that we are today and it's up to the new owners now to take it forward. But the business is in exceptionally good shape and that was demonstrated in that quarter.

Speaker 6

Thank you, Robin.

Speaker 5

Thank you, Jonathan and Robin and good luck.

Speaker 3

Thank you, Brian. And thank you to everyone for joining us today, and thank you for all the questions. Just to note, we are planning to hold a strategy day in Vancouver on November 5, followed by a site visit to Highland Valley the following day. So please watch out for a save the date notice, which we expect to send out shortly. As ever, please reach out to Fraser and the IR team if you have any further questions.

Speaker 3

And with that, please enjoy the rest of your day.

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Key Takeaways

  • Sale of steelmaking coal business for US$7.3 billion marks Teck’s transformation into a pure-play energy transition metals company and provides substantial funding for growth and shareholder returns.
  • Q2 adjusted EBITDA of US$1.7 billion (up 13% year-over-year) was driven by record quarterly copper production from Quebrada Blanca’s ramp-up and strong performance at Red Dog and steelmaking coal operations.
  • Quebrada Blanca copper output rose to 51,300 tonnes in Q2 with throughput nearing design capacity; full design rates are expected by year-end despite short-term ore grade and geotechnical challenges.
  • Transaction proceeds are being deployed to US$3.5 billion in share buybacks and dividends, a US$1.4 billion debt repurchase, approximately US$750 million in costs and taxes, and the balance funding near-term copper growth projects.
  • Teck’s industry-leading copper growth portfolio—including Highland Valley life extension, Zafranal, San Nicolás and QB debottlenecking—provides a pathway to 30% additional copper production from 2028 to meet resilient long-term demand.
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Earnings Conference Call
Teck Resources Q2 2024
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