Earnings Call Transcript - TECK Q2 2022

Operator, Operator

All participants, thank you for standing by. Welcome to Teck’s Second Quarter 2022 Earnings Release 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 27, 2022. I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead.

Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis

Thanks, Patrick. Good morning, everyone, and thank you for joining us for Teck’s second quarter 2022 results 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. 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 could be found in our MD&A, the latest press release on our website. Today’s conference call is not quite an ordinary call. Not only have we reported our fourth consecutive quarter of record-setting profitability, as you know, we’ve announced President and CEO succession. So, our format will be slightly different today. To begin, Don and then Jonathan will make some opening comments. They will then take us through our regular quarterly results presentation, followed by Q&A. We’ll then end with Don’s closing remarks. With that, for one last time, I will hand the call over to Don Lindsay, our President and CEO.

Don Lindsay, President and CEO

Well, thank you very much, Fraser, and good morning, everyone. Welcome to the second quarter call. As you all know, yesterday, I announced my retirement from Teck. This will officially be the 71st quarterly earnings call that I’ve led since 2005 and my final one with Teck. As such, I’m going to make a few opening comments about my decision and the transition, and then reflect on my last 17-plus years in the industry and at Teck. I’ll then turn it over to Jonathan Price, our new CEO elect, for him to make some remarks. When we get to the Q&A today, since this is my last time, you’re welcome to ask me anything. This is your ‘ask me anything’ moment, and I will try to answer, though as you will understand, I may be precluded from answering some questions. It’s tough to say goodbye to a company and to a team that you’ve been a part of this long and that you admire so much. There is no perfect time for this. The fact is a lot of planning and preparation have led up to this point. The Board established a succession committee 2.5 years ago. As you know, from a big picture, we are reshaping and rebalancing our portfolio to have a larger focus on copper and less on carbon. This transition is critical to ensure that the strategy is owned and led by the CEO who will be around and accountable for it in the long term, and I clearly wasn’t going to be that one. I will be 64 later this year, and I knew that this was the right time to make this decision to get the new team in place and move forward. The Board and I have been collaborating closely on transition planning for several years with the goal of a seamless transition. We are also drawing close to the completion of QB2 and first copper, which is very exciting and marks a major shift in Teck’s trajectory towards becoming a global copper player. This also comes as we celebrate our fourth consecutive record-setting quarter with $3.3 billion in EBITDA and $1.8 billion in adjusted earnings. In the last 12 months, we reported $5.7 billion in earnings, reflecting not just Teck’s assets but also to the strength of the incredible team we have here. When I joined Teck on January 1, 2005, my initial focus was on rejuvenating our resource base to maintain production over the long term. We were resource challenged at the time. For example, Highland Valley Copper was scheduled to close forever in 2008. The early years involved securing resources through key acquisitions and continuous investments in exploration. Our resource base has grown significantly—more than 3.5 times since 2005. Today we are resource-rich, and the new team has plenty to work with. Next, we transitioned to converting resources into production and cash flow by constructing key projects. With the completion of QB2, consolidated copper production capacity will double, with plans for additional increases. Our sustainability efforts continue to lead in performance recognition while building a strong relationship with our communities. I’m proud of where we are today, with unparalleled copper growth and a strong workforce committed to our values. I look forward to supporting the transition to Jonathan and Red's leadership and staying on as Executive Vice Chair into the second quarter of 2023. Most importantly, I look forward to seeing Teck transition into this next phase of growth, value creation, and substantial returns to shareholders. With that, I’ll pass it to Jonathan for comment, and then we’ll move on to the actual earnings presentation and Q&A. Jonathan, over to you.

Jonathan Price, CEO Elect

Thanks, Don. First, I would like to recognize Don’s exceptional leadership at Teck for more than 17 years. We've just announced our fourth consecutive set of record financial results—an outcome that reflects years of building a great team and a great culture, integral to what attracted me to Teck. Second, I want to reinforce the strength of Teck’s strategy and growth foundation. We have a portfolio with some of the industry’s best mining assets, a track record of operational excellence, and leadership as a responsible and sustainable miner. We continually strive to improve through innovation and the deployment of digital technologies. We also have unmatched copper growth options among our peers. This is all a product of long-term strategic thinking and a clear focus on value. As Don indicated, there is a tremendous additional value to be unlocked in our portfolio, and my team is fully committed to realizing that value for shareholders. Finally, I want to thank Don for the trust he has placed in me over the past two years. He has generously invested time in building my knowledge of Teck’s legacy, values, and future opportunities. It is an honor to be appointed Teck's next CEO. I am fortunate to have Red Conger working closely with me as President and COO. His leadership experience will be invaluable. I am excited about the opportunities ahead and leading Teck into the next chapter. Now back to Don to take us through the quarterly results presentation.

Don Lindsay, President and CEO

Thank you, Jonathan. I’ll now turn to slide 4 on the presentation for our highlights. We’re pleased to report our second quarter 2022 results, marking our fourth consecutive quarter of record-setting EBITDA and profitability. We delivered record adjusted profit attributable to shareholders of $1.8 billion—more than five times higher than Q2 last year—and record adjusted EBITDA of $3.3 billion, driven by strong profitability across our businesses. At QB2, we achieved exciting milestones during the second quarter, including completing construction of our transmission system, reaching starter dam design elevation, and beginning seawater flow into the pretreatment area for the desal plant—critical for first copper. Our financial performance enabled us to strengthen our balance sheet and return significant cash to shareholders. In Q2, we redeemed US$650 million in outstanding term notes, paid $67 million in dividends, and completed $572 million in share buybacks. Yesterday, we declared a $0.125 per share dividend and authorized an additional US$500 million in share buybacks, bringing our total authorized share buyback program to about C$1.4 billion year-to-date. I’m pleased with progress in our safety and sustainability leadership. We were named one of the best corporate citizens in Canada for the 16th consecutive year. Overall, our operational performance and strong balance sheet put Teck in a strong position as we manage through current inflationary pressures and global economic slowdown. Turning to slide 5, we delivered record adjusted EBITDA of $3.3 billion, which was more than three times higher than Q2 2021. Each business unit contributed meaningfully to our results, particularly steelmaking coal, which delivered record EBITDA of $2.7 billion during the quarter. Persistent global inflation saw our overall Q2 operating costs rise by 14% compared to last year, half of which was due to rising diesel prices. Moving on to the copper business on slide 7. Gross profit in Q2 increased by 5% compared to last year, aided by a 10,000-ton increase in sales that shifted forward from the third quarter. Despite this, cash unit costs rose to $2.03 per pound. Our total cash unit costs increased by US$0.23 and Q2 EBITDA of $210 million included a $251 million negative set of settlement price adjustment from the decline in copper prices towards the end of the quarter. However, copper prices remained well above historic averages at US$4.32 per pound. In Q2, we signed a new three-year collective agreement at Carmen de Andacollo, and our copper production guidance remains unchanged. We’ve adjusted our 2022 net cash unit cost guidance to US$1.48 to US$1.58 per pound due to inflationary cost pressures and lower byproduct price forecasts. Turning to zinc on slide 8, EBITDA tripled to $236 million, primarily due to higher zinc prices and a 40% increase in zinc and concentrate sales. Total cash unit costs for Q2 were $0.13 or 21% lower than last year. At Trail, we recorded a $32 million inventory write-down due to decreased zinc prices, and maintenance activities are planned in September to November, which will affect production. Our zinc production guidance remains unchanged for 2022. Now, moving on to slide 9. Our steelmaking coal unit delivered another record quarter with gross profit of $2.5 billion—surpassing last quarter's record of $1.8 billion. Steelmaking coal EBITDA was $2.7 billion—a six-fold increase compared to $435 million last year. FOB Australia prices for steelmaking coal reached a record high of US$527 per ton during the quarter, though prices pulled back to $300 per ton by the end of the quarter. Our upgraded rail infrastructure performed excellently, reducing mine inventories to near historic lows. Moving forward, we expect Q3 sales of 5.8 million to 6.2 million tons to match production, with a reduction in full-year production guidance to 23.5 million to 24 million tons and a $100 million reduction in sustaining CapEx guidance. Turning to slide 10, our energy business generated $174 million of EBITDA in Q2, benefiting from higher prices and sales. The ramp-up of Fort Hills to two-train operation successfully reduced unit operating costs. Adjusted operating cost guidance for the full year increased to $33 to $36 per barrel, but production guidance remains unchanged. Turning to slide 11, we now have approximately 13,000 workers on the QB2 project and have made steady progress. Key milestones achieved include completing the transmission system and hydro testing of the water supply pipeline. As we approach first copper from line 1 later this year, we’re focused on system completion, though vendor-related COVID-19 absenteeism may push this to January of 2023. Summary progress is ongoing, and I encourage you to visit our website for the latest updates. With that, I’ll pass it to Jonathan to discuss our financial results.

Jonathan Price, CEO Elect

Thanks, Don. As illustrated on slide 23, strong commodity prices drove Teck’s fourth consecutive quarter of record EBITDA and profitability in Q2. Record-high realized steelmaking coal prices increased quarterly to $453 per ton. While prices weakened since May, both FOB Australia and CFR China prices remain above historical averages. In Q2, Western Canadian Select averaged $96 per barrel, representing a 20% quarter-over-quarter and 75% year-over-year increase. Our adjusted EBITDA of $3.3 billion in the quarter reflects an increase of $2.3 billion compared to last year, primarily attributable to strong commodity prices, despite facing inflationary cost pressures that raised operating costs by 14% compared to last year. The 75% increase in diesel prices drove approximately half of that increase. Importantly, we generated significant cash flow from operations of $2.9 billion compared with $575 million a year ago, driven by record steelmaking coal prices. Our capital investments totaled $1.1 billion, including $819 million for QB2, and we incurred $255 million for capitalized stripping associated with future production. Higher diesel prices were the main driver of capitalized stripping expenditure. Our record financial performance enabled us to strengthen our balance sheet and return significant cash to shareholders during the quarter. We reduced our outstanding debt by US$650 million through a tender for select notes, further ensuring solid investment-grade ratings and decreasing our annual debt interest expense by approximately US$40 million. We completed $572 million in share buybacks and paid our regular quarterly dividend totaling $67 million. Our cash position at the quarter's end stands at $2.7 billion. Looking at slide 26, we have $8.4 billion of liquidity and maintain an investment-grade credit rating with no significant debt maturities due before 2030. We are optimistic about completing QB2 while navigating macroeconomic uncertainty. Adhering to our disciplined capital allocation framework, Teck remains focused on significant cash returns to shareholders. Year-to-date, we returned a total of $404 million in dividends and $662 million in share buybacks while paying down $1.2 billion of debt. We announced an additional US$500 million share buyback program, demonstrating confidence in our long-term outlook and our commitment to balancing growth with shareholder returns. Slide 27 outlines our updated capital investment guidance. For 2022, we increased CapEx for QB2 by approximately $200 million to a range of $2.7 billion to $2.9 billion, while reducing our steelmaking coal sustaining CapEx guidance by $100 million. We expect a significant decrease in capital investments in 2023, largely driven by reduced QB2 CapEx, and moving toward a cash flow inflection point, shifting from capital investment to cash generation. With that, I will pass it back to Don for closing remarks.

Don Lindsay, President and CEO

Thanks, Jonathan. Despite the short-term volatility and uncertainty due to the macroeconomic environment, we are confident in the long-term outlook for Teck and our key commodities. The COVID-19 pandemic has accelerated the demand for essential metals and minerals required for a low-carbon world, including copper, zinc, and steelmaking coal. Every megawatt of capacity for offshore wind turbines requires up to 9.6 tons of copper, 0.5 tons of zinc, and 50 tons of steelmaking coal. Each new offshore wind turbine requires significant quantities of these materials, making Teck crucial to the clean energy sector. 2022 is a transformational year for Teck, and our strong performance year-to-date positions us well to navigate inflationary pressures and a slowdown in global growth. Our growth is primarily driven by QB2, which is set to produce first copper soon and is anticipated to double our annual copper production next year. By advancing our copper growth strategy, we will rebalance our portfolio, reducing carbon reliance while maintaining our industry-leading sustainability practices. This will enable us to deliver meaningful long-term value to shareholders. Thank you for joining us—now I’ll turn the call over to the operator for Q&A.

Operator, Operator

Thank you. The first question is from Greg Barnes from TD Securities. Please go ahead.

Greg Barnes, Analyst

First off, Don, I just want to commend you on the track record at Teck over the past 17 years; it has been quite a ride. Secondly, how you positioned the Company heading into the QB2 construction, I think you did a great job on that front. My question for you is the long-term outlook from your perspective for the coking coal business, the steelmaking coal business within Teck, as you highlighted, is a key element of the decarbonization drive. Clearly, supply is going down, demand is going up, it looks like a pretty attractive business over the long term.

Don Lindsay, President and CEO

Yes, I very much agree with you. The supply-demand situation, you’re quite right. Supply will be constrained as there are not many players willing to invest in new capacity. Even if they did, financing and permitting are significant challenges. Long-term, supply will be challenged, while demand for steelmaking coal will continue to grow, reflecting growth in the overall global population, mainly in developing markets, which will predominantly source steel from blast furnaces. Technologies for new green steel are still years away, likely decades. Thus, the long-term outlook for the business appears strong. However, it’s important to recognize that a vast amount of the $40 trillion in assets under management have declared policies of not investing in coal-producing companies. While there’s growing awareness that steelmaking coal is critical for a low-carbon future, some restrictions remain. As I mentioned, the Board has studied this issue closely for a couple of years to reshape the portfolio, and we're already securing growth in copper, which will gradually shift our focus. The right answer will unfold over time, and I leave that to the Board to decide.

Operator, Operator

The next question is from Orest Wowkodaw from Deutsche Bank. Please go ahead.

Dalton Baretto, Analyst

Thanks, operator. Don, Jonathan, and Red, all the best to you guys as you go forward. My first question, I guess, is for Jonathan. I'm just wondering what might change in terms of the strategy going forward, particularly as it relates to things like portfolio construction, M&A, and capital allocation? Thanks.

Jonathan Price, CEO Elect

Thanks for the question, Dalton. The strategy Teck has established over many years is incredibly robust and not built on hope but on the resources amassed over time. Our strategy centers on copper growth, and we are fully committed to that. As Don has discussed, we will continue to evaluate the shape of the portfolio, opting to lean toward metals needed for decarbonization. Regarding capital allocation, that remains unchanged—we aim to balance our copper growth with significant cash returns to shareholders and a strong balance sheet. All of those elements remain intact, with the focus of the team being to execute on that strategy moving forward.

Dalton Baretto, Analyst

Okay, great. Thank you for that. And just maybe an operational question or two. You’ve announced two separate labor agreements here. I’m curious, given the current cost of living environment globally, are you at liberty to discuss what kind of increases are being demanded and what this means for your other operations?

Don Lindsay, President and CEO

Generally, we don’t disclose the details of those contracts. I can say that we’re pleased with their resolutions, although they are always tough negotiations. However, they provide us with labor stability going forward. Last year, we settled long-term contracts for our largest operations—Highland Valley, Fording River, and Elkview—all of which should provide stability for our core operations.

Red Conger, President and COO

If I could add one thing, we’ve completed negotiations for all of our labor agreements. Settling for maximum contract durations is a testament to the strong relationship the company has with its workforce and positions us well for the future.

Dalton Baretto, Analyst

That’s great to hear. And maybe if I can squeeze one last one in. With the decline in the Chilean peso, is there an opportunity to hedge over the next 12 months as you finish QB2 and ramp it up?

Don Lindsay, President and CEO

I’ll make an opening comment and then turn it to Jonathan. We discuss this topic probably every hour of every day. It's a continuous area of focus for us.

Jonathan Price, CEO Elect

Dalton, it’s something we are certainly aware of. If you can predict the Chilean peso's movements, we’d welcome that insight! Generally, we’re comfortable allowing it to float alongside our commodity price exposures and foreign exchange exposures, particularly amid the ongoing constitutional discussions and uncertainty in Chile makes it difficult to predict the peso's medium-term performance. For now, the Chilean peso acts as a tailwind for our operating and construction costs.

Operator, Operator

Next question is from Lawson Winder from Bank of America. Please go ahead.

Lawson Winder, Analyst

Hello. Good morning. Thank you for the update, Don. Congratulations on a remarkable tenure at Teck. And Jonathan and Red, congratulations on your new roles. I would like to ask two questions. So first would be about the QB2, COVID-19 CapEx increase. It sounds as though some non-COVID elements are included in the explanation for the higher CapEx estimate for QB2. Specifically, inflation on labor costs—what proportion of the increase is related to non-COVID-specific costs? Looking forward, what does that imply for QB and CapEx expectations?

Red Conger, President and COO

I appreciate the question, Lawson. We’re excited about reaching our employment levels of approximately 13,000 per shift, which is a significant achievement post-COVID and key for completing the project. We have overcome challenges and are focused on executing to schedule. Regarding increases, costs have resulted from various factors, including labor inflation obligations that ensure adherence to local laws and COVID-related delays that increased overall project time. We're enthusiastic about mitigating current issues through collaboration and creative approaches to maintain productivity. In the long term, we anticipate successfully completing the project.

Operator, Operator

The next question is from Carlos De Alba from Morgan Stanley.

Carlos De Alba, Analyst

Don, congratulations; Jonathan and Red, all the best in the new positions. Perhaps an update on the oil sands energy business within Teck and any insights into Project Satellites?

Don Lindsay, President and CEO

We’re pleased with Fort Hills’ performance, now fully ramped to two trains, performing above plans and further dropping costs. As we said for some time, once production is stabilized, we would consider a transaction to hold the operation differently so investors can choose their involvement. Many investors cannot buy Teck with a proportion of oil sands revenue. We are actively working on this matter and will provide updates as necessary. We’ve recently announced a deal regarding Mesaba, our project in Minnesota, joint ventured with PolyMet and Glencore. We continue to advance the Zafranal permitting process and engaging with partners on San Nicolas, expecting developments by the end of year.

Operator, Operator

The next question is from Matthew Murphy from Barclays. Please go ahead.

Matthew Murphy, Analyst

Hi. Congrats Don, Jonathan, Red. I have a question on met coal. Can Réal share thoughts on what’s driving the unusual dynamic of thermal coal prices being so much higher than met? What’s the outlook given the steel market slowdown in China? Would there ever be a strategy to redirect some sales to thermal applications?

Réal Foley, Analyst

Thanks for the question, Matthew. Regarding thermal, technical and operational limits exist for using steelmaking coal for power generation. We do sell a small quantity into thermal applications (less than 0.5 million tons a year). Steel production remains healthy despite drops compared to 2021; it’s still above pre-pandemic levels. The availability of coal continues to be tight with lower exports, which, coupled with low inventories, supports market prices, so we expect prices to increase once steel demand improves.

Matthew Murphy, Analyst

Got it. Thank you for that. As a follow-up, Don, during your tenure, how do you see the industry tackling investor skepticism towards major projects like QB2 amid pressures for production growth in copper?

Don Lindsay, President and CEO

The classic buy versus build debate often arises. It's increasingly challenging to build anything in various jurisdictions. There’s a growing reluctance from management teams to engage in long-term projects. QB2 has taken 15 years from acquisition to development. I believe the industry's bias has shifted towards acquisition, where immediate returns are possible rather than long-term projects. While macroeconomic pressures will eventually improve, those with recurrent assets will prosper.

Operator, Operator

Next question is from Orest Wowkodaw from Scotiabank. Your line is open.

Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis

Orest, we just want to check on whether you are still trying to get connected? Maybe you can send us an email with your question?

Don Lindsay, President and CEO

Orest, we can’t have a quarterly call without your question. If you’re still there, feel free to reach out.

Amparo Cornejo, Analyst

Good morning, Emily. As you may know, the Chilean government has introduced changes to the mining royalty bill under discussion at the Senate. The Finance Minister has indicated a willingness to listen to the industry; the process will continue there, and we hope to be part of that discussion. However, our stability agreements for QB2 and CdA are intact. Regarding the constitutional process, it’s ongoing with dialogue and campaigns surrounding potential approval or amendments. So we don’t perceive additional concerns for now. Depending on the outcome, discussions will take place in the Senate, and stability agreements should remain secure.

Emily Chieng, Analyst

Great. That’s very clear. My follow-up question is just around CapEx and more focused on sustaining CapEx—any initial thoughts on what that could look like in 2023? Is the $100 million sustaining CapEx reduction on the coal segment deferred into 2022, or is that fully reduced?

Jonathan Price, CEO Elect

We have not guided specifically to sustaining capital for 2023 yet. We did communicate that sustaining capital is expected to trend back down towards long-term levels, around the $1 billion annually, including future QB2 sustaining capital. We still have water treatment capital commitments over the next couple of years, and those will lessen over time, facilitating the return to the $1 billion range. We will provide specifics for 2023 in due course.

Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis

Thank you, Jonathan. We will take one more question. I have received an email question from Orest Wowkodaw. He asks about the coal business. Is Q3 production sales guidance indicative of achieving 26 million to 27 million tons as per the three-year guidance? Coal hasn’t produced above 26 million tons since 2018.

Robin Sheremeta, Analyst

Thanks, Orest. There have been several challenges over the past couple of years, including COVID-19’s staffing impact. Second, operational issues in the first half, particularly maintenance on large operations, mean we're confident these operations will return to reliability. The primary challenge right now is labor shortages compounded by turnover and absenteeism from COVID. We are actively working on hiring to address this. We have sufficient resource capacity to achieve the 26 to 27 million tons; achieving this relies on reintegrating a workforce effectively.

Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis

Great, thanks, Rob, and thank you for your question, Orest. Back to Don for closing remarks.

Don Lindsay, President and CEO

Thank you all for joining my 71st and final earnings call today. I want to conclude with heartfelt thanks. No one achieves anything alone. I had the support of many exceptional people, and while I risk forgetting some, I’ll do my best to acknowledge a few. I want to express my gratitude to Dr. Norman B. Keevil, without whom I wouldn’t be here, especially for his support during the 2008 financial crisis. The steelmaking coal sector has generated approximately $34 billion in average EBITDA since then, which has allowed us to build our base metals business and fund QB2. Also, my gratitude goes to Norman B. Keevil III, a great support of the business. Someday, I hope to be recognized for my contributions as much as those before me. I appreciate the long-standing analysts like Orest and Greg; your insights have always been valuable. To my global mining team at CIBC and other invaluable partners who supported me over the years, I extend my thanks. Finally, while I name some teammates, I also want to recognize everyone else involved—Alex Christopher, Andrew Milner, Dean Winsor, Marcia Smith, Peter Rozee, Nick Hooper, Réal Foley, and Fraser Phillips. Of course, a special thank you to my incredible support team—Mona Hat and Stephanie Dunlop. Lastly, I want to extend my wishes for success to Jonathan Price and Red Conger; they are capable individuals positioned to create tremendous new value for Teck. Under their leadership, the best is yet to come. Thank you all and over and out.

Operator, Operator

The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.