Earnings Call Transcript - TECK Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teck’s Third Quarter 2021 Earnings Release Conference Call. At this time, all participants are in listen-only mode. This conference call is being recorded on Wednesday, October 27, 2021. 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 very much, Lourie. Good morning, everyone, and thank you for joining us for Teck’s third quarter 2021 results conference call. Before we begin, I would like to draw your attention to Slide 2. This call contains forward-looking statements regarding our business. This slide describes the assumptions underlying those statements. Various risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward-looking statements. I’d also like to point out that we use various non-GAAP measures in the presentation. You can find explanations and reconciliations regarding these measures in the appendix. With that, I will turn the call over to Don Lindsay, our President and CEO.

Don Lindsay, President and CEO

Thanks very much, Fraser, and good morning, everyone. I will begin with third quarter highlights on Slide 3, followed by Jonathan Price, our CFO, who will provide additional color on our financial results. Then we’ll conclude today’s session with a Q&A. I’m pleased to report that our solid operational performance combined with an extremely favorable commodity price environment in the third quarter resulted in a record adjusted EBITDA and record adjusted profit. Third quarter adjusted EBITDA of $2.1 billion is more than triple the same period last year, and note that September alone contributed to approximately half of the total as strong realized pricing continued across all of our principal products, particularly steelmaking coal, but also copper, zinc, and energy. If you look at the pricing we’ve experienced in October, it’s higher than it was in September across the board. So, you have a pretty good indication of how we did in the month of October. Despite the continued impact of COVID-19, as well as the impact of forest fires in British Columbia in July, Q3 production was in line with plan across our business units, and our annual production guidance remains unchanged. However, as we previously mentioned, we are seeing inflationary cost pressures, notably in the price of diesel supplies and labor costs, and like our peers, these cost increases impacted third quarter operating results across our businesses. We expect upward pressure on our cash unit costs through the balance of the year and into 2022. Despite this, we have not changed our full-year cash unit cost guidance, as we anticipate higher utilization and efficiency gains to offset some of the current pressures. Looking ahead, we are well-positioned to capture the significant cash flow generation opportunities arising from current steelmaking coal prices in Q4 and into 2022. During the third quarter, we continued to advance our priority projects. Overall progress on our flagship QB2 copper growth project has surpassed the two-thirds mark as our team aggressively manages the conditions resulting from COVID-19. Vaccination rates among the project workforce are high, and we have ramped up staffing levels focusing on delivering on the project's key milestones. We continue to expect first production at QB2 in the second half of next year, with QB2 expected to double our consolidated corporate production by 2023. We are experiencing some upward cost pressures and expect to issue updated capital cost guidance on the project in February with our Q4 results. Our Neptune facility continues to ramp up, successfully demonstrating the ability to perform at design capacity. Just a couple of days ago, it loaded 91,000 tons, a new all-time record. The facility is expected to achieve a run rate at its design capacity of 18.5 million tons or higher in the fourth quarter. Our steelmaking coal supply chain transformation is contributing significantly to improved optionality and reliability. Last week, we announced the conversion of our US$4 billion committed credit facility into a sustainability-linked credit facility to support our sustainability goals. We are very proud to see our efforts recognized with an upgrade in our ESG rating from MSCI to AA from A, which puts Teck in the top decile of our sector, ahead of most of our diversified competitors. We were also named to the Forbes World’s Best Employers list for the second year in a row. Heading into the fourth quarter, we are focused on optimizing sales and production to capitalize on high commodity prices and advancing our priority QB2 copper project. Our revenues improved significantly from a year ago, driven by increases in the prices of all of our principal products, particularly steelmaking coal. Profit attributable to shareholders was $816 million or $1.53 per share, and adjusted profit attributable to shareholders was $1 billion or $1.91 per share, which is more than seven times higher than the same period last year.

Jonathan Price, CFO

Thanks, Don. I will start by addressing our third quarter earnings adjustments to reconcile our profit and adjusted profit attributable to shareholders. The most significant adjustment in the quarter is $97 million in QB2 variable consideration owing to IMSA, a former owner. This is a derivative financial liability that arose from our 2018 acquisition of an additional 13.5% interest in QBSA through a private Chilean company. This liability is carried at fair value, and any change in fair value is recognized on our income statement. Share-based compensation expense was $28 million in the quarter and commodity derivatives were $10 million. After these and other minor adjustments, the bottom-line adjusted profit attributable to shareholders was $1 billion in the quarter or $1.88 per share on an adjusted diluted basis. Notably, the large increase in steelmaking coal prices from Q2 to Q3 resulted in pricing adjustments of approximately $162 million.

Don Lindsay, President and CEO

Thank you, Jonathan. In summary, this is a very exciting time for our industry and for Teck in particular. Opportunities lie ahead as global growth and a transition to a lower carbon economy drive new copper metal demand. Given the current commodity outlook, we have the ability to generate significant EBITDA and free cash flow. Looking ahead, we have an industry-leading copper growth profile and a very attractive copper pipeline. We’re strengthening how we operate through cutting-edge innovation to improve productivity, as well as leading ESG performance. Our leadership team has the right mix of skills and experience to deliver on our strategy. We would be happy to answer your questions.

Orest Wowkodaw, Analyst

Hi, good morning. In your release, you disclosed that there are several challenges related to the port entailing facility at QB2. Can you please give us more detail on what the issues are and whether you see any potential impact to the schedule from these issues?

Don Lindsay, President and CEO

Okay. Well first congratulations, Orest. I’ll turn this question over to Red Conger. Red, you might be on mute.

Red Conger, Executive Vice President, Operations

We’ve had several things that we’re dealing with in the third quarter starting at the port. The sea conditions are actually softer now where we’re driving the pilings to extend the jetty out into the sea. Initially, you’d think that’s great, and it’s going to go faster. However, to meet the structural criteria that the facilities have been designed to, we’re having to drive those piles deeper into the seafloor to achieve that structural integrity. This requires us to burn additional effort hours in the third quarter.

Don Lindsay, President and CEO

What we're going to do is track Red down, because I’d like you to hear it straight from the man in charge. And we’ll come back to your question. Operator, if we could go then to the next question while we track down Red.

Greg Barnes, Analyst

Thank you. Don, can you give us some color around the inflation pressures you are seeing into 2022? Other mining companies are saying it’s in the range of outputs 5% to 7%?

Don Lindsay, President and CEO

So, two or three comments. First, it’s not what we would call structural inflation. It’s more broad-based inflation from different input items, such as diesel and supplies related to supply chain problems that we all hear about. The percentage would be in the 5% or less right now. We don’t know how it’s going to evolve, but we flagged that we’re getting hit with it too.

Jonathan Price, CFO

If we look at some of the underlying indices here, you look at crude up by 64%, gas up 39%, steel up 55%. It flows through all range of categories of spend. The sort of range that Don quoted is consistent with what we’re seeing in the business right now.

Robin Sheremeta, Senior Vice President, Operations

There’s no question that some of the costs are inflationary, but we’ve had considerable success with some of our RACE21 initiatives. They’ve reduced costs in many cases and increased productivity, particularly in the process plants and mines.

Shehzad Bharmal, Senior Vice President, Operations

The majority of inflation is translating from the energy complex with gas and crude and steel. We enjoy margins that have gone up for all of our products as well.

Greg Barnes, Analyst

Given you’ve got some experience now with Neptune operating at close to full capacity. What kind of tonnage loading rates are you seeing on a per ton cost basis?

Don Lindsay, President and CEO

We haven’t reported cost for a full quarter running at full capacity. That would be this quarter coming. But we’re looking forward to getting the benefit from that. The optionality to have that asset is strategically so important.

Curt Woodworth, Analyst

Can you just comment on your ability to capture the $600 China CFR price and what the net back would be for you today?

Réal Foley, Senior Vice President, Coal

We are capturing those higher prices as they occur. We’ve made sales at pricing above $600. On the FOB side, we have a combination of sales that reflect the average of the quarterly indexes lagged by a month.

Abhi Agarwal, Analyst

Is it fair to assume that you could look to target another 7.5 million tons of met coal into China depending on the premium between CFR and FOB persisting?

Don Lindsay, President and CEO

Yes, we’re still targeting about 7.5 million tons of sales to China for 2021. As we’re looking at our book for 2022, our objective is the same to maximize sales into China. If we did not do Neptune, we would be impacted by the full on effect of those cost inflations. And it provides the benefits of getting the coal to market reliably.

Jonathan Price, CFO

This is something that we will be doing when we report Q4 results in February. What we’re seeing for Q3 is that the inflationary pressures are offsetting some of our costs.

Jackie Przybylowski, Analyst

I just wanted to ask you about the sustainability bonds that you reported the other day. And if you could give us a sense of roughly what the cost of borrowing on those bonds would be.

Jonathan Price, CFO

The pricing on that at LIBOR plus 150 basis points is the same as the prior facilities that we had. The intent here is to ensure that we embed sustainability in everything we do.

Don Lindsay, President and CEO

Thank you for joining us, and we very much look forward to talking to you in February.