Earnings Call Transcript - TECK Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teck's Fourth Quarter 2021 Earnings Release Conference Call. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. This conference call is being recorded on Thursday, February 24, 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 very much, Patrick, and good morning, everyone, and thank you for joining us for Teck's fourth quarter 2021 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 slides two and three for the assumptions underlying our forward-looking statements. In addition, we will reference various non-GAAP measures throughout this call. Explanations and reconciliations regarding these measures can be found in our MD&A in the latest press release on our website. Don Lindsay, our President and CEO, will begin today's call with full year and fourth quarter highlights. He'll be followed by Jonathan Price, our CFO, who will provide additional color on our financial results. We will conclude today's session with a Q&A period to address any remaining questions. With that, I'll turn the call over to Don.

Don Lindsay, President and CEO

Thank you, Fraser, and good morning, everyone. Well, 2021 was a great year for Teck. We are pleased to close out the year by setting a number of financial records despite what was a very challenging backdrop. Solid operational performance and strong commodity prices drove $6.6 billion in adjusted EBITDA in 2021 and the highest ever quarterly adjusted EBITDA of $2.5 billion in Q4, which was more than triple last year's level. I am incredibly proud of the tremendous resiliency demonstrated by our team all across the company, who continued to operate our assets safely and sustainably through heat waves, wildfires, incredibly heavy rains, deep freeze, freezing temperatures, record cold temperatures and the continued impacts, of course, of the global pandemic. Unprecedented floods brought on by three atmospheric rivers, tested the resiliency of our steelmaking coal supply chain in British Columbia. And despite major rail and infrastructure damage caused by what is now referred to as one of the worst natural disasters in Canadian history, there was no material impact on our production. We reached multi-year collective agreements at Antamina, QB, Fording River and Elkview in 2021 and also at Highland Valley subsequent to year-end. So we now have long-term stable agreements at our three largest mines. We continue to advance our priority projects in the fourth quarter and overall progress at our flagship QB2 copper project has reached 77%. We are focused on delivering on the project's key milestones, including the commissioning of systems as they are completed. And we continue to expect first production in the second half of this year. Teck is already one of the world's lowest carbon-intensity producers of copper and zinc and steelmaking coal, but we are taking further action to support global efforts to combat climate change. We continue to reduce the carbon footprint of our operations as we progress towards our target of net zero by 2050. And in November, we announced an agreement with Oldendorff Carriers to employ energy-efficient bulk carriers, which is expected to reduce our Scope 3 emissions on a portion of our assuming coal shipments by up to 40%. The estimated savings can be up to 45,000 tonnes of CO2 annually, which is the equivalent to removing nearly 10,000 passenger vehicles from the road. In January, we announced our partnership with Caterpillar to deploy 30 zero-emission large haul trucks at our mining operations. And this is exciting progress because the decarbonization of our fleet represents the single largest opportunity to reduce our Scope 1 emissions. And overall, we're very pleased to see our continued efforts in ESG are being recognized by the industry. For the third year in a row, we are ranked number one in the metals and mining industry on S&P's Corporate Sustainability Assessment. We are also ranked number one among North America's metals and mining companies by Moody's ESG, and number 2 in diversified metals by Sustainalytics and rated AA by MSCI for our ESG performance. Turning to Slide 5. Annual adjusted EBITDA of $6.6 billion in 2021 was a record, reflecting strong contributions from each of our copper, zinc, and steelmaking coal business units. And importantly, our record profitability enabled us to deliver meaningful cash returns to shareholders. Yesterday, the Board approved an amended dividend policy and declared a dividend and authorized a repurchase of up to $100 million of Class B subordinate loan shares in 2022. Under the new dividend policy, the annual base dividend has been increased from $0.20 a share to $0.50 a share. And in accordance with the new dividend policy, our capital allocation framework, the Board declared a dividend of $0.625 per share, consisting of $0.125 of a quarterly base dividend and a supplemental dividend of $0.50 per share. In addition, the Board authorized annual share buybacks up to $100 million and additional buybacks on top of that will be considered regularly. Taking into account the new annual base dividend in 2022 and the supplemental dividend and assuming the $100 million in share repurchases, these initiatives represent a total of approximately $635 million in aggregate of dividends and share repurchases. Our ability to deliver a supplemental dividend in 2021 and the increased annual base dividend and the new annual share buyback demonstrate both our confidence in the outlook for our business and our commitment to balance growth and returns to shareholders. So turning to our operations on Slide 7. Fourth quarter EBITDA for our copper business unit increased by 64% compared to last year supported by copper prices, which reached an all-time quarterly record. Production was in line with plan, although copper sales were impacted by heavy rains and extreme winter conditions, which affected rail service and shipment schedules. Net cash unit costs after cash margins for byproducts were USD 1.52 per pound. That's $0.25 higher than last year. We continue to experience inflationary cost pressures. As I've already noted, we are pleased to have reached multiyear collective agreements in Antamina, Quebrada Blanca and subsequent to quarter end at Highland Valley. So looking ahead, we expect strong performance from all of our copper operations in 2022. Moving on to zinc on slide 8. Our zinc business generated $290 million in EBITDA in the fourth quarter, and that's an 80% increase compared to last year. The increase was driven by higher zinc prices and partly offset by higher royalty costs related to profitability at Red Dog. Lower Red Dog zinc and concentrate production was primarily due to lower mill throughput and recoveries as a result of unplanned maintenance, which is now behind us. Refined zinc production at our Trail operations was 11,800 tonnes lower than a year ago due to issues we encountered in the commissioning of new equipment as well as unplanned maintenance. Looking ahead, Trails 2022 production will be impacted by major maintenance activities from September to November. In 2022, we expect a significant increase in zinc production at Red Dog and a decline in total cash unit cost before byproduct credits despite ongoing cost inflation pressures. Turning to slide 9. Our steelmaking coal business unit had a record fourth quarter, generating $1.7 billion of EBITDA in the quarter, and that compares with $118 million last year. Realized prices averaged USD 351 a tonne, which was $244 higher compared to a year ago. Thanks to our Neptune facility, which had ramped up and was exceeding design capacity during the quarter, we ended the first half of November with historically low levels of clean coal inventory at the mine sites. This allowed us to continue operations with minimal production impacts despite the logistics disruptions that occurred in the latter half of the fourth quarter. Sales in the quarter were 5.1 million tonnes, which was slightly below our revised guidance. We sold 1.8 million tonnes of steelmaking coal to customers in China in the quarter. Annual sales to customers in China totaled 7.6 million tonnes or approximately 30% of our annual sales volumes. The remainder of our sales are still based on the FOB Australia price, which also averaged at a record level through the fourth quarter. Our annual adjusted site cash cost of $65 per tonne was within our previously disclosed guidance range of $64 to $66. Fourth quarter transportation costs of $49 per tonne reflect the extraordinary vessel demurrage in the quarter. As a result of prolonged supply chain disruptions, we entered 2022 with very high mine site steelmaking coal inventories. With CN and CP Rail making progress towards fully restoring rail service to our cold terminals, we expect to be able to largely recover delayed fourth quarter sales within the first half of 2022. And assuming full recovery of the rail network, we expect sales to be between 6.1 million and 6.5 million tons for Q1. We expect 2022 steelmaking coal production between 24.5 million and 25.5 million tons. Our production estimate is reflective of prudential production curtailments in the first quarter due to higher inventory levels. Further, while the recent surge in Omicron cases has not had a major impact on productivity to date, continued absenteeism has the potential to have a negative impact on our operations. So, despite unprecedented logistics challenges and continued inflationary pressures, our steelmaking coal business unit delivered record financial results in 2021 and is well to deliver very strong financial performance again in 2022. And I note that Australia FOB prices are up again today, and they are currently over $450 per ton. Turning to our Energy business unit on slide 10. Our results improved from the fourth quarter 2020 largely due to the 88% increase in the Western Canadian Select oil price, which resulted in a positive operating netback. In the fourth quarter, the focus was on ramp-up to full rates. We were pleased to see Fort Hills safely and successfully resumed to a two-train operation in December. The facility is expected to operate at an average utilization rate of 90% throughout 2022. The midpoint of our guidance represents an increase of approximately 85% compared to 2021 for our share of the annual production. With higher production and productivity, adjusted operating costs are expected to come down by approximately 40% to between $26 and $30 per barrel in 2022. Underpinned by strong global energy prices, we expect to see a meaningful improvement in Fort Hills EBITDA in the first half of 2022. And I note that WTI is $97.33 as we speak and with differentials fairly stable, that means that we have a Western Canadian Select price in the mid-$80s or well over CAD100. Moving on to slide 11. As I mentioned earlier, we continue to advance construction at QB2 with overall progress now having reached 77%. We are very proud of Q4, by the way, that we achieved 11% completion in that quarter and 35% for the whole year. We are proud of this achievement especially in light of the challenges that we have faced around COVID-19. The number of cases in Chile rose very rapidly in January and early February. So, we weren't able to continue the rate of progress that we were making in Q4 during that time. We are continuing to aggressively mitigate the impact of the pandemic on QB2 and we believe that we're past the peak there, and this has improved quite significantly from the worst of it. Construction continues to progress, and we remain focused on delivering key systems as we position for first copper later this year. We have completed more than 90% of the water supply pipeline welding, and the tailings starter dam is more than 85% constructed. We've also energized the port area substations, and we are continuing with our pre-operational testing of the desalination plant. Our operations and commissioning teams are working in close collaboration with the construction teams and are busy commissioning systems as they are completed and handed over. We've also completed commissioning and testing of the autonomous haul truck system, and these trucks are now doing productive work in the mine area. A number of us will be going again next month. Turning to Slide 12, which shows the testing and commissioning of the electrical systems associated with the mine electrical loop. Energization of the mine loop was an important step in completing commissioning of our mining fleet. With the mine loop energized, you can see the two new electric shovels that we've commissioned on Slide 13, and these shovels will be used for pre-stripping mining activities. Slide 14 is a view of the 15-storey-high ore stack structure, which transfers ore from the crusher to the ore stockpile. Slide 15 shows the grinding building where we have all the mills in place. We're working on the mechanical and electrical systems and we've commenced the installation of the siding. The next slide, Slide 16, shows one of the 85-meter-diameter tailing thickenings, where we are completing the installation of the internal mechanical components now. And from here, Slide 17, we go to the starter dam at the tailings management facility, where we continue to make excellent progress and are now over 85% constructed. The Teck mining fleet has done a great job in providing materials for construction. We've energized the four substations in the port area, which is an important step towards commissioning of the infrastructure at the port area. And finally, Slide 20 shows the roof structure in place for the 75,000-tonne capacity concentrated storage building. In summary, we continue to be very pleased with the progress that we are making. We are excited about building on our construction successes to date with a focus on delivering to the project's key milestones. Now I will pass it over to Jonathan to discuss our financial results.

Jonathan Price, CFO

Thanks, Don. Profitability in the fourth quarter improved significantly from a year ago as a result of higher prices for all of our principal products as shown on Slide 22. Copper prices reached an all-time quarterly record of USD 4.40 per pound in the fourth quarter, up 35% from last year, while zinc prices increased by 29%. Western Canadian Select, the heavy oil benchmark price was 88% higher compared to the fourth quarter last year and has continued to increase through the first quarter of 2022, as Don outlined. Similarly, we benefited from record-high steelmaking coal prices. Realized prices in the fourth quarter were USD 351 per tonne, more than a threefold increase from USD 107 a tonne a year ago. High realized prices reflected our strategy to increase our sales to customers in China in 2021, which was priced at a premium to the FOB Australia price assessments. A large increase in steelmaking coal prices from Q3 to Q4 resulted in pricing adjustments of approximately USD 69 million in the fourth quarter or USD 44 million on an after-tax basis. We generated $2.5 billion of adjusted EBITDA in the quarter, an increase of more than $1.6 billion compared to the same period last year. This was largely driven by higher prices across all of our principal commodities, partially offset by lower sales volumes, higher operating costs and the strengthening of the Canadian dollar. It was also impacted by asset impairment and impairment reversal related to Fort Hills. We continue to experience inflationary cost pressures, notably in diesel prices, mill steel and replacement parts, driven largely by price increases for underlying commodities such as steel, crude oil and natural gas. The inflationary pressures reflected in fourth quarter operating results across our business are expected to continue in 2022. Cash flow from operations in the fourth quarter was $2.1 billion compared with $594 million a year ago. Our capital investments in the quarter totaled $1.1 billion, including $715 million on QB2 and $300 million in sustaining capital. Capitalized stripping was $186 million, primarily related to the advancements of pits for future production at our steelmaking coal operations. Debt proceeds were primarily driven by $303 million from our USD 2.5 billion project financing facility in the quarter. Net-net, we also repaid $268 million on our revolving credit facility, bringing our balance on this facility to nil. Including these and other minor items, we ended the quarter with cash and cash equivalents of $1.4 billion, an increase of approximately $1 billion as compared to the end of the last quarter and the same period last year. We are pleased to have enhanced our already strong financial position. Our solid operating performance, combined with strong commodity prices, resulted in a 49% adjusted EBITDA margin and $6.6 billion in adjusted EBITDA for the year. Our net debt-to-adjusted EBITDA ratio was one-time. During the quarter, we converted our USD 4 billion committed credit facility into a sustainability linked facility with zero amounts drawn at this time. Subsequent to the end of the quarter, on January 18, 2022, we redeemed USD 150 million of our maturing 4.75% term notes. As of February 23rd, we had $7 billion of total liquidity. Importantly, our strong financial performance enabled us to return meaningful cash to shareholders. Applying our capital allocation framework to our cash flow from operations of $4.1 billion in 2021, we deducted sustaining and committed growth capital of roughly $3 billion, net of QB2 project financing and partner contributions, $106 million of base dividends and $335 million of debt repayments to improve our capital structure. This left us with over $730 million of available cash flow. The first 30% of any available cash flow is automatically returned to shareholders, and this totaled approximately $220 million. According to our framework, the balance of 70% can also be returned to shareholders or otherwise used for investment in growth or debt reduction or a combination of these. The Board made the decision to pay a supplemental dividend of $0.50 per share, or $267 million, representing 37% of available cash flow above the minimum stipulated in our capital allocation framework. And going forward, the Board approved a 150% increase in the annual base dividend to $0.50 per share per year from $0.20 per share and authorized an annual share buyback that allows us to repurchase up to $100 million.

Don Lindsay, President and CEO

Thank you, Jonathan. So as you can see, this is an exciting year for Teck. This is the year of transformation where we rebalance our portfolio and really start ramping up our copper production. We are months away from the startup of QB2 in the second half. We're particularly excited by this position because we find ourselves as QB2 ramps up to full capacity, we expect to shift from a period of significant capital investment to what will be a period of significant cash generation. At copper prices between USD 350 a pound and USD 450 a pound and with QB2 at full production, we believe that we can generate between $6 to $7 per share of what we call available cash flow for shareholders, which we can use to grow our copper business while returning significant cash to shareholders at the same time while also maintaining a strong investment-grade balance sheet. We have a portfolio of high-quality growth options that is the envy of our peers. After carefully assessing multiple configurations for the further expansion of QB beyond QB2, we have determined that the next phase of development will be the QB mill expansion or QBME. The mill expansion is expected to increase concentrate throughput by 50% with the addition of one identical semi-autogenous grinding line, one SAG mill, and two ball mills. This configuration optimizes the timeline to obtain approval, the permitting process, and to progress the development of this world-class ore body leveraging the existing infrastructure that we're building right now for maximum capital efficiency. The QBME feasibility study has already started, including all of the environmental baseline activities, with completion targeted for the fourth quarter of this year. We are also continuing to progress the project satellite assets. We hope to announce a partner in due course. It’s taken a little longer than we thought, but we are certainly deep into it. We believe that our coal is amongst the highest quality in the world and that it produces steel with significantly lower carbon emissions than alternatives. However, we know that there are ESG pressures, and we have to take that into consideration. The board has been studying this intensely for the last couple of years, looking at how to reduce our carbon footprint while still ensuring that we provide value to our shareholders. We will look to see whether we should maintain our coal business or reduce our exposure somewhat.

Operator, Operator

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

Greg Barnes, Analyst

Thank you. Good morning. Can you give any comments about the coal sales into China in 2023 as you had last year?

Don Lindsay, President and CEO

Okay. And congratulations, Greg. So I'll turn that question over to Réal. We've done a lot of thinking but as you know, the CFR price and the FOB price do not necessarily move in sync, sometimes one side or sometimes the other side. But Réal, over to you.

Réal Foley, Coal Sales Executive

Overall, looking at 2022, we're expecting our sales distribution to be similar to 2021. As we've discussed previously, we're continuing to maintain our supply to our ex-China customers because those are long-term relationships. And we're confident as well in China as the steel production recovers. We've seen steel production already come back very strongly right after the Olympics. So, we see that as continuing to support CFR China pricing as China continues to be short hard coking coal. The last point is, we keep a portion of our book for spot sales and these will be placed in markets where we achieve the highest returns for Teck.

Greg Barnes, Analyst

Great. Thanks, Réal. A follow-up question again for you, Don, on coal. Your thinking around the near-term future of coal in your portfolio seems to be evolving. Can you talk about how you're positioning the business, in your mind, from this point forward?

Don Lindsay, President and CEO

Nothing has changed from what we've said before that we're on the journey to rebalance our portfolio so that carbon, both coal and oil sands, will be a lower percentage of the portfolio, whether you measure it in terms of revenue or EBITDA. We believe that the carbon part of the portfolio will be reduced as copper grows. But we still had the same position on oil sands on the Fort Hills project that I've talked about before, so nothing has changed in that. I want to give a shout-out to our whole team that works in the coal division, as there are a lot of ESG pressures. They are dedicated and determined in addressing issues. We now have tremendous water treatment capacity up and running in the highest minimum concentrate area, and it’s really going well.

Greg Barnes, Analyst

That’s great. Thanks, Don. Just wanted to clear that up. And I’ll pass it on.

Operator, Operator

The next question is from Orest Wowkodaw from Scotiabank. Please go ahead.

Orest Wowkodaw, Analyst

Good morning. A couple of questions for me, if I could, Don. First one, I've noticed that the languaging around the share buyback seems to suggest that the Board may consider buybacks a lot more often than just annually. Is that the right way to interpret it, that we could actually see something reviewed quarterly?

Don Lindsay, President and CEO

We didn't say quarterly, but we said regularly. The direction of your question is correct that where we're at now, we’re 77% complete of QB2. As we are making financial decisions, we want to ensure the Board is attuned to the issue. We will be looking at how best to deploy capital as cash is generated from commodity prices.

Orest Wowkodaw, Analyst

Thanks, Don. Just as a follow-up on QB2, you gave us a fair amount of status updates on the key pieces, but what about the concentrator? Where is that at with respect to completion? And is that now the critical path to startup?

Don Lindsay, President and CEO

Very good question. I'm going to ask Red Conger to take that question. Red, over to you.

Red Conger, Project Executive

Good morning Orest, appreciate the question. Yes, it's been a busy time for us on the project, and we're pleased with progress. The critical path remains grinding line 1. That work is key to getting the first copper production. We did a lot of work with our contractors to account for changes and complete the contract with them. We are excited about where we are at. The grinding line 1 remains the critical path.

Orest Wowkodaw, Analyst

And just to be clear, can you give us a percentage of completion on that?

Red Conger, Project Executive

Yes, we are at 77% now.

Operator, Operator

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

Matthew Murphy, Analyst

Hi. It's probably too early, but I can't resist asking about capital on the QB expansion. Any kind of ballpark bracketing of possibility you could give us?

Don Lindsay, President and CEO

It's like half of QB2, but without a lot of the infrastructure involved. So less than that. But you've got to consider cost inflation happening over the years. A ballpark of $2 billion is reasonable, but that's simply a rough estimate at this time.

Matthew Murphy, Analyst

So if I said something like $2 billion, that's like not ridiculous?

Don Lindsay, President and CEO

Well, it's in that range, but think about the cost increases as time goes on.

Matthew Murphy, Analyst

Thank you.

Operator, Operator

The next question is from Carlos De Alba from Morgan Stanley. Please go ahead.

Carlos De Alba, Analyst

Thank you. Good morning, everyone. So coming back to QB2, given where we are and the fourth quarter run rate, is it fair to say that your first production will most likely come during the fourth quarter?

Don Lindsay, President and CEO

That's right. We're trying to stay away from predicting too specifically. We're looking forward to getting this done in the second half with our best efforts for first copper.

Carlos De Alba, Analyst

And just on tax pools, can you remind us where the tax pools are and how much further you have to go on those?

Jonathan Price, CFO

Those tax pools are held in Canada, and we expect to fully consume those pools early in this year, which means we start accruing Canadian income taxes.

Operator, Operator

The next question is from Lawson Winder from Bank of America Securities. Please go ahead.

Lawson Winder, Analyst

Thank you. I’d like to ask about the Chilean Constitutional Convention and how that might factor into your decision to proceed with QBME. Do you expect to have the ability to obtain a stability agreement, or might it be even potentially grandfathered in with QB2?

Don Lindsay, President and CEO

In terms of making a decision for QBME, we need clarity on Chile's political situation first. We believe that the proposal falls under the current taxability agreements, but we will see what the final rules are before we make a decision.

Amparo Cornejo, Chilean Operations Executive

There is no indication that the mining royalty deal under discussion will have any impact on our stability agreement. We are following the constitutional process closely.

Lawson Winder, Analyst

Thank you, that’s helpful. And a follow-up on HVC 2040. What's your latest view on the timeline to approval?

Shehzad Bharmal, Project Executive

HVC 2040, our plan is to submit our permitting documentation in the first quarter of next year and with a 12-month permitting timeline.

Operator, Operator

The last question will be from Lucas Pipes from B. Riley Securities. Please go ahead.

Lucas Pipes, Analyst

Thank you. I wanted to follow up on the portfolio management regarding Fort Hills. Where do you see that asset fitting in longer term?

Don Lindsay, President and CEO

Once we got to full production and it was operating well, the Board will consider the future strategy for Fort Hills. If it is not valued within Teck Resources, then we may conclude that it should be held differently, such as being sold to another partner, contributing to a mid-sized company, or perhaps spun out as a yieldco.

Lucas Pipes, Analyst

That's very helpful. And regarding Slide 28, you're looking at a reduction of CapEx of $2 billion in 2023. Any particular driver on that?

Jonathan Price, CFO

There will be some carryover of QB2 capital into 2023. Once QB2 is completed, we would see a further reduction into 2024.

Don Lindsay, President and CEO

Thank you very much, everybody, for attending today. In closing, I want to say how excited we are about 2022 in this transformational year. We are expecting significant cash generation moving forward. We will continue to strengthen how we operate across all fronts, including innovation to improve productivity and our leading ESG performance.

Operator, Operator

Please disconnect your lines at this time, and thank you for your participation.