Q3 2022 Teck Resources Ltd Earnings Call
Flagship QB two copper growth project in Chile, Crystal <unk>, our interim CFO will then provide additional color on financial and operational highlights. We will conclude today's session with a question and answer period to address any remaining questions with that I'll turn the call over to Jonathan.
Thank you Fraser and good morning, everyone. It's a pleasure to address you today as the CEO of Chegg.
We're excited by the opportunities ahead for <unk> to build on our existing strong foundation and position the company for long term success.
In recent meetings with investors I've been asked whether they should expect any changes to tax strategy as I assumed the role of CEO .
Having been part of the development an articulation of tech strategy for the past two years I can confidently say our current strategy is the right one to drive long term sustainable shareholder value.
Now turning to slide four the heart of our strategy is copper growth.
We remain focused on generating value from our industry, leading copper growth profile.
QB two we will double our consolidated copper production when it reaches full production next year.
And together with the remainder of our portfolio of attractive drugs options has the potential to have five times the amount of our current copper equivalent production.
Secondly, we are rebalancing our portfolio of high quality assets towards a low carbon metals in particular copper where demand is expected to double by 2050, driven in large part by electrification and the low carbon transition.
We intend to capitalize on this market opportunity while at the same time, reducing the proportion of carbon in our overall portfolio.
Third as we have demonstrated this year, we will balance our investments in growth against returning capital to our shareholders, while maintaining a strong balance sheet.
To this end on remains fully committed to our capital allocation framework.
By growing responsibly I believe we can strike the right balance between growth and cash returns to shareholders, while ensuring we are well positioned to weather periods of market uncertainty and volatility.
And finally, we will continue to build on our strong sustainability track record.
Staying ability is core to our purpose and values and we view it as a competitive advantage.
Sustainability will continue to be fully integrated into our activities and business processes at all levels of our organization.
Together with the entire tech team, we are focused on the execution of this strategy as we navigate a backdrop of global economic uncertainty.
The recently I've also been asked by investors about my priorities as CEO .
As outlined on slide five my top priority is to continue to advance our long term copper growth strategy.
Our immediate priority is completion of the ramp up of the <unk> project.
We build capacity in the organization to advance our suite of high quality copper projects.
In doing so we will rebalance our portfolio to low top metals and reduce the overall proportion of carbon in our portfolio.
Second we remain laser focused on operational excellence, including through the deployment of autonomy and digital technologies.
And finally, we're committed to maintaining our industry, leading sustainability performance as we work to deliver on our short and long term targets.
And collectively these priorities will position us to meet growing demand for copper driven by the global net zero transition, while returning significant capital to our shareholders.
To that end, we executed on a number of important transactions in the quarter.
On July 20th we announced an agreement with Parliament, and which Glencore retains the majority equity interest to advanced than North <unk> project, and our Massawa mineral deposit in Minnesota.
And on September 16th we announced an agreement with Agnico Eagle to advance our San Nicolas copper zinc project in Zacatecas, Mexico.
Agnico Eagle will subscribe for the first U S $580 million of shares in the tech subsidiary that understand Nicholas giving agnico Eagle a 50% effective interest in San Nicolas.
Together these transactions derisked, our positions provide a pathway to developments and we'll crystallize significant value from our copper growth pipeline.
Closing is subject to customary closing conditions, including receipt of regulatory approvals.
Further just yesterday, we announced an agreement to sell our 21, 3% interest in Fort Hills to Suncor for gross proceeds of approximately $1 billion in cash.
The sale of our energy assets advances our strategy of pursuing industry, leading copper growth and rebalancing our portfolio of high quality assets to low carbon metals.
It is the culmination of an extensive process, we undertook to evaluate all options to realize the highest value for our shareholders.
The transaction value is consistent with the current outlook for the Fort Hills business reflected in the most recent in depth review conducted by Suncor and the resulting long range plan for the project and is in line with comparable transactions.
As a result of the sales agreement, we recorded an after tax noncash impairment charge of approximately $950 million in the third quarter.
We will review the use of proceeds in accordance with our capital allocation framework in February of 2023.
The sale agreement will be effective November finished closing is subject to customary conditions, including the receipt of regulatory approvals.
Now turning to our third quarter results, starting with key highlights on slide six.
Overall, our third quarter financial results remained strong primarily due to the continued strength in commodity prices. Despite the overall economic slowdown.
Gross profit before depreciation and amortization was $2 4 billion.
A meaningful increase from $2 1 billion in.
In Q3 of 2021.
Adjusted EBITDA was $1 9 billion and.
And adjusted profit attributable to shareholders was $923 million.
$1 74 per share on a diluted basis.
Year to date, we have returned $1 4 billion to shareholders through buybacks.
And 468 million through dividends.
All the while paying down $1 2 billion of our debt outstanding.
During the quarter, we achieved a number of important milestones at QB, two including commissioning of our power transmission system significantly advancing commissioning of the desalination plant and beginning pre operational testing of the line one driving mills.
All of which are on the critical path for first copper.
Subsequent to the quarter, we announced plans to deploy to electric tugboats around Neptune chairman.
Collaborating with transportation providers to develop green transportation corridors as part of our climate action strategy and supports our goal of net zero emissions by 2050.
Christopher will provide a detailed run through of our business performance and guidance updates in a few minutes.
However, I want to highlight three key changes on slide eight.
First for Q2, we have revised our construction and capital cost guidance to U S. Seven four to $7 $75 billion.
Based on our current foreign exchange assumptions cost pressures related to weather and subsurface conditions and other factors.
This is an increase from our prior guidance of U S six $9 billion to $7 billion.
We continue to target first copper from line one late this year.
However, with productivity impacts persist this will be delayed into January 2023.
First copper production as part of the continuous commissioning plan for mechanical completion of line, one which will be followed by mechanical completion of line tunes and ramp up through 2023.
Cobre the blank of copper production is expected to ramp up over 2023, following commissioning of QB two.
Now expect QB copper production to range between 170, and 300000 tons per year in 2023 to 2025 compared with the previous range of 245 to 300000 tons per year with 2023 at the lower end of the guidance range.
Second for steelmaking coal, we have updated our three year production guidance.
Our steelmaking coal production capacity across our four operating mines in the Elk Valley is approximately 26 to 27 million tons and we had operated at those levels for most of the periods between 2014 and 2019. However.
However over the past three years external challenges largely out of our control and more recently reliability challenges at our <unk> plant have impacted our ability to operate at those levels.
These challenges include severe weather related events, including rain flooding extreme colds and wildfire events in 2021, as well as the Covid pandemic and the associated ongoing disruption to supply chains and labor availability.
As a result to better reflect the increasing frequency of these adverse events and associated risk of impacts to our operations. We have reduced our three year production guidance commencing in 2023 to 25 to 26 million tons from 26 to 27 million tonnes previously.
Third and finally, our outlook for 2023 Capex.
While we continue to expect our capital expenditures for 2023 to be lower than 2022.
The increase in <unk> capital guidance and continued inflationary pressures, we no longer anticipate a reduction of $2 billion as compared to 2022 projected spending levels.
We will issue our 2023 capital expenditure guidance in February as usual.
Overall, thanks to our resilience and financial strength, we remain well positioned to manage through any near term pressures, while staying focused on our copper growth strategy.
With that I will now pass it over to Red to provide some operational highlights from the third quarter.
Thank you Jonathan and supported her to address you today as president and COO.
I wanted to give you an update today on.
Unplanned outage.
At the end.
Scenario pressures that we're seeing and what we're doing about them.
On the organizational capacity to deliver on our growth strategy and our progress in Q2, including a quarter or two of them.
Moving to slide 10.
We announced a structural.
Comparable on September 20 <unk>.
While this is often steelmaking coal processing at the site.
<unk> activities have continued.
Most importantly, there were no injuries as a result of this sense of that.
A multi disciplinary team has been assembled.
The organization then we have some of our best people working 24 Stefan on this furlough.
We're well on our way to getting this plant back up and running.
Demolition of the feed tube and supports is complete and access has been reinstated to all areas of the plant.
We have substantially completed the sourcing of materials and labor to conduct a replacement of.
The team was able to source suitable prefabricated joubert tubes sections and all tube sections have now been transported to.
Fabrication shop in Montana and are undergoing the necessary modifications.
Delivery of the or compare tube and support components is on schedule to take place over the next two weeks and we are on schedule and plan to complete commissioning and restart production at the plant in late November .
We continue to estimate the impact of steelmaking coal production to be a reduction of approximately one 5 million tons in 2022.
Moving to slide 11, we are.
Like others in the industry, we continue to operate in a period of uncertainty.
Across the business inflationary pressures have increased our operating cost by 14% compared to the same period last year with similar persistent pressures on our capital costs.
While the rate of inflation appears to be slowing we continue to experience significant inflation in the price of many of our key suppliers when compared to the same period last year.
Increases in the cost of supplies, including mining explosives grinding media are being driven largely by price increases for underlying commodities such as steel.
Oil and natural gas as well as rate increases for labor and transportation.
Our underlying mining drivers remained relatively stable.
Our generic pressures on diesel prices and other key input costs have increased our unit cost.
We adapt to higher input prices were keenly focused on managing our controllable cost.
We have realized tangible results today from our continuous improvement and race programs, reducing unit costs and increasing production.
Creasing productivity is in the minds of our processing plants across our business.
And our minds, we are successfully driving efficiencies through load and haul improvement initiatives predictive maintenance initiatives are utilizing equipment sensors to reduce equipment downtime at operational interruptions.
And on the cost savings initiatives related to our drill and blast operations.
From a logistical perspective digital planning applications or conduct operations with logistics schemes.
Reduce costs and maximize throughput between tech steelmaking coal operations and our Neptune terminal.
Addition, automated train loading imported river has increased floating per car by 2% and loading speed by 40%.
Going forward, we will continue to drive further improvements, which will enable us to achieve our current and future production targets to reduce the impact of inflationary cost pressures.
Keep our cost structure, we stable for the long term.
Turning to slide 12.
As we actively progressed work to realize value from our suite of copper growth product areas.
Building organizational capacity ahead of the next wave of project delivery.
To that end, we reported Tyler mitchelson as our senior Vice President of copper growth effective July 4th.
Reports directly to me with the dotted lines and their Cooper, our senior Vice President of corporate development and exploration.
In this new role Tyler has broad responsibility over the execution of pets worldwide copper develop them.
Responsible for prioritizing project execution construction and commissioning of our copper growth assets as well as the expansion or mine life extension of existing operations.
His new role in this and the experience that Tyler brings to it will be a key enabler to advance our copper growth strategy.
Turning to an update on QB two starting on slide 13, we're very proud of the steady progress we have made through the quarter and remain focused on system completion.
And over.
In terms of key milestones achieved were completed commissioning of the 220 kv transmission system and the final testing of the main substation switch gear at the concentrator.
In terms of water, we are well advanced and commissioning of the pre treatment area and <unk> discussing of the reverse osmosis units in their desalinization.
And we have completed the hydro testing of the water supply pipeline and the water pump station, which is no small accomplishment of 156 kilometers of pipeline have now been all fiber test.
That's the main area also them systems for ball mill number one in stack vulnerable Warner and pre operational testing and we have completed the ore stockpiled dome.
Installation of all the implant conveyor belts in the 12.
Alarming or long train lengths longer.
Given the delay in completion of the jetty and ship owners loaders seeing here on the right.
Concentrates shipping arrangements are well advance as a temporary measure until the ship loader is commission.
As Jonathan noted earlier, we have updated our capital cost guidance for the project and we continue to target first Hopper from line one in the latter part of this year followed by completion of line two and ramp up through 2023.
On slide 14, you'll see the <unk>.
Treatment tanks, desalinization plant, where we continue the commissioning process.
Slide 15 shows the overland conveyor that will transport ore from the primary crusher stockpile concentrate or <unk>.
Installation splicing of the bonus was completed during this last quarter.
Slide 16 shows the <unk>.
Concentrator area.
The ore stacker.
In the foreground with the stockpile to home than with the building.
And the grinding lines there on the left.
Slide 17.
The grinding mills themselves as we mentioned previously all stuffs systems for ball mill number one and Sag mill number one.
Pre operational testing.
Slide 18 shows the flotation area of the concentrator, where we're focused on completing the piping and electrical systems.
On slide 19, you can see the concentrates the areas, which are undergoing hydro testing as part of the pre operational works.
Slide eight shows the.
Trailing longer that goes out to the tailing storage storage facility.
12 kilometers of that.
Okay.
Longer have now been completed and are ready to be used.
Yeah.
On slide 19, you can see the concentrate.
Yes.
So in summary.
We continue to be very pleased with the progress, we're making and are excited about building on our construction and commissioning success to date with <unk>.
On delivering to the projects' key milestones.
I encourage you to visit the investors section of our website to watch the latest progress video and view. The most recent photo gallery I will now pass you over to Crystal for additional color on financial and operating highlights.
Thank you Rod.
We've outlined the key drivers for our profitability in the third quarter on slide 22, including our adjusted EBITDA of $1 9 billion in the quarter.
The inflationary cost pressures discussed by Red increased our Q3 operating costs by 14% compared to last year approximately half of the increase relates to diesel costs at our operations and in our transportation costs.
The primary cost increases are not related to key mining driver such as mine productivity and strip ratio, which remained relatively stable.
In fact looking at the items that were under our control during the quarter, including production and operating costs, we generated a net positive impact on adjusted EBITDA compared to Q3 of 2021.
We expect inflationary pressures on diesel prices and other key input costs as well as profit based compensation and royalties to continue to put upward pressure on our unit cost guidance through the balance of the year and into next year and on our capital costs into next year.
Turning now to our operations and starting with our copper business unit on slide 23.
Gross profit in the third quarter decreased by 50% compared to last year, primarily driven by an 18% decline in realized copper prices and a 9000 ton reduction in sales volumes, resulting from the timing of shipments.
Realized copper prices decreased to EUR $3 49 per pound from U S $4.28 per pound last year, but remain above historic averages.
Production decreased by 6% to 66000 tons compared to last year, primarily due to a significant precipitation events in July that reduced production at Carmen de <unk>. This was partially offset by higher production from Angelina due to higher mill throughput.
Total cash unit costs increased by 28 cents to U S. $1 96 per pound. This was primarily driven by higher consumables costs, particularly diesel maintenance and repair costs and contractor expenses.
Looking forward, our 2022 copper production guidance remains unchanged.
We've reduced our three year Highland Valley copper production guidance range to 110 to 170000 tons per year as a result of delayed pre stripping in the <unk> pit, which reflects maintenance related issues and high rates of absenteeism, particularly in the skilled trades.
Our 2022 net cash unit cost guidance for copper remains unchanged.
Moving now to our zinc business unit on slide 24.
Gross profit increased by 9% from last year to $311 million.
The increase was primarily driven by higher zinc prices and a 45% increase in thanking concentrate sales volumes, which was partially offset by higher unit operating costs at our Red dog operations.
In the quarter zinc concentrate production increased by 34% at Red dog due to increased mill throughput and higher zinc grade.
The 13% decrease in Q3 refined zinc production at our trail operations reflects major work underway to replace the kids that furnace Hearts and zinc rest are done we expect the maintenance work, which started in September to be completed in November .
Finally, total cash unit cost in our zinc business unit increased by eight to 64 cents per pound.
This increase is reflective of higher steel or sorry, higher diesel and consumable costs transportation costs as well as smelter processing charges.
As we look forward, we have reduced our refined zinc production guidance to 257% to 276000 tons due to the extended planned maintenance and lower than planned production through the year.
We expect Red dog zinc in concentrate sales of 130 to 150000 tonnes in Q4.
Our 2022 net cash unit cost guidance for zinc remains unchanged.
Turning now to slide 25, our steelmaking coal business unit delivered another strong quarter with gross profit increasing by 37% to $1 2 billion compared with $901 million last year the.
The increase was primarily driven by higher steelmaking coal prices and was partially offset by the effect of lower production and sales volumes and increased unit operating cost due to inflationary pressures.
Notwithstanding a decline of 33% from the second quarter of this year realized steelmaking coal prices increased by 28% to USD $304 per ton compared to last year.
There'll be Australia price assessments for steelmaking coal averaged USD $287 per ton in the third quarter. After a record high of USD $527 per ton in Q2 of this year.
Sales to our customers in China are based on the CFR, China price, which averaged 310 per ton.
Third quarter steelmaking coal production decreased by 5% to $5 7 million tons compared to last year. The decrease was primarily driven by the <unk> plant outage outlined by Rob earlier.
Sales volumes decreased by 5% to $5 6 million tons, which was within our disclosed guidance range. The decrease was driven by the impact of the LC plant outage and the recently resolved labor disruption at Westwood terminal or.
Our significant investment in and that's not too important materially reduce the impact that the western terminal shutdown would otherwise have had on our Q3 steelmaking coal sales volumes Neptune operated at design capacity in the month of September .
Compared to last year adjusted site cost cost of sales increased by 46% to $92 per ton from $63 per ton due to lower production and inflationary cost pressures across all major operating cost input category.
30% increase in the WTO oil price accounted for 24% of our cost increased year over year.
And finally transportation costs increased to $48 per ton from $46 per ton last year due to higher rail fuel surcharges, and partially offset by lower demurrage costs.
As we look forward the althea out is as it is expected to impact production and sales in the fourth quarter.
Our 2022 steelmaking coal production guidance has been decreased to 22% to $22 5 million tonnes from 23, 5% to 24 million tonnes and we expect Q4 sales of five to $5 4 million tonnes.
The <unk> plant outage is also expected to impact our site in transportation costs.
We expect upward pressure on our full year guidance for adjusted cash cost of sales of 87 to $92 per ton and we increased our transportation cost guidance to <unk> 46 to $49 per ton due to the expected impact on volumes and demurrage costs.
To help you plant is expected to restart production in late November and opportunistic plant maintenance is being completed during the outage.
Turning now to slide 26, our energy business unit delivered gross profit of $84 million in the quarter.
From a loss of $28 million a year ago the.
The increase was driven by significantly higher WCS prices increased sales volumes and lower unit operating costs as a result of two train production rates.
As Jonathan noted earlier, we announced the sale of our interest in Fort Hills for gross proceeds of approximately $1 billion in cash and recorded an after tax noncash impairment charge of approximately $950 million in Q3.
The sale agreement is expected to be effective November 1st and is subject to customary closing conditions and regulatory approvals.
Our interest in Fort Hills will be reported as a discontinued operation beginning in the fourth quarter of 2022.
Slide 27 outlines our updated guidance for capital investment as.
As a result of the revised <unk> capital cost guidance, we increased our 2022 capital guidance by $100 million to $200 million.
And as Jonathan noted earlier, while we continue to expect our capital expenditures for 2023 to be lower than 2022, we no longer expect a reduction of $2 billion.
Given the increase in <unk> capital and continued inflationary pressures across our business.
Looking now at Slide 28, we continue to maintain our strong financial position. We currently have $8 3 billion of liquidity, including $2 9 billion of cash and an Undrawn 4 billion sustainability linked revolving credit facility.
We have a net debt to adjusted EBITDA ratio of <unk> five times.
Investment grade credit ratings from all four credit rating agencies and no major debt maturities prior to 2030.
We are very confident in our ability to complete QB two while successfully weathering this period of macroeconomic uncertainty given our balance sheet strength.
And adhering to our disciplined capital allocation framework Tac continues to uphold our track record of significant cash returns to shareholders as demonstrated by strong returns in the third quarter with that I'll turn it back to Jonathan for closing comments.
Thank you Crystal.
Our continued investment in resource developments on acquisition has resulted in an outstanding top of growth pipeline, which is something that many of our peers simply do not have.
Turning to slide 30, we have updated our copper growth pipeline to reflect recently announced transactions, which is subject to customary closing conditions, including receipt of regulatory approvals.
Cumulatively these projects have the potential to add new copper equivalent production of more than one 5 million tons per year.
<unk> is the first step in our transformational copper growths.
The next phase of development of QB will be the broader blank and mill expansion.
<unk> feasibility study, including all environmental baseline activity is expected to be completed in 2023.
<unk> is expected to be a significant contributor to our near term copper growth portfolio with first production targeted for 2026.
We're also continuing to progress our other copper growth projects.
The <unk> project updated feasibility and detailed engineering is underway.
San Nicolas we are targeting completion of the feasibility study work in Q1 2024 and first production in late 2026.
And this is that for now.
Feasibility study was completed in mid 2019, and we are in the final stage of the permitting process.
We will continue advancing these off for now on a path to realizing value in 2023.
In closing Teck is well positioned to drive long term sustainable shareholder value.
There are meaningful opportunities ahead, as global growth and the transition to a lower carbon economy, drawing new copper metal demand and we have a portfolio of high quality copper growth options that is the envy of our peers.
As we move forward, we will continue to rebalance our portfolio to cover while reducing the proportion of carbon in our overall business.
We will continue to follow our rigorous capital allocation framework.
In growth and cash returns to shareholders.
At the same time, we will maintain our leadership in responsible resource development drive best practices and sustainability and share in the benefits of mining with all stakeholders.
This is consistent with tax purpose at the very core of our strategy envisions setting us up for an incredibly exciting future.
Thank you I will now turn the call back over to Frazer.
Thanks, Jonathan just before we go to Q&A I just wanted to note for everyone.
If we don't happen to good time on the call today, we have a fair amount of time left who don't happen to get to your questions.
We are available myself my team afterwards too for any follow ups that are required with that then Ariel just hand, it over to you to conduct question and answers.
Certainly to join the question queue. Please press Star then one on your Touchtone telephone you'll hear a tone acknowledging your request.
You are using a speaker phone. Please ensure you lift the handset before pressing any teeth. If you wish to remove yourself from the question queue. You May Press Star then two.
The first question comes from Greg Barnes of TD Securities. Please go ahead.
Thank you Jonathan I, just want to get a better handle on capex going forward, obviously with the higher Capex QB two coming into 2023.
Sustaining capital given the inflationary pressures that you've experienced.
Can you also.
Should we be looking at a number of somewhere between or as high as $2 billion on sustaining capital in Canadian volatile ones.
Thanks, Greg for the question I'll hand over to Crystal in a moment just to provide some more detail.
Generally speaking we discussed previously the step down of $2 billion from sugar.
Just above five to just above three.
Clearly from the updated guidance, we've given you for QB two there's more capital to be spent in 2023 now on that project specifically.
Your question on inflation broadly the same factors that have been driving inflation in our unit costs are driving inflation within that.
Sustaining capital costs. These are the sort of factors would be fuel for example.
Labor related whether that goes to sort of profit linked costs, but let me just hand to crystal to see if she has anything to add on our expectations for Capex, which as we said we will guide to in the normal course in early 2023.
Thank you Craig for your question.
As Jonathan mentioned, we are working towards our guidance in February .
System with our normal practices, and we are still making our way through through our budgeting process. So I can't answer your specific question on where sustaining capital will be in 2023, but I can say across our capital Ah portfolio for expenditures, we are still expecting it to be lower than where we came in for 2022, but we'll have to wait and.
We finalized our guidance in February .
Okay, that's all I give it a try.
Just as a follow on.
Again, Jonathan on the coal business the reduction the three year guidance to a 25 to 26 million tonnes. So have your permanent he lost the ability to get to 2016 to 27 million tonnes, given all of the issues that you've outlined in the M&A or do you think you can get back to that level at some point.
So the suddenly the plants and the mines are capable of achieving 26 to 27.
As mentioned over recent years, we've had a series of events many of them external factors, which have caused us to produce below that level.
Therefore from a planning perspective and to assist the marketing understanding a reasonable outlook for.
Production expectations, we've started to factor vahid. So how we think about this business now if you had a year absent any sorts of external events than the 26 to 27 million tonnes per annum remains achievable.
But what I'll do is just hand over to Robin Xiaomi to the president of our cone business. It will just give you a little bit more color on some of the factors that we've included in our thinking here and why we have decided to guide future production the way we have.
Thanks, Jonathan just Greg I.
I kind of want to walk you back through the last three years, because I think it kind of gives you a sense of where we're at in and maybe why that opportunity is not lost but if you go back to 2020, obviously COVID-19 was the headliner through that year.
We went through all the different issues with us at the same time, we had a couple of environmental events.
Really in 2020 was the start of what became.
Higher absenteeism in the operations due to Covid and due to some of the steps we've taken in.
In 2021, we had we had a lot of mitigation steps in place for COVID-19, we actually saw a strong rebound in our production and logistics performance compared to 2000.
Despite having <unk>.
Continued high absenteeism, which we also still have today and so we were able to drive inventories down we got our store plant capacity prioritized and we actually took advantage of a good strong market and then we got taken out by the wildfire events in the summer, which took out logistics and production curtailments.
And then were just recovering from the wildfires through the summer and we got hit with the atmosphere River rain and flooding events in November and that again causes logistics and inventory related production impacts.
So those two years were fraught with things well out of our control come.
Coming into 'twenty, two we ended up starting the year with maximum inventories again due to the rain event and then early in the year, we had extreme freezing that caused additional production challenges. So we didn't get a strong start to the year.
Now Fortunately for the most part the remaining years spend.
Less eventful from an environmental perspective, but we do continue to have challenges with labor, we're still trying to rebuild from from two years of pandemic and we're still trying to establish levels.
That help offset that so that takes time it takes time to train people to attract people to the operations and I will say, we're seeing considerable improvement in that over the last couple of months I'm getting more and more confident that we have.
They were able to rebuild the capacity that we had before so and this latest issue with the <unk> plant. It's a one off incident, we will get through it.
The team is working really hard to get that plant back we've got most of the difficult pieces of the.
Reconstruction I guess behind us the foundations are going in now and we've got some of the new tube, arriving so all that remains on track we should be back in good shape by the end of the month so.
You take all these things into account and in which a pandemic related.
We felt it was important to recommend a range that was more reflective of some of the uncertainty that happens around environmental conditions and things like that.
If we have a year, where we're the world doesn't conspire against US I think we would be.
Be quite confident in hitting that.
Our historical levels of production. So the plants are capable it's just a matter of scale.
I'm, having a bit of luck on our side I guess.
Okay, great. Thanks Robyn.
Uh huh.
Our next question comes from Rs <unk> of Scotiabank. Please go ahead.
Hi, Thank you Jonathan your number two priority seems to be rebalancing the portfolio to low carbon battles I'm wondering if that if your strategy there is solely around growing the copper business.
And E diluting the coal business or do you see the potential for accelerating that transformation, perhaps by either divesting some of the coal business.
Yes, hi, and thanks for the question.
There's a number of number of approaches that we've been taking to that be the first as you have seen overnight as the announced divestments of Fort Hills.
Nearly oil sands carbon and opportunity that to reduce weight in the portfolio through that divestment something we're very pleased with.
We have agreed and have gotten the whites secondly, as you highlight really the key approach for US is the growth horizons copper with the the doubling its copper production as we bring <unk> online next year, and then would be the projects I mentioned.
Being.
New range being San Nicolas being the <unk> mill expansion, all bring more copper units into the portfolio, which further through the swing is towards green metals and away from carbon.
As we've said before we always remain very active and thoughtful and reviewing the shape of the portfolio and the composition of our portfolio, but but right now those factors I've I've mentioned, all the key execution priorities.
And that's what the team is focused on and that's what we're gearing up to deliver.
Okay. Thank you and as a follow up.
A question for Red probably here, Greg we've seen significant escalation on the Capex for <unk> in the last two quarters in total about U S $1 2 billion.
I've been surprised just at the magnitude of that increase can you give us more color on what youre seeing there in terms of what's driving that.
I just can't be simply inflation.
No no we're not we're not attributing it to entirely to inflection or a straight greater too on the line with you again.
There is a variety of things.
We've been dealing with there.
Keeping you up to date.
All of those quarter to quarter. Firstly I just wanted to emphasize we've got a very robust system with outdoor where we track all of the trends con.
Contractors and everybody involved.
Turn in what's happening to them.
Our costs are going what what are variances from the initial plans that we made and we bring we bring it out.
Every quarter true it up.
We do everything we can to address it.
Is that.
That occur and don't just incur costs for what can we do to change the outcome here Here's an example of of our costs.
Costs that we incurred yet overall, it's going to be very financially advantageous for us.
The 12 kilometers of trailing longer that I mentioned in the.
A presentation earlier this year late last year, we were very concerned.
The method of construction.
Contractor was using was was not going to allow that that piece of the construction to be completed in time for us to get started here at the end of the year, which.
If that happens.
Would be a huge cost impact.
We reviewed all of that with came up with a different method of construction.
We read too.
The financial terms of their contract in order to acknowledge the deferred construction approach.
Now we have.
Tailing longer Thats complete ready to go.
So good.
This outcome there.
We're making adjustments like that here in the past quarter significantly. Another another example would be.
On the.
Jetty, we've now with the electrical room.
Or that on land and so on the pier.
<unk> to accelerate commissioning of the.
The desalination plant et cetera, and then throughout all of this you you've got all of the inefficiencies associated with Covid I, just want to remind everybody, where we're flying 13000 people in and out of this remote location every two weeks we're running.
Charter planes, a day to do that.
At 10% absentee rates.
You don't have key employees showing up leg crane operators supervisors, whatever you're up to reconstitute. Your your crews on to apply and do what you can with with the skills and the crowd that you have so.
We've been adjusting and dealing with all of those things and let me just end with.
I was there last week.
Bruce know their on site this week.
It's really exciting to see this thing come together our work.
While our critical path.
Pictures today.
It's coming together, we've done it under extremely.
Adverse circumstances, the last couple of years, everybody safe and healthy doing it.
We now for the first time in October .
Of all of our employees onsite were master optional they don't have to wear.
<unk> associated with.
Virus protocols et cetera, So first time ive seen people spaces up there in two years and this is all voluntary.
Very encouraging.
We're going to finish this thing as strong and it'll it'll be up and running here by the end of the year.
Just finally, what's your confidence level in this updated number seven four to seven point something five do you think this is Ed.
Well the qualifiers, knowing knowing what we know today.
All trends there everything that we know of today are included in that.
We've assumed that we continue to have this high absentee rate that we're incurring right now.
The inefficiencies associated with that or are all calculated and so.
Those those everything we know.
As in there in trend inventories occurring.
What's happening on the ground today so.
We're confident that it's a good a good number and a good estimate.
Thanks Rod.
Our next question comes from Lawson Winder of Bank of America Securities. Please go ahead.
Hello, Good morning, and thank you for the update.
If I may I would like to ask about.
The alternate concentrate shipping options for <unk>, if you could maybe.
Discuss to the extent possible what those arrangements are.
What they look like in terms of cost.
What they look like in terms of capacity. So for example, if.
The processing facility were fully ramped up.
With that.
Alternate concentrate shipping arrangement be sufficient.
Thank you very much.
So listen thanks for the question.
So off to a real Foley, our SVP of marketing and logistics.
Alright, Thanks Lawson for for the question.
Yes.
Working hard on those alternative shipping arrangements and.
We actually have real painters and plays there theyre actually containers with a live for shipping via trucks to alternative ports.
There are arrangements in place.
With alternative boards.
Working also with trucking companies in order to enable that.
So we are confident that we have the capacity to ship.
The concentrate will be produced by <unk> during the year.
We're also looking at domestic sales within Chile to the copper smelters.
<unk> in Chile, and transportation arrangements are also being worked on together constantly to those concentrates.
Yes, Thanks trial, the only the other thing I'll just add to that Lewiston as some of these arrangements are very common in Chile and that they used to to handle supply chain disruptions and interruptions of course due to weather events. So establishing some of this now will likely be.
Advantageous for us anyway in the medium term.
It makes a lot of sense. Thanks, Jonathan Thanks for Al and then just any indication as to the cost of this alternative versus the.
Yes, Lawson I think it's early days for that we'll provide guidance.
As we go into.
Into next year.
This is something that we do give guidance on.
Okay Fair and then I don't know.
Wanted to follow up on the oil sands.
Congratulations on a complete completing that now.
The so you are now quickly out of the business of operating oil sands or sharing operating oil sands assets that you still have a substantial oil sands project and the portfolio has there been any thought to the potential sale of frontier has there been any.
Interest in <unk>.
From potential buyers, who may be purchasing that.
Yeah.
I'll just make a couple of comments first on the divestments of Fort Hills.
We have run a competitive process on that.
Non operated interest in that for some time, we did have multiple parties actively bidding on the assets. The valuation we've achieved here the the $1 billion of cash.
Cash from Suncor.
Reflects the assumptions that underpin the long range plan.
We provided by the operator, and if you look at Suncor.
Yes release, they will talk to some of the medium term challenges associated with that.
Now understood.
We'll give more detailed guidance at the end of November So I think that will be helpful. In getting a better understanding of the potential value of this asset now on a forward looking basis, perhaps.
Relative to prior expectations. The final thing I would say about <unk> is the multiple that we've transacted off.
Is actually competitive relative to recent precedent transactions for similar assets for oil sands asset. So we are very satisfied with the valuation achieved here and we think it's a good deal for our shareholders. We think it improves our invest ability because we know oil sands has been an overhang for us.
It is consistent with our strategy of moving away from carbon towards Green metals in the portfolio now to your specific question on frontier and lease 421.
Do believe that they are valuable options they are not auctions for us.
Two to execute and develop as you highlight we won't be operators.
The energy sector nor.
Nor in oil sands, specifically and therefore, we will evaluate options to transact on those over time.
Fort Hills Love being in an asset in operation was the priority for us and hence we chose to deal with that upfront.
Fantastic. Thank you very much.
Our next question comes from Jackie <unk> of BMO capital markets. Please go ahead.
Thank you very much.
For taking my questions.
My first question I think we'll be on to follow up on the question about.
Fort Hills and.
Jonathan I know you sort of alluded to this at the beginning of the call, but I would love to hear just some thoughts about.
What you want.
Are you planning to do with the $1 billion that you'll be bringing in from the at the tail end.
And even just it's really broadly is that thought of as a potential.
It's fairly large onetime capital returned to shareholders or do you require that for <unk> or other parts of the business or is there going to be through some combination of both things. Thank you.
Yes, great question Jackie on the the proceeds when we receive them.
Upon the completion of the transaction.
Will be put towards the the capital allocation framework.
That's how we've how we've talked about this previously as you know through the capital allocation framework. The first 50% of available cash flow is automatically returned to shareholders and then we retain.
Course based on consultation with our board the discretion to return additional amounts if.
We believe that's warranted.
Based on the other uses of cash at that point in time so.
Message will be returned to shareholders as a result of this due to the operation of the capital allocation framework minimum, 30%, but potential for upside on that.
And that would be just to be clear that would be a special dividend or could it be a buyback or do you have to.
<unk> talked about sort of the format on that.
It could be the Jackie we make that determination.
Based on the share price for example, based on discussions with them.
With our shareholders in any particular view on preferences at a point in time, but it could go either way.
Understood. Thank you.
And maybe another question.
And then just the last couple of quarters.
Sure.
Our MD&A has talked about income taxes.
When it is going to be starting to be charged from Canadian assets starting in 2022.
With maybe cash tax payments in 2023, and 2024 can you give us a little bit of help.
Modeling how should we expect to see your income statement change maybe in the beginning of 2023 as a result of that.
Yes. Thanks, good question I'll hand that over to Christopher.
Thanks Jackie.
Good question you are correct. We will we are cash taxable on our 2022 earnings.
We have lots of tax installment rules and there are some income inclusion timing rules relating to our partnerships, that's where most of our Canadian coal and copper operations are held that allows for us to differ.
The cash tax payments associated with the 2022 earnings into.
Into 2023.
And the majority of which actually would be deferred into 2024, so that the termination of the amount of those cash taxes will depend on on our full year earnings for 'twenty two.
We would we can take offline the proportion to to allocate but but I think you can assume the majority of it goes into 2024 in terms of the timing.
That's great color.
Follow up with you online offline. Thank you and if I could just maybe sneak one last question.
And hopefully just a quick one.
I think it will be.
The revised budget that you've given us for QB two can you.
Can you give us any indication on how much contingency remaining in the budget for <unk> now that you've changed the <unk>.
Bookings.
Crystal or Red do you want to pick that one up.
Oh.
Yeah.
Yeah, Jack the way I would characterize it as well.
All known variances.
Thank you.
Thanks going forward or are all included in that estimate we've also made a.
An estimate on foreign exchange rate et cetera. So.
I would tell you that all considering all things that we know all contingencies are covered at this point.
Okay. Okay.
But when I say, thank you very much that's all my questions. Thank you everybody.
Okay.
Our next question comes from Brian Macarthur of Raymond James. Please go ahead.
Good morning, just two follow ups, the first red or Jonathan.
The QB numbers when you say everything is in does that include working capital build as well or is there another cash call for that as we go through two.
2023, and given all the timing changes on this now.
Okay.
Red if you buildup.
Yes, Brian .
When we talk about construction capital, there's no working capital Bill.
<unk> built in about where we.
Budgeting on the on the operation side or.
The startup of the mining operations and all that goes on there.
Four.
Any working capital steps are going to be.
Got counted for.
Okay.
Yeah.
Great. Thanks, that's all I thought you were doing it and second question you talk about on Fort Hill.
Gross proceeds and back to the tax discussion that was out there is there are significant tax.
On that sale, what I'm trying to get at is obviously the potential proceeds available for capital return.
Crystal.
Alright, Thanks, Brian Great question.
In short the answer to that is there there is no material tax impact there is a small capital loss that we expect on the transaction, but it isn't material in nature in relation to the $1 billion.
Thank you.
Just going to say no no capital gain Bryan is crystal Arlington.
Perfect. Thank you and then my third question just relate.
And Jonathan I think the long term copper slides great to show all your options.
When you sort of have Csar for now in there now is the.
Or are you still now maybe changing your view that you are maybe going to develop this as opposed to have a partner, which was may be the way. It was discussed before financing has anything changed there just given the.
Divestiture of Fort Hills, and anything is there any change in the strategy with that for now going forward.
We're still looking at the optimization of that Brian we have a number of options. There of course, you know in the past we were looking we were looking to divest that.
We continue to ensure that that is fully permitted with the feasibility study behind us so it will be completely de risked.
We could look at the introduction of another partner given we have Mitsubishi and they have a 20% at the moment and we have the balance of <unk>.
And we could just move ahead with the development on 100% basis. It's all options are still on the table for us on that one we have a lot else in the pipeline in that same timeframe to be grappling with so I would say we are certainly loan options in that period and part of the determination we need to make it.
What is the right sequence of development here for these assets.
Based on that risk and return profile so.
All part of the optimization also in the mix on all options on the table.
Great. Thank you very much for answering my questions.
First of all.
This concludes the question and answer session I will now hand back the call over to Mr price for closing remarks.
I think it will probably hand, it to Mr. Phillips for closing remarks.
Yeah.
Yeah.
Absolutely. So thanks, everybody for joining us.
If you didn't get your questions addressed and I know there are some that did not please let us know and we'll follow up and.
So it's something up so we can chat or due to over email.
Thanks, again for joining us and look forward to speaking to everybody again in a quarter from now.
Yeah.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Sure.
Hum.
Oh My God.
Maryann Mannen answered Paul Berger.
Jim.
Yes.
Sure.
<unk>.
Yes.