Q3 2022 Teck Resources Ltd Earnings Call
Ladies and gentlemen, thank you for standing by.
To Teck's third quarter 2022 earnings release conference call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session.
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This conference call is being recorded today Thursday October 27th 2022.
I would now like to turn the conference over to Fraser Phillips Senior Vice President Investor Relations and strategic analysis. Please go ahead.
Thanks, Good morning, everyone and thank you for joining us protect third quarter 'twenty to 'twenty two results conference call.
Please note today's call contains forward looking statements various risks and uncertainties may cause actual results to vary Teck does not assume the obligation to update any forward looking statements. Please refer to slide two 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 M. D N a.
The latest press release on our website.
Jonathan Pryce, our CEO will begin today's call with comments on our strategic focus and priorities Red Conger, President and Chief operating officer will follow with operational highlights from the quarter, including a progress update on our flagship QB two copper growth project in Chile Crystal pristine our interim CFO will then provide additional.
All are 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 a check.
I'm excited by the opportunity to hedge the attack 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 assume the role of CEO .
I think the path of the development and 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.
Turning to slide four the heart of our strategy is copper Greg Weaver.
We remain focused on generating value from our industry, leading copper growth profile.
Would you be too 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 House.
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 call them in our overall portfolio.
As we have demonstrated this year, we will balance our investment and growth against returning capital to our shareholders, while maintaining a strong balance sheet.
So they said well remain fully committed to our capital allocation framework.
By growing responsibly.
If we can strike the right balance between drugs 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.
Sustainability is core to our purpose and values and we view it as a competitive advantage sustainability will continue to be fully integrated in July activity 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.
Now recently like all so I've 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 QB two project as we build capacity in the organization to advance our suite of high quality copper projects.
In doing so we will rebalance our portfolio with a 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.
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, it's driven by the global net zero transitions, while returning significant capital to our shareholders.
That's it that aim we executed on a number of important transactions in the quarter.
On July 20th we announced an agreement with pulling that in which Glencore retains the majority equity interest to advanced Vandal Snipe project and I want to solve a mineral deposit in Minnesota.
I don't September 16th we announced an agreement with Agnico Eagle, So advanced 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, the Thames, San Nicolas, giving agnico Eagle, a 50% effective interest in San Nicolas.
Together these transactions Derisked all 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.
Sure.
Just yesterday, we announced an agreement to sell our 21, 3% interest in Fort Hills to southern cool too.
Gross proceeds of approximately $1 billion in cash.
The sale of our energy assets advances our strategy of pursuing industry, leading copper drive and rebalancing our portfolio of high quality athletes 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 Sun Cool and the resulting long range planning 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 strengthening 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 Q3 of 2021.
Adjusted EBITDA was $1 9 billion and adjusted profit attributable to shareholders was $923 million.
Our $1.74 per share on a diluted basis.
Year to date, we have returned $1 4 billion to shareholders through buybacks and 468 billion through dividends.
All the while paying down $1 2 billion of all debt outstanding.
During the quarter, we achieved a number of important milestones at QB two.
<unk> commissioning of all power transmission system significantly advanced and commissioning of the desalination plant and beginning pre operational testing of the line one grinding mills all of which are on the critical path for fifth Copa.
Subsequent to the quarter, we announced plans to deploy to electric tugboats around <unk> 10.
Collaborating with transportation providers to develop Green transportation corridor.
Talking about climate action strategy and supports our goal of net zero emissions by 2050.
Crystal 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 QB, two we have revised all 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 $6.9 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 top of production as part of the continuous commissioning plan for mechanical completion of line, one which will be followed by mechanical completion of line two and ramp up through 2023.
Cobra blanket copper production is expected to ramp up over the 2023 following commissioning of T V too.
We now expect Q be copper production to range between 170, and 300000 tons per year in 2023 to 20 to 25 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 period between 2014 and 2019.
However over the past three years external challenges largely out of our control and more recently reliability challenges at our <unk> plant.
In fact at our ability to operate at that level.
Yes.
These challenges include severe weather related events, including rain flooding extreme colds and wildfire events in 2020, one 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 staff for your production guidance commencing in 2023 to 25 to 26 million tons from 26 to 27 million tonnes previously.
Fifth 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 QB, two 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 it's a pleasure to address you.
And C O O.
I wanted to give you an update today on.
And finally, the outage at El Cubo.
She married pressures that we are seeking and what we're doing about them.
The organizational capacity to deliver on our copper growth strategy, our progress in Q2, including our board I'm sure.
Moving to slide 10.
We announced a structural euro planned comparable on September 20th.
This is all good steelmaking coal processing at the site mining activities have continued.
Importantly, there were no injuries as a result of the sense of that.
A multi disciplinary team that's been assembled from across the organization and we have some of our best people working 24 stuff and I missed that one.
We are well on our way to getting this back up and running.
The evolution of the feed tube and supports is complete and access has been reinstated at all areas of the play out.
We have substantially completed the sourcing of materials and labor to conduct the replacement.
The team was able to source suitable pre fabricated to bear two sections and all tube sections have now been transported.
Fabrication shop.
And are undergoing the necessary modifications.
Delivery of the work is there to support coupon notes is on schedule to take place over the next two weeks and we are on schedule to complete commissioning and restart production of the plan 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.
Well 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.
Generic pressures on diesel prices and other key input cost have increased our unit costs.
As we adapt to higher input prices were keenly focused on managing our controllable costs wherever.
We have realized tangible results today from our continuous improvement and race programs, reducing unit costs and increasingly productive.
Leasing productivity is in the minds of our processing plants across our business.
Our minds, we are successfully driving efficiencies through load and haul it if we'd been initiatives predictive maintenance initiatives quite utilizing equipment sensors to reduce equipment downtime and operational interruptions.
The cost savings initiatives related to our drill and blast operations.
From a logistical perspective digital banking applications at their conduct operations with logistics teams and reduce costs and maximize throughput between check steelmaking coal operations and our Neptune terminal.
In addition, the automated train loading it.
Or has increased floating per car by 2% and loading speeds by 40%.
Going forward, we will continue to drive further improvements, which will enable us to achieve our current and future production targets reduce the impact of inflation.
Our cost structures and publicly part cost structurally stable for the long term.
Yeah.
Turning to slide 12.
As we actively progressed work to realize value from our suite of copper growth projects. We're building organizational capacity ahead of the next wave of project delivery.
To that end, we appointed Tyler Michal Stein, our senior Vice President copper grades effective July 4th.
Our reports directly to me with it.
We are seeing.
Your vice President of corporate development and exploration.
In this new role Tyler has broad responsibility over the execution of its worldwide copper development.
Responsible for prioritizing project execution construction and commissioning of our copper both assets as well as the expansion or my wife extension of existing operations.
This new role and the experience that Tyler brings to it will be a key enabler to advance our copper growth strategy.
Yeah.
Turning to an update on QB two starting on slide 13, we're very proud of the steady progress we have made during the quarter and remained 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 pre op testing of the reverse osmosis units in the desalinization plant.
We have completed the hydro testing of the water supply pipeline and the water pump station, which is no small accomplishment 156 kilometers of.
Pipeline have now been all I ever tested.
That's the main area all subsystem for ball mill number one in fact, no number one are in pre operational testing and we have completed the ore stockpiled dome installation of all the implants conveyor belts.
[laughter] kilometer long train lengths longer.
Given the delay in completion of the jetty and ship owners loaders seen here on the right are going to concentrate shifting 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 proper from long run 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 pretreatment tanks at the desalinization plant or we continue the commissioning process.
Slide 13 shows the overland conveyor that will transport ore from the primary crusher stockpile auction theater installations splicing of adults was completed during this last quarter.
Slide 16 shows the concentrator area, where the ore stack or is it.
In the foreground with the stockpiles at their home then whats the AR build building again.
Grinding lines there on the left.
Slide 17.
So of the grinding mills themselves as we mentioned previously all subsequent systems for ball mill number one and second of all number one our three operational testing.
Slide 18 shows the floatation area of the concentrator, where we're focused on completing the piping and electrical systems.
On slide 19, you can see the concentrate which are undergoing hydro testing as part of the pre operational works.
Slide 20 shows the.
Trailing longer that goes out to the tailing storage storage facility 12 kilometers of that.
Got it.
Longer have now been completed and are ready to be used.
On.
Okay.
On slide 19, you can see the concentrate sarcastic.
Yeah.
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 a focus 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'll now pass you over to Crystal for additional color on financial and operating highlights.
Uh huh.
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 you asked $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 asking me not due to higher mill throughput.
Total cash unit costs increased by 28 cents to U S. Dollar 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 water next 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 thinking 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 grades.
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 cents to 64 cents per pound.
This increase is reflective of higher steel 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 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 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.
It was sounding a decline of 33% from the second quarter of this year realized steelmaking coal prices increased by 28% to U S $304 per ton compared to last year.
F O B, Australia price assessments for steelmaking coal average U S $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 our CFR, China price, which averaged 310 U S per ton.
Third quarter steelmaking coal production decreased by 5% to five 7 million tons compared to last year. The decrease was primarily driven by the althea plant outage outlined by Rob earlier.
Sales volumes decreased by 5% to $5 6 million tons, which was within our disclose guidance range. The decrease was driven by the impact of the <unk> plant outage and the recently resolved labor disruption at Westwood terminals.
Our significant investment in the Neptune 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 categories.
30% increase in the W. T I oil price accounted for 24% of our cost increase 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.
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 and transportation costs.
We expect upward pressure on our full year guidance for adjusted site cost cost of sales of 87 to $92 per ton and we increased our transportation cost guidance to 46 to $49 per ton due to the expected impact on volumes and demurrage costs.
The L. P 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.
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 cost 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 investments as a result of the revised QB two capital cost guidance, we increased our 2022 capital guidance by 100 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 U S 4 billion sustainability linked revolving credit facility.
We have a net debt to adjusted EBITDA ratio of 0.5 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 development and 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 pipelines 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 $1 5 billion tons per year.
Q2 is the first step in our transformational copper grades.
The next phase of development of QB will be the core broader blanket mill expansion.
<unk> feasibility study, including all environmental baseline activities is expected to be completed in 2023.
<unk> I'd expect it to be a significant contributor to our near term copper growth portfolio with first production targeted for 2026.
We are also continuing to progress our other copper growth projects.
North meant 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.
Zephyr in our feasibility study was completed in mid 2019, and we are in the final stage of the permitting process we.
We will continue advancing as 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.
There are meaningful opportunities ahead, as global growth and the transition to a lower carbon economy drive 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 copper, while reducing the proportion of carbon in our overall business.
We will continue to follow our rigorous capital allocation framework balancing 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 sharing the benefits of mining with all stakeholders.
Consistent with tax purpose and 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 if.
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 question.
We're available myself my team afterwards to for any follow ups that are required with that then area I'll just hand, it over to you to conduct question and answers. Thanks.
Certainly to join the question queue. Please press Star then one on your Touchtone telephone you'll hear a tone acknowledging your request. If you are using a speaker phone. Please ensure you lift the handset before pressing and Keith 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.
Yeah. Thank you Charles I, just wanted to get a better handle on Capex going forward, obviously with the higher capex for Cupid two coming into 2023.
Staining capital given the inflationary pressure that you've experienced over the past.
Last year so should.
Should we be looking at a number that's somewhere between or as high as $2 billion on sustaining capital in Canadian bulletins.
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 Sig.
Just about five to just above three.
Clearly from the updated guidance, we've given you for Q V. 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 our 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 he has anything to add on our expectations for Capex, which as we said we will guide to in the normal course of nearly 2023.
Thank you Greg for your question.
As Jonathan mentioned, we are working towards our guidance in February are consistent 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 you know I can say across our capital our portfolio for expenditures.
We're still expecting it to be lower than where we came in for 2022, but we'll have to wait until we finalize our guidance in February .
I'll, probably give it a try and just as a follow on again.
Again, Jonathan on the coal business the reduction the three year guidance to a 25 to 26 million tonnes. So having permanent he lost the ability to get to 2016 27 million tonnes given all of the issues that you've outlined in the M&A. What 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.
However, as mentioned over recent years, we've had a series of events many of the external factors, which have caused us to to produce below that level.
Therefore from a planning perspective and to assist the market in understanding a reasonable outlook for production expectations. As we've started to factor vahid. So how do we think about this business now if you had a year absent any sort of external events than the 26 to 27 million tonnes per annum remains achievable.
So what I'll do is just hand over to Robin Xiaomi to be the president of our coal business. He 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 you.
It kind of a I'll walk you back through the last three years, because I think it kind of gives you a sense of where we're at and maybe why that opportunity is not lost but if you go back to 2020, obviously COVID-19 was the headliner through that year.
That we went through all the different issues with that at the same time, we had a couple of environmental events.
Really in 2020 was the start of what became a higher absenteeism in the operations due to COVID-19 and due to some of the steps we've taken in <unk>.
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 'twenty.
Despite having continue.
Continued high absenteeism, which we also still have today and so we were able to drive inventories down and we got our start plan 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 cause more production curtailments.
Recovering from the wildfires through the summer and we got hit with the atmospheric 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.
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 than 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 ago, I'm getting more and more confident that we've that we're able to rebuild the capacity that we had before so and this latest issue with the <unk> plant, it's a one off.
This incident 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 are going in now and we've got some of the new tube, arriving so all that remains on track and we should be back in <unk>.
Good shape by the end of the month so if.
If you take all these things into account many of which are pandemic related.
We felt it was important to recommending 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.
Quite confidence in hitting that.
Or oh historical levels of production. So the plaza capable, it's just a matter of.
I'm, having a bit of luck on our side I guess.
Okay.
Robyn I'll pass it on.
Our next question comes from our erstwhile cadet with 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 solely around growing the copper business.
And I eat diluting the coal business or do you see the potential for accelerating that transformation, perhaps by either divesting some of the coal business.
Yeah, Hi, Austin and thanks for the question.
There's a number of number of approaches that we've been taking to that the first is you've seen overnight to be announced divestments of Fort Hills.
Nearly oilsands carbon an opportunity there to reduce weight in the portfolio through divestments and something we're very pleased.
We've agreed and have gotten the whites secondly, as you highlight really the key approach for US is the growth horizons copper with the doubling of copper production as we bring <unk> to online next year, and then would be the projects I mentioned.
<unk>.
The new range being San Nicolas being the <unk> mill expansion will bring more copper units into the portfolio, which fit our furthest swing is towards green metals and away from carbon.
As we've said before we always remain very active and thoughtful in 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 question.
Question for Red probably here, Greg we've seen significant escalation on the Capex for QB two 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 you're seeing there in terms of what's driving it because I just can't be simply inflation.
Yeah.
No no we're not we're not attributing that to entirely to inflation or a great great to be on the line with you again.
There is a variety of things.
We've been dealing with there.
Keeping you up to date on all of them this quarter to quarter first I just wanted to emphasize we've got a very robust system with outdoor where we track all of the trends.
Contractors and then everybody involved.
Turn in what's happening to them where costs are going what what are variances from the initial plans that we made and we bring we bring to that.
Forward every quarter true it up.
We do everything we can to address it.
Issues that.
Current and don't just incur possible what can we do to change the outcome here Here's an example of.
Of the cost that we incurred yet overall, it's going to be very financially advantageous for us to go.
Kilometers of tailing wander the that I mentioned in the.
A presentation earlier this year late last year, we were very concerned.
The method of construction, but the contractor was using it was it 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 you know what that if that happens what would be a huge.
Cost impacts will be.
We reviewed all of that with them came up with a different method of construction.
We re did.
The financial terms of their contract in order to acknowledge the deferred construction approach.
And now we have a.
The tailing lender, that's complete ready to go.
So good.
What outcome there.
Making adjustments like that if youre in the past quarter significantly. Another another example would be.
On the <unk>.
Jody.
Now with the electrical room.
Or that our land and stuff.
Pierre.
<unk> to accelerate the commissioning of the.
The <unk> plan et cetera.
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 in 13000 people in and out of this remote location every two weeks, we're running out of charter planes, a day to do that.
At 10% absentee rates.
You don't have key employees showing up like crane operators supervisors, whatever you have to reconstitute. Your your crews on the fly and do what you can with with the skills and a craft that you have so.
We've been adjusting and dealing with all of those things and you know let me just end with I.
It was there last week outage, whereas now they're on site this week.
It's it's really exciting to see this thing come together I walk walk the entire critical path you saw the picture.
Pictures today.
It's coming together.
Under extremely.
The circumstances the last couple of years.
Body safe and healthy doing edge.
We now for the first time in October .
All of our employees onsite wear masks or optional or they don't have to wear.
Merisis associated with.
Virus protocols et cetera, So first time ive seen people spaces up there in two years and it's all.
And very encouraging and 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 read what's your confidence level in this updated number seven four to seven point something five do you think this is it.
Well.
The qualifiers, knowing knowing what we know today are all on trends there everything that we know of today are included in that and we.
We've assumed that we continue to have.
This high absentee rate.
We're incurring right now.
The inefficiencies associated with that or are all calculated and so.
Those those everything we know.
It is in there and trended according to current.
What's happening on the ground today. So we're 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'd like to ask you about.
The alternate concentrate shipping options for QB, two if you could maybe.
Discuss to the extent possible with those arrangements are.
What they look like in terms of costs.
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 would be sufficient.
The lead volume thank you very much.
So listen thanks for the question I'll pass that to our rail folio SVP of marketing and logistics.
Alright, Thanks, Paul for the question.
Yes.
Working hard on those alternative shipping arrangements and.
We actually have <unk> in place there they're actually.
Painters split a lid for shipping via trucks to alternative ports.
There are arrangements in place.
With alternative towards working also with trucking companies in order to enable that.
So we're 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.
Chile and transportation arrangements are also being worked on together constantly to those concentrates.
Yeah.
Yeah. The only other thing I'll, just add to that Louis and as you know some of these arrangements are very common in Chilean than 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, Ray Allen just any indication as to the cost of this alternative versus the port.
Lawson I think it's early days, but that's where we will provide guidance.
As we go.
Into next year.
If this is something that we do give guidance Sean.
Okay Fair and then I also wanted to follow up on the oil sands sale I can't congratulations incomplete completely not now.
The as you know, especially out of the business and operating oil sands or sharing it.
Oil sands asset, but you still have a substantial oil sands project and the portfolio has there been any thought to that.
Central sale of frontier has there been any interest in.
From potential buyers and maybe purchasing that.
Yeah listen I'll, just make a couple of comments first on the divestments of Fort Hills, we have run a competitive process on that on a non operated interest in that for some time, we did have multiple parties actively bidding on the assets the valuation we've achieved.
Sadly the $1 billion of cash from southern cool.
Reflects the assumptions that underpin the long range plan.
We've provided by the operator, and if you look at Suncor.
Press 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.
You know relative to prior expectations. The the final thing I would say about glasses is the multiple that we've transacted off.
Is actually competitive relative to recent precedent transactions for similar assets for oil sands assets. So we were 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.
And it's 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 options for us.
To to execute and develop them as you highlight we won't be operated in the energy sector, Aaron's and nor in oil sands, specifically and therefore, we will evaluate options to transact on those over time.
Fort Hills Love being in a you know 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.
All my questions.
First question I think it will be on a quick 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 your plans.
Are you planning to do with the $1 billion that you'll you'll be bringing in from the asset sale and and even just it's really broadly is that thought of as a potential for a fairly large one time capital returned to shareholders or do you require that for T V. Two or other parts of the business or is there going to be see some combination of both.
Thank you.
Yeah, Great question Jackie on the the proceeds when we receive them.
From 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. We first 30% of available cash flow is automatically returned to our shareholders and then we retained of course based on consultation with our board the discretion to Richard additional amounts if we believe that.
As warranted.
Based on other uses of cash at that point in time so.
Key message that there will be a return to shareholders. As a result of this due to the operation of the capital allocation framework minimum, 70%, 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 deep thoughts about sort of the format on that.
It could be that Jackie we make that determination you know at the time 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.
Thank you and maybe another question just I noticed in the last couple of quarters.
Sure.
Your MD&A talks about income tax.
It's going to be starting to be charged on Canadian assets starting in 2022.
Maybe cash tax payments in 'twenty 'twenty, three and 'twenty 'twenty four can you give us a little dance.
Modeling help how should we expect to see your income statement change maybe in the beginning of 2023 as a result of that.
Yeah. Thanks, Good question I'll hand that over to Christopher.
Thanks, Jackie that's a good question Yeah, you're correct. We will we are cash taxable on our 2022 earnings.
However, we have a you know what the 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. Our house that allows for us to defer.
The cash tax payments associated with the 2022 earnings.
Into 2023.
And the majority of which actually would be deferred into 2024, so that the termination of the amounts of those cash taxes will depend on our on our full year earnings for 'twenty two.
And we would we can take offline you know the proportion to it to allocate but but I think you can assume the majority of it goes into 'twenty 'twenty four in terms of the payroll tiny.
That's great I might follow up with you online offline. Thank you and if I could just maybe sneak one.
One last question.
And hopefully just a quick one I'm I'm I'm guessing it will be I E. The revised budget that you've given us for Kiwi to can you can you give us any indication on how much there is contingency remaining in the budget for QEP now that you've changed it.
Bookings.
Crystal or Red do you want to pick that one up.
Oh.
Yeah, Jack the way I would characterize it is all all known variances that we didn't.
And going forward.
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 or cover at this point.
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.
Hi, Good morning, just two follow ups first read or Jonathan for.
Or 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.
Twenty-three given all the timing changes on this now.
Okay.
Right if you go down.
Yeah, Brian .
When we talk about construction capital Theres no working capital.
So built into that where we were budgeting on the on the operation side or the.
The startup of the mining operations and and all that goes on there.
For your working capital steps are going to be.
Chart four.
Okay.
Yeah.
Great. Thanks, that's all I thought you were doing it second question you talk about on Fort Hills.
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 that material in nature in relation to the $1 billion.
Thank you Amanda.
So I'm just going to say no no capital gain Bryan is crystal highlighting.
Perfect. Thank you and then my third question just relate.
Jonathan I think the long term copper slides great to show all your options.
But you sort of have Csar for now in there now is the.
Or are you still now maybe changing your view that you're maybe going to develop this as opposed to have a partner, which would maybe the way. It was discussed before financing if anything changed there just given the.
You know 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 you know in the past we were looking we were looking to divest that.
We continue to to ensure that that is fully permitted with the feasibility study behind us. So it will be completely de risked.
You could look at the introduction of another partner given we have Mitsubishi in there for 20% at the moment and we have the balance of <unk>.
And we could just move ahead with the development on 100% basis.
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 long options in that period and part of the determination we need to make it you know is 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 banks and all options on the table.
Great. Thank you very much for answering my questions.
Most welcome.
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.
Yes.
Yeah.
Absolutely. So thanks, everybody for joining us.
If you didn't get your questions are addressed and I know there are some that did not please let us know and we'll follow up and send something up so we can charter doing 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.
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