Q2 2022 Teck Resources Ltd Earnings Call
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Please standby your conference will begin momentarily to ask a question. Please wait for the moderator to start the conference then press Star one system, Tony will be heard when you request has been.
This conference is being recorded so it's close to home that don't go as you see.
All participants thank you for standing by.
Welcome to Texas second quarter 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.
This conference call is being recorded on Wednesday July 27th 2022.
I would now like to turn the conference call over to Fraser Phillips Senior Vice President Investor Relations and strategic analysis. Please go ahead.
Thanks, Patrick.
And thank you for joining us for Teck's second quarter 'twenty to 'twenty two results conference call.
Please note today's call contains forward looking statements.
Risks and uncertainties may cause actual results to vary.
It does not assume any 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.
And reconciliations regarding these measures can be found in our MD&A. The latest press release on our website.
Today's conference call is not quite.
Not only have we reported our fourth <unk> fourth consecutive quarter of record setting profitability.
President and CEO succession.
Format will be slightly different today to begin dawn and then Jonathan will make some opening comments.
We will then take us through our regular quarterly results presentation, followed by Q&A.
Closing remarks.
That for one last time.
On the call over to Don Lindsay, our president and CEO well. Thank you very much Fraser and good morning, everyone and welcome to the second quarter call.
I guess, you all know yesterday I announced my retirement from Tech.
Officially be the 71st quarterly earnings call that I've had since 2005.
And as such I'm going to make a few opening comments about my decision and the transition and then a little bit of reflection.
17, plus years in the industry and then I'll turn it over to Jonathan price, our new CEO elect.
Make some remarks and when do we get to the Q&A today. Since this is my last time you are welcome to ask me anything this is you're asking anything moment.
Though as you will understand.
From answering some questions.
So it's tough to say goodbye to a company into a team that you have.
Been a part of this long and that you admire so much.
And there is no perfect time. The fact is a lot of planning and preparation if I'll, let up to this point.
In fact established a succession committee.
Five years ago.
As you know from a big picture point of view attack, we are reshaping and rebalancing our portfolio.
Bigger focus on copper and less on carbon and with that shift to a new phase of growth for tech. It is important to shareholders in particular that the strategy is owned and led by the CEO , who will be around and accountable for it in the longer term.
He wasn't going to be.
Round.
I will be 64 later this year.
So I knew that this was the right time to make this decision to get the new team in place and to just get on with it.
And I have been working closely together on transition planning for several years with the goal of having a seamless transition as possible.
We also of course, drawing close to completion of QB, two and first copper. We're all very excited about it and that marks a major shift in text trajectory towards becoming a major global copper player and it isn't just QB two we have not one not two but for projects that could be in production as early as 2026.
This announcement also comes as we Mark our fourth consecutive record setting quarter in a row $3 3 billion and EBITDA of $1 8 billion in adjusted earnings and in the last 12 months, we reported $5 $7 billion in earnings.
These results really speak to the strength of not just Tex assets and certainly commodity prices were a big contributor.
Also to the strength of the incredible team of people that we have here.
Now looking back when I joined tack on January one 2000 to five my initial focus was on rejuvenating our resource base to ensure that we could maintain production over the long term and to position us for future growth. We were I would say at the time resource challenge.
Copper was scheduled to close forever in 2008, just as an example.
So the early years were all about getting a hold of resources.
Delivered on that through some key acquisitions, such as ore resources Global copper Fort Hills, and ultimately the full ownership of the 40 pooled Trust in addition to investing in.
In exploration.
And or resources of course gave us QB.
At the time, we knew about eight deep drill holes.
The suggested the Sulphides would be there, but they might not have been it was a bit of a risk.
By the end of this year, we are on track to report 11 billion tons of resources.
One of the top 10 resources in the World.
As a result Tech's total resources.
<unk> resources across all commodities on a copper equivalent basis has increased over three and a half times. Since 2005. So today, we are resource rich and the new team has a lot to work with.
Next we transitioned into converting those resources into production and cash flow to realize that potential.
The construction of key projects like the Highland Valley Mill optimization.
Which combined with various push backs happen to extend the life out to 2027, and we will extend it again past 'twenty the.
The VIP two project at Red Dog, which meant that instead of the production dropping from 550000 tons to something starting with a three is stayed over 500000 and so it was like building a whole new zinc mine. There was the construction of Fort Hills rebuilding key assets of trail the two asset class.
Were so important and helped actually increase production there was rejuvenating the Elk Valley steelmaking coal operations to drop them from the highest third quartile in fact edging into the fourth quartile of the cost curve right down to the second quartile.
And then of course commencing construction at QB two.
Coming completion of QB, two consolidated copper production capacity will double and we are uniquely positioned to double again.
And that includes the plan to be no expansion, which could add a further 150000 tons of production and we have numerous other assets through project satellite.
Advanced Safford, Alan say Nicholas projects, and our recently announced Massawa polymeric joint venture with calling that back by Glencore.
Together these projects could add five times the amount of our current copper equivalent production and make a very significant copper producer.
At the same time as we did all of this we worked hard to foster a culture of safety and sustainability in every corner of the company, including reducing total recordable injury frequency by 80% compared to 2005, and reducing high potential incident frequency by 90% since 2010.
Our people really live those values day in and day out.
Demonstrating that it truly is possible to provide essential metals and minerals with the smallest footprint possible all the.
While creating jobs and prosperity for people and communities.
I'm very proud of how far we've come and where this company is today Teck is in an enviable position in our industry with unparalleled copper growth optionality.
<unk> production for World class operations, leading sustainability performance and a purpose and values driven employee culture that is second to none.
I'm looking forward to supporting the transition to Jonathan the Reds leadership over the next few months will also be staying on to support them in an advisory capacity and the role of executive Vice chair seem to the second quarter of 2023, but most of all I'm very much looking forward to seeing tech transition into this next phase of growth and value creation and very.
Partly listened carefully and returning substantial capital to shareholders.
With that I'll pass it to Johnson for comments and then we'll move on to the actual earnings presentation and Q&A jumping over to you.
Thanks, Don first I would like to recognize Tom's exceptional leadership attacks of more than 17 years.
As mentioned, we've just deny them stuff fourth consecutive set a record financial results and I've come which is the product of many years of building a great team and a great culture, both of which was central to what attracted me to attack.
Second I want to reinforce the strength of tech strategy and growth Foundation, we have a portfolio comprising some of the industry's best mining assets and we have a track record of operational excellence and leadership as a responsible and sustainable miner.
And we're continually striving to improve through innovation and the deployment of digital technologies.
We also have a suite of copper growth options without parallel amongst our peers.
This is all the product of long term strategic thinking a clear focus on value and creative commercial dealmaking.
As Don indicated and this is important there is tremendous additional value to be unlocked in our portfolio.
And I and my team are fully committed to working to realize that value for shareholders.
Finally, I want to personally thank Don for the Trustees has placed in me over the past few years. He has been generous in that time. He has spent helping to build my knowledge and appreciation of text legacy.
<unk> and the opportunities we have ahead of us and it is a great honor to be appointed as tax next CEO of.
Of course, I'm also very fortunate to have Red Conger working closely with me in the role of President and CFO .
I know his leadership track record and depths of industry experience will be invaluable.
I'm very excited for the opportunities ahead and to be leading tech through the next chapter.
Don to take us through the quarterly results presentation.
Okay. Thank you very much Jonathan.
I will now turn to slide four on the presentation and we will go through the highlights. We're pleased to report our second quarter, 2020 results, which mark teck's fourth consecutive quarter of record setting EBITA and profitability.
We delivered record adjusted profit attributable to shareholders of $1 $8 billion, which is more than five times higher than Q2 last year.
And record adjusted EBITDA of $3 3 billion driven by strong profitability across each of our businesses.
At QB, two we achieved a number of exciting milestones during the second quarter, including the completion of construction of our transmission system getting the starter dam twists design elevation and beginning the flow of seawater into the pre treatment area. The diesel plant, which is on the critical path for first copper.
And while we execute on this transformational growth our strong financial performance in the quarter enabled us to further strengthen our balance sheet and returned significant cash to shareholders. During Q2, we redeemed U S $650 million of outstanding term notes, we paid $67 million in dividends and we completed $572 million.
And share buybacks, yes.
Yesterday, we declared a 12 and a half cent per share dividend.
Or is he further $500 million U S in share buybacks and this brings our total authorized share buyback program to approximately 1.4 billion Canadian year to date.
I'm pleased with our commitment to and continued progress in safety and sustainable sustainability leadership.
Year to date, our high potential injury frequency remained low at 0.1 and building on our long standing commitment to biodiversity Tech became the first mining company to set an ambitious goal of becoming a nature positive company by 2030.
Our sustainability efforts reflect the passion of our employees for carrying for the land where they live and work. We are proud of the ongoing recognition by the outside industry. We were named to the best 50 corporate citizens in Canada for the 16th consecutive year.
Overall, our solid operational performance and strong balance sheet protect on a very strong footing as we manage through the current inflationary pressures and the slowdown in the global economy.
Turning to slide five.
As stated earlier, we delivered record adjusted EBITDA of $3 3 billion, which was more than three times higher than Q2 of 2021.
Our results reflect meaningful contributions from each one of our business units, particularly steelmaking coal of course, which delivered record EBITDA of $2 7 billion in the quarter.
No I didn't like others in the industry persistent global inflationary pressures increase our overall Q2 operating costs by 14% compared to last year and half of that is attributable to the price of diesel.
Turning to our operations, starting with the copper business on slide seven.
Gross profit in the second quarter increased by 5% compared to last year, driven by a 10000 ton increase in sales that shifted toward from the third quarter as production remained flat year over year. This was partially offset by higher consumables, particularly diesel and transportation costs. Our total cash unit costs increased by 22.
Since U S to $2.03 per pound.
Q2, EBITDA of 210 million included a $251 million negative set them on price adjustment, resulting from the decline in copper price towards the end of the quarter.
Notwithstanding that copper prices in Q2 remained well above historic averages at $4.32 U S per pound.
During the quarter, we signed a new three year collective agreement at Carmen de <unk>.
And looking forward, our 2022 copper production guidance remains unchanged.
We increased our 2022 net cash unit cost guidance for copper to $1 48, $2 58 per pound from the dollar $40 50, we were before primarily due to inflationary cost pressures and lower byproduct price forecasts.
Moving onto zinc on slide eight.
EBITDA in our zinc business tripled compared to Q2 last year to 236 million. The increase was primarily due to substantially higher zinc prices, a 40% increase in zinc in concentrate sales and higher byproduct contributions.
Q2, total cash unit costs are 13 cents or 21% lower compared to last year, largely due to lower smelting smelter processing charges, which more than offset the inflationary cost pressures on consumables and labor.
At trail the increase in Q2 refined zinc production reflects the zinc roaster maintenance in 2020 one.
But we also recorded a $32 million inventory write down due to the decrease in zinc prices at the end of the quarter.
Subsequent to quarter end on July eight we reached a new five year collective agreement at trail.
Looking ahead, the Red dog shipping season commenced in July 4th and we expect sales at Red dog zinc and concentrate to be 215000 to 240000 tonnes in Q3, reflecting the normal seasonal pattern.
Major maintenance activities are planned to trail from September to November which will impact production.
Our 2022 zinc production guidance remains unchanged.
We increased our 2022 net cash unit cost guidance for mine zinc, 237% to 43 cents per pound from 32 to 38 cents per pound previously.
The increase is primarily due to higher smelting smelter processing charges expected.
Second half of the year as well as higher diesel prices and increased profit based compensation.
On slide nine.
Our steelmaking coal business unit delivered yet another record quarter.
<unk> profit of $2 5 billion, surpassing the record set last quarter at $1 8 billion.
Steel, making coal EBITDA was $2 7 billion, which was a six fold increase compared to $435 million last year.
F O B, Australia price assessments for steelmaking coal hit a record high of $527 U S per ton in the quarter.
Prices pulled back and made to exit the quarter at $300 per tonne they remain higher than historical averages.
Sales to our customers in China are based on the CFR, China price, which averaged $461 per ton in Q2.
As a result of strong prices, our realized price reached a record high of $453 U S per ton more than triple Q2 of last year.
Production of $5 3 million tons was lower than a year ago due to planned maintenance shutdowns and some plant reliability challenges.
Sales were $6 3 million tons in the quarter, which were within guidance.
Importantly, our upgraded rail infrastructure and Neptune terminal performed very well through the quarter and demonstrated their value by reducing inventories to near historic low levels, enabling us to capitalize on high steelmaking coal prices in the quarter.
Looking forward, we expect sales of five eight to $6 2 million tons in the third quarter to closely match production as mine clean coal inventories at record low levels.
Given the plant reliability and workforce challenges, we lowered our full year production guidance to 23, and a half to 24 million tons of 24, 5% to 25 and a half million tons previously.
We increased our adjusted site cash costs sales guidance for the full year to 87% to $92 per ton from 79 to $83 per ton as a result of reduced annual production and higher inflationary cost pressures.
Transportation unit costs are expected to decline in the second half of the year.
Full year guidance remains unchanged.
Our 2022 sustaining capital guidance for steelmaking coal was reduced by $100 million due largely to a shift in timing of water project spending.
Turning to slide 10.
Our energy business generated 174 million of EBITDA in the second quarter, driven by strong Western Canada select prices and higher sales.
Realized blended bitumen prices in the second quarter averaged $98.42 U S per barrel, which was a 72% increase compared to last year sales.
Sales were $3 1 million barrels in the quarter compared to $1 6 million last year with Fort Hills are created on one train only.
To wrap up to a two train operations at Fort Hills drove increased production and lower unit operating costs compared to last year.
Further our planned 20 day maintenance outage was successfully completed in the quarter.
And in addition to its positive contribution to the bottom line Fort Hills provides us with a natural hedge against increasing W. T I and diesel prices.
Looking forward adjusted operating cost guidance for the full year increased to 33 to $36 per barrel from 28 to $32 per barrel previously due to higher natural gas and diesel input costs as well as an increase in contractor costs, but production guidance remains unchanged.
Moving on to slide 11.
At QB two we now have approximately 13000 workers on the project and we are proud of the steady progress that we've made through the quarter.
Terms of key milestones achieved we have completed construction of the 220 kv transmission system and our suite of sequentially energizing the electrical substation.
The water, we began pumping seawater into the pretreatment area for commissioning. So we're 50% complete the hydro testing of the water supply pipeline and pump stations.
At the mine, we completed the starter dam to its design elevation, we began system turnovers to pre operational testing of the concentrator, we transferred the truck shop to operations.
Our capital cost guidance remains unchanged, while our COVID-19 related costs have increased to 1.4 to $1 5 billion due to the impact of inflation on labor costs.
The ultimate impacts of the omicron wave that we experienced in Q1 and ongoing inefficiencies, including as a result of COVID-19 related absenteeism, which continues to run at approximately 10% levels.
We continue to target first copper from line one in the latter part of this year with a focus on system completion and handover. However, if COVID-19, absenteeism and related vendor specialty Kraft availability continues into the fourth quarter. This may be delayed into January of 2023.
Slide 12 shows the progress on the main jetty, where we continue to advance the piling a deck construction they will support the ship loader.
Structural progress here has been impacted by marine whether it's subsurface conditions, necessitating alternate concentrates shipping arrangements until the ship loader is commissioned in the first half of 2023.
On Slide 13, you can see the desalination plant and the poor ground, where we're completing the high pressure testing in the background you can see the pre treatment area, where we have introduced seawater for commissioning activities.
14 shows the completed truck shop that was transferred to operations in the quarter Slide 15 shows the gas insulated switch gear inside one of the completed electrical substations are being sequentially energized. This substation, providing power to water supply pump station three one of the key systems that's needed for first copper.
Slide 16 shows the completed power transmission lines in the water supply pump station five which is one of the stations for pumping water up from the <unk> plant to the concentrator.
Now completed more than 50% of the pipeline and pump station hydro testing is required to advance the system into commissioning.
On Slide 17, you can see a photo from may of the stockpiled Dome Assembly.
As of today it is almost fully enclosed.
On Slide 18, you can see an overall view of the concentrator area with the grinding building on the rate and the floatation area on the left to focus in this series on completion of line one in preparation for <unk> copper and in the quarter. We began turnover of key system to this area to pre operational testing.
On Slide 19, you can see the installation of the liners inside a sag mill with the grinding building.
<unk> 'twenty shows a portion of the tailings Lauder, which is a concrete channel that conveys the tailings from the concentrated area to the tailings facility.
Finally, slide 21 shows the starter dam.
We completed all of the earthworks associated concrete works to bring the dam to as desired height.
So in summary, we continue to be very pleased with the progress that we're making we're excited about building on our construction successes to date with a focus on delivering to the projects' key milestones and I encourage you to visit the investors section of our website to watch the latest progress video view the most recent photo gallery.
With that I'll now pass over to Jonathan to discuss our financial results.
Thanks, Don as illustrated on slide 23, strong commodity prices drove <unk> consecutive quarter of record EBITDA and profitability in Q2.
Record high realized steelmaking coal prices increased by nearly a $100 per ton quarter over quarter to $453 per ton in the second quarter.
While prices have weakened since may both the F O B, Australia, and CFO , China prices remain above historical averages.
Western Canadian select the heavy oil benchmark price averaged $96 per barrel in Q2 up 20% quarter over quarter and 75% year over year.
Zinc prices increased by eight cents to an average of $1.78 per pound in Q2 compared to Q1.
And while copper prices declined from the all time quarterly average record of $4 53 per pound in Q1, they remained well above historic averages with an average at $4.52 per pound in the second quarter.
We've outlined the key drivers for our record profitability on slide 24.
Adjusted EBITDAR of $3 3 billion in the quarter represents an increase of $2 3 billion compared to last year.
Actually attributable to the strong commodity prices I mentioned.
Like others in the industry, we continue to face inflationary cost pressures, which increased our Q2 operating costs by 14% compared to last year.
With 75% increase in diesel prices over the same period drove approximately half of the increase.
Additionally increases in the cost of a number of our key suppliers, including mining equipment fuel tires and explosives continued to be driven by price increases in underlying commodities, such as steel crude oil and natural gas.
It's important to note that the primary cost increases are not related to our key mining drivers such as mine productivity and strip ratios, which remained relatively stable.
In fact looking at those items that were under our control during the quarter production and operating costs, we generated a net positive impact on adjusted EBITDA versus Q2 2021.
However, inflationary pressures on diesel prices and other key input costs as well as profit based compensation and royalties continue to put upward pressure on our unit cost guidance through 2022.
Now moving to slide 25.
In the second quarter, we generated significant cash flow from operations of $2 9 billion compared.
Compared with 575 million a year ago, driven by record steelmaking coal prices.
Our capital investments totaled $1 $1 billion.
Including $819 million for QB, two and $212 million in sustaining capital.
We also incurred $255 million for capitalized stripping primarily related to the advancement of pits for future production at our steelmaking coal operations. Once again higher diesel prices was the main driver of higher than planned capitalized stripping expenditure.
Importantly, as Don outlined earlier, our record financial performance enabled us to strengthen our balance sheet and returned significant cash to shareholders during the quarter.
We reduced our debt outstanding by U S $650 million through a waterfall tender of our 2035 2014 2041 notes.
Further ensuring our ability to maintain solid investment grade rating through the cycle and reducing our annual debt interest expense by approximately USD 40 million on a pretax basis.
We completed $572 million in share buybacks through the purchase of a total of $11 5 million class B shares under our normal course issuer bid and we paid a regular base quarterly dividend of $12 five per share totaling $67 million.
We ended the quarter with a strong cash position of $2 $7 billion and as at the date of reporting. This now stands at $3 3 billion.
Now looking at Slide 26, we are pleased to have enhanced our already strong financial position.
We have $8 $4 billion of liquidity with a net debt to adjusted EBITDA ratio of 0.4 times investment grade credit ratings from all four credit rating agencies have no significant debt maturities due prior to 2030.
We are very confident in our ability to complete QB two while successfully weathering this period of macroeconomic uncertainty.
Adhering to our disciplined capital allocation framework Tech continues to uphold our track record of significant cash returns to shareholders.
Year to date to June 30th we returned to shareholders, a total of $404 million in dividends and $662 million in share buybacks, while paying down $1 $2 billion of all debt outstanding.
And as Don noted earlier further through our previously announced Canadian $100 million in U S dollars $500 million in class B share buybacks, we announced an additional U S 500 million share buyback program yesterday.
This demonstrates both our confidence in the long term outlook for our business and our commitment to balance growth with shareholder returns.
Slide 27 outlines our updated guidance for capital investment for.
For 2022, we have increased capex for QB, two by approximately $200 million.
To a range of two seven to $2 9 billion from $2 five to $2 7 billion previously at.
At the same time, we have reduced our steelmaking coal sustaining capex guidance by $100 million.
With the completion of QB two 2022 is expected to be the high water Mark in our capital spend profile.
We continue to expect a significant decrease in capital investments in 2023 with a reduction of approximately $2 billion.
The decrease was driven by significantly lower QB two capex.
With first copper from QB, two not only months away and the operation that ramping up to full capacity. We are approaching a major cash flow inflection points, where we shift from a period of significant capital investment to a period of significant cash generation.
With that I will now pass it back to Don for closing remarks. Thanks.
Thanks, Jonathan.
Despite the short term volatility and uncertainty related to the macroeconomic environment. We are confident in the long term outlook protect and our key commodities.
COVID-19 pandemic has accelerated demand for metals <unk> minerals that are essential for a low carbon world, including copper zinc and steelmaking coal.
Let's take a look at renewable power as an example.
Each megawatts of installed generation capacity for an offshore wind turbine.
Requires up to 9.6 tonnes of copper have a tendency inc. And 50 tons of steelmaking coal each megawatt requires that so each of today's largest 13 megawatt offshore wind turbines with rotor diameter spanning 200 meters and up to 260 meters in height. They require approximately 125 tonnes of copper.
Seven tons of zinc and 700 tons of steelmaking coal.
So you can really look at attack as the procurement arm for the clean energy wind power companies.
Teck is uniquely positioned as a major supplier of these critical materials required for the development of wind power and also for other renewable energy technologies.
In closing 2022 is a transformational year protect them and our strong performance year to date has set us on a very strong footing as we manage through the inflationary pressures and a slowdown in the global economy in the near term our growth is being driven by <unk>, which is months away from producing first copper and is expected to double our consolidated copper.
<unk> by next year as we bring on QB, two and advance our copper growth strategy, we will rebalance our portfolio and reduce the proportion of carbon.
All business and all of this is in combination with our track record as an industry leader in sustainability and it positions <unk> to deliver meaningful long term value to shareholders.
And with that I'll turn the call over to the operator to open it up for questions.
Thank you you May press Star one he said the question.
The first question is from Greg Barnes from TD Securities. Please go ahead.
Thank you operator first off Dan I, just want to commend you on it.
Track record of tech over the past 17 years, its been quite a ride and secondly, how you're positioning the company heading into the QB. Two construction I think you did a great job on that front.
My question for you is the long term outlook from your perspective for the coking coal business. The steelmaking coal business within Tech as you highlighted as a key element of the decarbonization drive it.
Nearly <unk>.
Supply is going down and demand is going up it looks like a pretty attractive business over the long term.
Yeah, I know I very much agree with you and let me say congratulations I'm going to ask the first question Greg.
The supply demand situation, you're quite right I think that our supply is going to be constrained that there arent that many players who want to invest in new capacity and even if they did is very difficult to finance it or to get it permitted so I think in the longer term.
Supply will be challenged whereas really demand for steelmaking coal will continue to grow as the steel industry continues to grow reflecting the growth in the old called global population, mostly in developing markets, which will mostly.
Get their steel from blast furnace as the new Greenfield technologies are quite a few years away and we were talking decades.
So yeah I think the outlook for the business is pretty good from that point of view that said, there's there's no doubt that our assets under management.
Something like 40 trillion dollars of declared a.
Policies are about investing companies that produce colon and.
Well more and more people are starting to realize that.
Steelmaking coal is absolutely required for a low carbon future more and more people are realizing that it's still there. There's a there's some restrictions out there and the board has to be cognizant of that as I've said before the board has studied this issue intensely for a couple of years now on how best to reshape the portfolio and you.
You know that that's happening on its own with the growth in copper.
And we have a lot of growth in copper it takes a few years for that to occur but.
Somewhere in there will be the right answer and I'll leave that to the board to decide.
Thank you.
Thank you next question is from our erstwhile quota from Scotiabank. Please go ahead.
Which I think we cannot hear you.
Our S. One quota from Scotiabank.
Might be on mute.
Well go to the next question from Dalton Barreto from Canaccord Genuity. Please go ahead.
Thanks, operator, and Don Jonathan and read all the best to you guys as you go forward.
My first question I guess is for Jonathan I'm, just wondering what might change in terms of the strategy going forward, particularly as it.
As it relates to <unk>.
Things like portfolio construction, M&A and capital allocation. Thanks.
Yeah. Thanks for the question Dalton.
<unk> Tec has put together an hour over many years is an incredibly robust one and it's a strategy that is not built on hope. It's the strategy. That's built on the the resources that have been put together in this company over many years and as you know it's a strategy centered on top of growth we are incredibly committed to that.
As Don has just discussed we continue to contemplate the the balance in the shape of the portfolio overall and the direction remains moving that towards the metal is required for decarbonization.
Finally, your point on your question on capital allocation.
Now again, that's unchanged we are determined to to strike a balance of growing our.
A couple of business, while returning significant cash to shareholders and maintaining a foundation of a strong balance sheet. So all of those elements are adult and remain very much intact. The focus of this team going forward will be continuing to execute on that strategy.
Okay, great. Thank you for that and then just maybe an operational question RK.
You've announced two separate labor agreements here and I'm just wondering.
Given the current cost of living environment globally.
Are you at Liberty to discuss what kind of increases are being demanded and what this means for your other operations.
Well, we generally don't disclose the details of those contracts.
I can say that we're pleased with the resolution of a tough negotiation as they always are but it provides us with labor stability going forward. So.
And we're very fortunate in that last year at our two largest operations are.
Three largest operations Highland Valley, Fording River and <unk> all settled long term.
Five and in some cases six year contracts. So generally for the core of the operations of the company we have labor stability.
At reasonable agreements going forward.
Red dog and if I could just add one thing.
This is actually completes the cycle of all of our labor agreements. So we've been through the whole raft of them in the last several years.
And my experience too subtle for maximum contract durations like Dan mentioned five years six years is a real testimony to the working relationship that this company has with with the union with the workforce. So it sets us up very well for the future.
That's great to hear and maybe if I can squeeze one last one with the decline in the Chilean peso is there an opportunity to.
Hedge over the next 12 months as you finished Q eto and wrap it up.
Although I'll make an opening comment and then turn to Jonathan but I just want to tell you. We discussed this probably every hour of every day.
So and that's all I'm going to say you go Jonathan Yeah. The adult it's you know, it's something where we're very much a life too. If you can tell us with some conviction, which way the Chilean peso. He's going to go next would be a would be welcomed to get that feedback look. It's you know it's it's something we were comfortable to keep floating as we do.
With all of our commodity price exposures as well as all foreign exchange exposures you know.
There's a lot of uncertainty still in Chile with respect to the constitution.
And the process that will play out in the months ahead, and therefore, it's very difficult to get a good read them on which way the peso will go in the medium term.
Right now of course, that's a tailwind for us with respect to both operating costs and Chile, and construction cost in Chile, but no no hedging action at this point in time.
That's great. That's all from me guys. Thank you.
Thank you.
Next question is from Lawson Winder from Bank of America. Please go ahead.
Hello. Good morning, Thank you for the update Dan Congratulations on a remarkable tenure attack and Jonathan Congratulations on your new roles.
I would like to.
Asked two questions. So first would be about the QB two COVID-19, Capex increase so it sounds as though there are some non COVID-19 elements included the explanation for the higher and higher.
Capex estimate for forgive.
Forgive me too so, namely inflation on labor costs and I'd just be curious.
To know what proportion of the increase would be the sort of like non COVID-19 specific related costs and then looking forward what is that sort of non COVID-19 inflation component imply for <unk> capex expectations. Thanks.
Yeah appreciate the question Larson.
Let me just hit on a couple of the highlight points before before I answer. Your question directly we're really excited about first of all being able to get our employment levels up to roughly 13000.
Per shift that's quite an accomplishment after COVID-19 in and gives us lots of optimism.
About getting this thing built and completed this year a lot of those are our key crops that we need at this point, our welders and.
And electricians or we continue to have world class health and safety performance on the project and of course that that's a big contributor to our success as well the when when Don talks about a milestone of first <unk>.
The transmission line there was a whole lot behind that I mean, we've we've been commissioning parts of the T cell play out using temporary powder powered portable gen sets.
Now have the substation actually officially on the Chilean grid. So it's it's thoroughly checked out a 100% functional and that gives us a step change in an ability and performance right now we have all of the electrical rooms.
Now outside of all of the electrical rooms that we need to not only make desalinated water at the port but push it all the way up to 14500 elevation of all of those electrical rooms are actually set in place a.
Cabling is being pulled in and terminated for all of those so so those are huge milestones for us that they've been achieved in this last quarter, a 145 weeks of construction to complete the starter dam to its.
Ultimate height.
We're now hydro testing throughout the system.
We've got the pipeline from the coast up to the <unk>.
Concentrate are divided into about 10 logical sections or where we do the hydro testing. We've completed four of those works out water and flotation cells. After the concentrate are now testing hydro testing.
Our vessels like quite.
Flotation cells other water tanks et cetera. So we're really proud of the team, making all of that progress in the face of these challenges that you mentioned soda to specifically go it at your question.
The increases have come in several different categories, one of which has been this this labor inflation.
You mentioned when we look at it that specifically.
That's a.
Chilean labor practice that's.
According to law at mid year, you you adjust based on CPI etcetera.
But for these delays that we've been talking about for.
Last year and a half we we wouldn't even be here, what we're doing construction right now so that the inefficiencies that have happened.
The social distancing all the things that we've had to do to.
To keep people safe and healthy on the job have caused this thing to run much longer time wise in.
That is related to the pandemic and that's that's the way we've we've called out so as we go forward.
We're doing a myriad of things to manage the current situations.
We now have the opportunity to take tech personnel that we've hired to run and maintain the operations. There. They are now participating in commissioning efforts with.
Second some of them to backfill to help with our field supervision productivity oversight those kinds of things so we're being.
Very very creative very collaborative with with all entities to mitigate.
Mitigate these things that we're dealing with and continue to.
To get this thing built in.
The biggest thing to preventing cost overruns as to get it get it built and get the contractors off the project and that's that's what we're focused.
Thank you.
The next question is from Carlos de Alba from Morgan Stanley . Please go ahead.
Yes. Thank you very much Dan congratulations Jonathan rental divesting in the new positions.
Maybe the question I have and you see if you could give us an update on the latest thinking about the oil.
Oil sands energy business within peg.
And also any update that you might have in the copper project satellite and.
It's a process that you are pursuing there. Thank you.
Okay sure well, we're very pleased with how Fort Hills is running now with his two trains up and running and that it has been.
Performing above plan on many days and weeks. So it's good to see that that happening and that will only get better from here and continue to drop the costs.
As we've said for a couple of years now once we headed up at full production we would consider.
A transaction, where it would be held differently, so shareholders could choose whether they want to continue to participate in the energy cycle or not we're conscious that there are quite a few investors that cannot by attack when we have a certain proportion of our revenues coming from oil sands and so that that suggests that.
It should be held in a different way outside of the tech resources portfolio. We.
We are working on that and.
I think you just have to stand by and see what evolves in due course in terms of project satellite.
We announced a deal last week on Massawa project in Minnesota, a joint venture with <unk>, which is backed by Glencore. So we're very pleased with that Andrew we continue to advance says that pronounced through the permitting process and we continue to have detailed discussions with partners potential partners.
On Saint Nicholas and I expect something to eat.
And that in and of that this year.
And then of course <unk> is advancing and we're all very excited about that one and we'll be able to announce something.
<unk> two.
Sort of a combined pre feasibility and feasibility study efforts that's going on now and we can put a I think in December was something to say about that.
Great. Thank you.
Yes.
Thank you.
Next question is from Matthew Murphy from Barclays. Please go ahead.
Hi, Congrats dawn Jonathan Craig.
I have a question on met coal just wondering maybe real can share some thoughts on.
What what you see in.
You know this unusual dynamic of thermal coal prices being so much higher than that and what you're seeing.
You know with steel market slowing down in China would there ever be a strategy to divert some sales to thermal applications or are you pretty much.
Sad for the foreseeable outlook with your current customers.
Yeah. Thanks for the question Matthew.
Maybe start with.
With the end of your questions first so when we look at thermal I mean, there are technical and operational limits as to using steelmaking coal for power generation so tip.
Typically our coals are high coking properties, so that theyre not so suitable for thermal application, we do sell a little bit of oxidize met coal steelmaking coal into turmoil applications, but that is usually less than half a million tons a year.
Now with respect to what is happening in the overall market. If you look at.
The steel and the hot metal production overall it is still up granted it's dropped year over year compared to 2021 that was running very high.
But it is still higher than when we were in 2019. So when you look at exact numbers.
The crude steel production in hot metal production versus 2019 on an annualized basis year to date is still running.
Around 70 million tons higher for crude steel and 50 million tons higher for hot metal production at.
At the same time, the steelmaking coal exports year to date for the major exporters.
Is down around 31 million tons versus 2019 so.
Availability continues to be tight.
Despite the demand slowdown that we're seeing on the steel side.
And then when you look at overall what has happened in the first half of this year.
With the record high prices miners were focused on getting sales to market. Just just like we did so there is little inventories out there so the expectations from those low inventories and continuing high terminal prices is.
As soon as demand improves on the steel, making coal side, we will see.
<unk> turned up again.
Got it okay. Thank you for that.
Maybe just as a follow up the second question.
Don I can't resist to ask me anything a window here.
Just having gone through the construction of QB, two obviously, it's not done yet but.
Seems to me the most challenging thing in this industry right now is investor dislike of major projects.
And so I guess I'm wondering any reflections on how this industry deals with.
You know sort of a current slowdown, but an awareness that there's got to be more production growth in copper well when you look at capital markets that don't necessarily like these projects.
Yeah.
Classic buy versus build question and it gets debated.
Internally and amongst our industry colleagues.
Frequently you know I share your.
<unk> that is getting tougher and tougher to build anything anywhere.
And different jurisdictions get the spotlight from time to time, but you can you can look at it in Canada, you can look at women within Canada different provinces, United States, you can look at Chile, Peru, you look in the Congo.
Mongolia, any any jurisdiction is getting tougher not easier.
And I'd also say that the management teams that allocate the capital are less willing to engage in that.
Long term advair.
Adventure or misadventure I was trying to build something QB two it'll be 15 years from when we bought or resources, knowing their eight deep drill holes now that'd be a lot of drilling done and so on.
From start to finish is 15 four years, that's a long time and I think that the willingness of teams to do that is.
Is not not that high.
And the barriers to doing that are getting higher and higher.
So what that means in the long term of course is that our.
Demand will exceed supply and pricing will be good for those that have current assets.
It should do well.
No.
I have sense to shift.
Partly related to the pandemic, partly related to the tragic War, Russia, Ukraine War.
People are at.
The highest levels of government are starting to recognize the critical minerals. They really are critical and they are needed in there.
Scarce supply and that they have to change their policies and their attitude to encourage the mining industry to go in and develop a more production.
Pretty significant shift in Ottawa positive very positive.
But that takes a long time to have an effect a long time so.
No.
The projects that are already underway like our are to be two angles, Quebec over ramping up.
They'll come on but you look two years out after that I don't see much but the world will fix itself in terms of global recessions hopes for things and demand will come back and there just won't be enough.
Supply available so.
That's how I see it if it's a classic build versus buy I think most of us would rather buy because like the day. The deal closes you started getting cash our cash returned right away and.
Yeah, it's difficult to buy well you always want to buy at the low end ever quite Ken, but but I think most of the industry as a bias to do that.
Those are just some thoughts to share.
Got it thanks a lot.
Thank you one moment please.
The next question is from RF, while Codell from Scotiabank. Your line is open.
If you're on mute can you on mute your line. Please.
We cannot hear you Mr Weil quota from Scotiabank and you're on mute. Please.
Whereas we're worried about you.
We can't have a quarterly call without a question from worse or is it maybe he can text one to you.
Well you could do worse, you could do that if you'd like you wanted to send me or send me an email.
<unk>.
<unk> been trying for a while to get on again.
Whatever reason.
Alright, let's move onto the next question.
Certainly.
Yes.
The next question is from Emily Chang from Goldman Sachs. Please go ahead.
Good morning, Don Congratulations on your retirement and Jonathan and read on your new roles here today.
My first question is just around perhaps getting the latest update on the fiscal regime and in Chile, and what you're seeing that as it relates to both the mining right.
L T and also the constitution rewrite.
And we have an unparalleled on the line who could answer that question. Please in peril.
Yes, good morning, Amy well as you may be aware the government of Chile introduced some changes in the mining royalty deal that was being discussed at the Senate.
And there has been some comments about these changes in this proposal of the government. It is important to mention that and now the process will continue. This is a discussion that will take place at the Sydney. We have kicked in the last days that the minister of Finance has indicated that the government is open to <unk>.
Listen to the industry and potentially introduce some changes into the b. So basically this is a process that has not yet finished and we'll continue a discussion and we hope that the industry will be part of that conversation. Nevertheless, it is important to reinforce that we do have a stability agreement for QB two.
And also for C. D E and F doses stability agreements are not at risk and there are no indications that this could change so in relation with the constitutional process.
The commission that was preparing the constitution presented the constitution to the precedent early in July .
They did he say very open process of dialogue and campaigns and sharing a defensible seashells from people that would like the new constitution to be approved and those that have concerns and don't want that process to be approved and what most of final list.
<unk> today is Jamie is that despite that we saw at the discussion on the Constitution will continue.
It is highly possible that changes will be made if the new constitution is approved and also if it's not approved Daddy's same station to also conduct reforms. So we believe that Chile will continue.
Being processed.
All of the discussion and institutional process in order to approve and to change.
The constitution in the future so in regards with the mining industry.
At this moment, we don't see any additional.
Levels of concern.
If they can rent it.
<unk> is approved and a.
A lot of discussion we need to continue at the Senate level. So we will continue having this institutional discussion in the in the short term.
Great that's very clear.
My follow up question is just around Capex and <unk>.
We'll focus on sustaining capex and what that could potentially look like in 2023.
It looks like though has been about $100 million of sustaining capex from the coal segment may be reduced or potentially deferred into 2022, but any early reads on what that number could potentially look like and.
Also what sort of the water treatment capex could look like for 'twenty three as well.
Yeah Ali we haven't guided specifically to sustaining capital for 2023 at this point, we did commute.
<unk> communicated in the last quarter that we expected to see sustaining capital trend back down towards long term levels, and you know give or take including in future sustaining capital for QB. Two we said that would be around the $1 billion mark annually in.
In the short term, we do still have some water treatment capital commitments over the next two to three years.
They reduce over time, which is what helps bring us back into that $1 billion range, but we will communicate the specifics for 2023 in due course.
Great. Thanks, Jonathan.
Thank you Patrick.
Patrick It's Fraser I think.
We're going to have to just take one more question and I did get it actually on the email from worst walking down.
So whereas ER.
Get rid of these pop ups. He says my question is on the coal business Q3 production sales guidance of five eight to $6 2 million times, there's only $24 8 million tonnes.
Annualized on the high end what gives you confidence that the business can still yield 26 to 27 million times moving forward as part of your three year guidance.
Call hasn't produced above 26 million tons since 2018.
I think we'll turn that over to.
Robin share of meta to start in the Red if you want to add any comments as well Robin.
You bet Thanks horse.
There's been a number of things that have occurred over the last couple of years for sure not the least of which has been a COVID-19 pandemic cannot suddenly stress the business.
And then more recently, we've gone through a number of plant challenges here through the first half so that kind of spoke about that in the last quarter I believe but.
We took our two largest operations down for planned maintenance during the second quarter.
So going forward.
Pretty confident that they're going to be.
Back up to normal reliability.
Our normal reliability situation, but.
The single biggest thing that's affecting US right now and it's growing across pretty much all aspects of the business is just the shortage of labor that we have which isn't any different really than any of our peers are facing and both our industry and any other industry right now.
So again, we're seeing the impacts of Covid with higher absenteeism, we've got higher turnover limited availability of new skilled hires and all of that.
The constraint on our production capacity in the short term we have to work through that.
We are seeing increasing success in hiring so we've ramped up our efforts significantly and we're starting to see uptake in that but again. It takes time, we have to train and integrate those new employees into the operations.
All that said, we still have an extraordinary resource.
We've got all the capacity established for that $26 million to $27 million at our at our plants and our operations and we really just need to get the labor force in place to deliver on that we've got enough equipment. You've got again good good plant facilities. So it's really just a matter of getting the labor reestablished here to get back up to those very much.
<unk>.
That's great. Thanks, Rob and thanks for the question worst back.
Back to Don for closing remarks, Okay, well. Thank you everyone for joining our second quarter call My 71st call and final one I want to close today with some important. Thank you is nobody gets anywhere working alone I've had a lot of support from a lot of wonderful people and I'm going to take the risk of naming some of them, which always carries a danger that might forget someone that I.
<unk> is an advanced to whoever that might be I want to start with Doctor Norman B, keevil, without whom I would never have had the job in the first place and more importantly, thank him for his support in November 2008 in the midst of the global financial crisis, without which I would never been able to launch the 12 step plan to work our way out of a challenging situation following the porting Cole acquisition.
Fortunately since that acquisition the steelmaking coal business has generated about $34 billion in aggregate EBITDA and about 22 billion in free cash flow, which allowed us to build our base metals business and finance QB two.
I also want to thank normally be capable to serve as vice chair of our board and one of the most decent people I know and a huge supporter of the business.
I also have a special place in my heart for everyone, because sumitomo metal mining that ive ever dealt with this is one of the class acts in the global mining industry and every leader I've had the privilege to work with in every board member who has joined US as contributed and done nothing but be helpful. In professional.
Quick thank you to two of the longest serving analysts aurist and Greg very.
Very much appreciate all of your insights some questions in or is that to say after you'd be the first question for so many calls are always kind of fun to have Gregory first and you realized so seems fitting for some reason.
I want to say some thank yous to the global mining team at CIBC, which I was the founder and I did that was a very special partner named worn Gilman I wish him well as he builds up his own investment business and I mentioned, Andy Quinn, you know Johnson, David Scott and Pulse Packard, who are all incredible professionals and great partners and Jon Huntsman, who was chairman and CEO of the bank and a great mentor.
Mine and from whom so many of us learned about inspiring leadership.
To attack and its so hard is there so many to recognize but I'll name a few a few names from the past, Doug Horne, well, Greg Waller, Ron Vance, Ron Mills, Dell Andros, who have retired over the years, but made tremendous contributions to the company some of the past and present board members, Bob Wright, Who's 90 years old who I heard from last night.
Originally involved in recruiting me in the first place Jack Cockwell, who is a very very important mentor of mine Werent Siefert, who is vice chair of the board and the hardest working directors. We currently have at Delhi, Tim Snyder and Sheila Murray. Thank you to all.
I want to acknowledge my team because boy what a team we've got to.
Get them, all copper pins last year, saying best team ever IC Reds holding is an I assure amended but current team members from operations of private Robbins chairman it shows that by email Kieron, mcfadyen, renting or metals and coal and energy divisions, Alex Christopher on projects, Andrew Milner on a whole Tds and raised 21 on the corporate <unk>.
<unk>, some pretty special people Dean Windsor.
<unk>, who I've worked with so closely I'm, putting the team together so much I appreciate your support Marsha Smith, we wouldn't be number one in ESG without her team and everything she's done for us Peter Rosy has been there through thick and thin through everything Oh, the oh that transactions all the issues that we've had to deal with Nick Cooper, a whole new brain trust in us.
Company now looking at all things going on in the World Real Foley, who has become like the guru of commodities commodities for the whole streets and it's just been great working with you Fraser Phillips, whose wisdom and understanding of shareholders.
And then Ralph Lutz, one of my Great partners, whose since so much for us in Asia and now now in China.
My support team Mona hat and Stephanie Dunlop over the last 22 years I wouldn't have been able to survive without them and Connie Wang who steps it on the <unk> for the third time now here to help out I have a special gratitude to them for sure finally, I want to wish Jonathan price and Red Conger, nothing but the greatest.
Yes, they're both tremendously capable individuals with complementary experiences skills and I know.
They will be focused on creating tremendous new value and taking the company to even greater heights. So believe me when I say under this team the best is yet to come.
You all.
Overnight.
Thank you.
Conference has now ended please disconnect your lines at this time and we thank you for your participation.
Okay.
Yeah.
Any color.