Q2 2023 Teck Resources Limited Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to <unk> second quarter 2023 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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At this conference. This call is being recorded on Thursday July 27th 2023.
I'd now like to turn the conference over to Fraser Phillips Senior Vice President of Investor Relations and strategic analysis. Please go ahead.
Oh, Thanks, Kalia and good morning, everyone and thank you for joining us for Teck's second quarter 'twenty to 'twenty three 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 any obligation to update any forward looking statements.
Please refer to slide two for the assumptions underlying forward looking statements. In addition, we will reference various non-GAAP measures throughout this call explanations and reconciliations regarding these measures can be found in our MD&A and the latest press release on our website.
Jonathan price, our CEO will begin today's call with highlights from our second quarter results Christopher <unk>, our CFO will follow with additional color on the quarter.
Then Jonathan will conclude the call today.
With an update on our copper growth strategy and of course, we will then.
Open the lines to questions with that I'll turn the call over to Jonathan.
Thank you Fraser and good morning, everyone.
Now before we get into the second quarter results I'd like to begin by taking a moment to say that we are deeply saddened by the fatality that occurred in May 2023 at our CRO bladder Blanka operations.
Health and safety is a core value of attack and we are focused on our goal of every single person going home to their families safe and healthy each and every day.
We undertook a thorough investigation and learnings from the investigation are being shared across tech and with our industry peers to help prevent future incidents.
Okay.
Moving now to the highlights for the second quarter on slide four.
Overall, we maintained positive momentum through the second quarter with achievements across all four pillars of our value creation strategy.
First we made significant investments in cop of drugs.
We achieved a major milestone at QB two was the first sale of copper concentrate and we are advancing ramp up towards full production rates later this year.
We also continued to progress our copper growth pipeline, we achieved another major milestone with the receipt of regulatory approval from the Peruvian Environmental authority for our XI for an allo product.
The team did a fantastic job throughout the process and we are very pleased to have the permits in hand.
And for San Nicolas in Mexico, We closed the joint venture transaction with Agnico Eagle in the quarter and the New project management team finalized the E. I a permit application in June .
Second our continued focus on execution on our operations drove strong financial performance, we generated $1 $5 billion in adjusted EBITDA and ended the quarter with $7 billion of liquidity.
Third our strong financial performance enabled us to return cash to shareholders, while continuing to strengthen our balance sheet.
We paid our quarterly base dividend repurchased $85 million of class B shares through the NCI B and repaid the first biannual installments on the QB two project finance facility.
And finally, we advanced our governance and sustainability initiatives.
We made a step change in the advancement of our governance structure with the completion of the plan of arrangement to implement the sunset of the multiple voting rights attached to the class a common shares.
We also marked the one year anniversary of tech, becoming the first mining company globally to commit to the goal of becoming nature positive by 2030 with a 10 million dollar donation to the Chilean nature Fund.
This will help protect our critical global biodiversity area.
Since the launch of our nature positive program I am, particularly proud with the tech his help conserve over 51500 hectares, which is equivalent to four and a half times the size of the city of Vancouver.
Further we are pleased that travel became the first standalone zinc processing sites globally to be awarded the zinc Mark based on 32 responsible production criteria, including GHT emissions community health and our respect for indigenous Peoples' rights.
And we were honored to be named one of corporate Knights best corporate citizens in Canada for the 17th consecutive year.
Now looking at our progress at QB two on slide five.
As noted earlier, we achieved a major milestone at QB, two with the first shipment and sale of copper concentrate in the second quarter.
Line, one is operating well as per expectations in line two is now and commissioning.
The concentrate pipeline concentrate filter plant and storage systems at the port and now in operation.
Due to delays in construction and commissioning we have updated our QB two 2023 production guidance to 80000 to 100000 tons, but continue to expect to be operating at full production rates by the end of the year.
So total QB 2023 production guidance has been revised to 90 to 110000 tonnes, which includes 10000 tons of cathode.
Our project capital cost guidance of eight to 8.2 billion U S dollars remains unchanged and with that I will hand, it over to crystal for additional color on the quarter.
Thank you Jonathan.
Let's start on slide seven with our financial results for the quarter.
As Jonathan noted, we delivered solid financial performance in the quarter, driven by a robust commodity prices and steelmaking coal sales.
Overall, adjusted EBITDA was $1 5 billion and adjusted profit attributable to shareholders was 643 million or $1 22 per share on a diluted basis.
We paid 65 million in quarterly base dividend completed $85 million in share buybacks and reduced our debt through the first semiannual repayment on our Cubic's U project finance facility of 147 million U S.
We've outlined the key drivers of our profitability on slide eight.
Adjusted EBITDA was $1 5 billion in the second quarter.
Compared to the same period in 2022, the decrease was primarily driven by lower prices for our principal products, which were at historically high levels last year, particularly for steelmaking coal.
Lower prices were partially offset by a weaker Canadian dollar.
Lower copper sales volumes continued inflationary pressures on our unit costs and the sale of Fort Hills also had a negative impact on our Q2 EBITDA compared to last year.
Looking ahead, we remain highly focused on managing our controllable operating expenditures.
Diesel and other fuel costs have materially declined from last year, we continue to experience inflationary pressures in our cost of key supplies, including mining equipment tires and contractors.
Our underlying mining drivers remain relatively stable and the continued pressures on certain input costs are already reflected in our 2023 sustaining capital and annual unit cost guidance, which are unchanged.
Looking now at each of our business units in more detail and starting with copper on slide nine.
Copper production of 64000 tons was 10% lower than the same period last year, reflecting expected lower grades as well as unplanned maintenance at Highland Valley and reduced milling rates in response to cyclone impacts adapt to me now.
Copper production in the second half of the year is expected to be strong with our annual copper production guidance, excluding QB two unchanged.
Net cash unit costs were higher than the same quarter last year due to lower production and higher consumable cost, particularly for power as well as higher maintenance costs.
We expect copper unit costs to be within our annual cost guidance range with higher production in the second half of the year.
Importantly, we achieved our first sale of copper concentrate at QB two in the quarter.
Looking forward as Jonathan mentioned earlier line, one is operating well and line two is in commissioning.
We continue to expect to be two to reach full production rates by the end of 2023.
However, recent changes to offer us require us to recognize sales proceeds and related costs associated with products sold during ramp up and commissioning through our earnings.
Historically, we and others in the industry would have capitalized these amounts during ramp up through to commercial production.
We expect this change in accounting treatment to increase our unit operating costs for QB two during ramp up.
As a result, we do not anticipate generating significant gross profit from QB two in the third quarter. Despite the expected ramp up in production rates.
As Jonathan noted earlier, we updated our full year production guidance for Q2 to 80000 to 100000 tons from 140000 to 170000 tonnes.
As a result, our total annual copper guidance has been updated to 330000 to 375000 from 390000 to 445000 tons.
Our previously disclosed cubic to production guidance for 2020 four to 2020 six is unchanged.
Turning now to think on slide 10.
Red dog zinc production of 134000 tons decreased by 7% compared to last year as a result of lower grades as expected in the mine plan as well as reduced power system availability.
Red Dog zinc production is expected to improve in the second half of the year.
At trail refined zinc production was impacted by the planned roaster shut down and the commissioning of the automated circuit to produce zinc.
Refined lead production was impacted by unplanned chipset boiler repairs.
Net cash unit costs were higher than the same period last year and above our annual guidance range for 2023, primarily due to the timing of sales our annual unit cost guidance for the year is unchanged.
Red Dog shipping season commenced on July 4th and looking forward, we expect red dog zinc in concentrate sales of 240000 to 280000 tonnes in Q3, reflecting the normal seasonality of ourselves.
For the full year, we have updated our guidance for led production at Red Dog to 95000 to 110000 tonnes from 110000 to 125000 tons.
As a result of our decision to advance the kids that boiler replacement at trail from 'twenty to 'twenty six into 'twenty 'twenty four we expect lower byproduct production and related profitability next year.
Turning now to slide 11.
Strong performance in cash flow generation from our high margin steelmaking coal operations in the second quarter further reinforce the inherent value of this business.
While prices decreased from all time record highs in Q2 last year, they remain strong and significantly above the long term average.
Production of $5 8 million tonnes was 9% higher than the same period last year, reflecting the timing of maintenance outages and improvements in productivity and reliability, despite intermittent plant reliability challenges in the quarter.
The logistics chain performed well during the second quarter, drawing down steelmaking coal inventories to low levels as anticipated.
Quarter sales volumes were $6 2 million tonnes within our guidance range and similar to last year.
We were pleased to enter into a long term rail agreement with Canadian Pacific, Kansas City limited to support the efficient movement of our high quality low emission steelmaking coal to global customers through 2026.
We also announced jointly a unique collaboration to pioneer hydrogen locomotive technology, which supports our climate action plan and the objective of achieving net zero by 2050.
Looking forward, we expect Q3 sales of 5.6 to 6 million ton, reflecting planned shutdowns at two of our operations and our low inventory levels.
We expect slightly elevated transportation costs in the third quarter, reflecting the utilization of alternate port capacity to minimize the impact of the B C Port Workers' strike in July .
Nonetheless, we anticipate transportation cost to decline in the second half of the year due to lower demurrage costs.
As a result of our annual transportation cost guidance is unchanged.
We expect our annual production to be at the lower end of our previously disclosed guidance range of 24 to 26 million tons.
Moving now to slide 12, our financial position remains strong.
Liquidity is currently $7 billion, including $1 7 billion of cash.
In Q2, we purchased approximately one 6 million class B shares for $85 million and paid our quarterly base dividend of 12, and a half cents per share.
We also reduced our debt through the first semiannual repayment of 147 million you asked on the QB two project finance facility.
We continue to maintain investment grade credit ratings from S&P, Moody's and Fitch.
Looking ahead in accordance with our capital allocation framework, we remain focused on balancing our investment and growth against returning capital to shareholders, while maintaining a strong balance sheet.
And with that I'll turn it back over to Jonathan.
Thanks Crystal.
Now I would like to take a moment to touch on our progress on advancing our strategy to create value for shareholders.
First and foremost the board and senior management remains focused on delivering the tremendous value inherent in our base metals in steelmaking coal businesses.
The exciting potential we see is a testament to the incredible work our teams have done to position each business for sustainable long term success.
The board continues to evaluate path to unlock the full potential of our unparalleled copper growth pipeline and create significant value and opportunity for our shareholders and all stakeholders.
As previously announced tech continues to engage with a number of parties that have expressed interest in our steelmaking coal business.
These expressions of interest demonstrate the broad recognition of the quality of texts high margin long life steelmaking coal assets.
The Board and Special Committee are pleased with the progress we have been making to date.
As we continue to move through this comprehensive uncompetitive review, we are focused on arriving at an outcome that maximizes value for shareholders and ensures a sustainable future for the benefit of our employees local communities and indigenous peoples.
Our steelmaking coal business is best in class underpinned by a high quality reserve base with top quartile margins and a record of free cash flow generation through various commodity cycles.
This business is positioned to capitalize on the global supply gap from existing mine depletion and a lack of new projects coming into production.
Core business fundamentals are robust.
I highlight this only to underscore our commitment to delivering the right value for a highly profitable and resilient steelmaking coal operations, we will transact only if the benefits to our shareholders and other stakeholders are clear.
And we don't intend to provide any other detail regarding the ongoing review at this time, but we'll continue to provide updates as appropriate.
So turning to slide 15.
Driving organic growth through development of our copper project pipeline remains critical to our value creation journey.
As I mentioned earlier, we continue to ramp up our flagship QB two project demonstrating its ability to operate consistently to plan and significantly accelerating our copper production profile.
Our pipeline of additional projects is full of high quality assets in stable jurisdictions and the portfolio is this an advanced state of readiness, given our deliberate pre investment.
We have the opportunity to double our copper production in the near term and double it again by the end of the decade to drive substantial new intrinsic value.
Well, we will always remain disciplined in balancing that pursuit of growth with returning capital to investors in line with our capital allocation framework.
Now looking at our near term copper projects in more detail.
We have five significant near term projects to drive additional copper focused growth.
Located in well established mining Jewish.
So Nicholas QB any zephyr now new range and Galore Creek.
These are diversified by jurisdiction and scale with all projects significantly less complex and QB two.
In addition, they are forecast it to be low cost operations and in many cases already derisked through strategic partnerships.
As I mentioned earlier, we significantly advance these projects in the second quarter with receipt of regulatory approval for Zaffar now and close of the JV with Agnico Eagle and finalize the permit documentation for submission for San Nicolas.
On slide 17 Tech is pursuing an active portfolio management approach to our growth pipeline maximizing optionality and value.
With numerous sanction windows within the next three years, we'll be in a position to drive substantial additional growth from these development projects before the end of the decade.
For each of these projects, we have significant work underway to advanced development, including resource definition engineering and design and permitting and told her engagement.
We are progressing projects towards the earliest possible sanction date.
We have derisked product delivery financially and operationally through a partnership approach such as our approach for the development of QB.
It is important to note that this is an unconstrained view of our copper growth.
In prioritizing our growth options, we will consider multiple investment criteria include.
Including financial returns balance sheet capacity and financing options project readiness project development capacity and the social political and environmental context.
Importantly, each of these projects will have to compete for capital with the rest of the business.
Demonstrate and generate strong returns.
Well permitting is a major gating factor in determining potential sanction dates we are largely in control of project timing we.
We will continue to apply our disciplined capital allocation framework that balances growth with returns to shareholders.
Overall, teck's copper growth pipeline is well positioned to maximize optionality and value.
In closing on slide 18, I want to reiterate our objective to responsibly create value for shareholders.
That is my job first and foremost.
And if there is one conclusion that I hope our shareholders will take away from this call. It is that everything we do at Tek is designed to further that goal of responsible value creation.
This is our north star as we explore a range of options to unlock the full potential of our world class base metals business and evaluate any transaction for all high margin steelmaking coal business.
It is also a focus as we continue to execute against our copper growth strategy, while continuing to balance growth with cash returns to shareholders.
And we remain strongly committed to our purpose and values and to being a responsible corporate actor with good business practices. We are steadfast in our belief that behaving responsibly and thoughtfully enhances value.
Operating the right way makes tech a partner of choice minimize disruptions to our operations and opens new opportunities for our company and our stakeholders.
<unk> is a fantastic company with an incredibly bright future.
There is undoubtedly more work to do and we remain both confident and excited about the potential for teck in the future.
Thank you operator, please open the line for questions.
Certainly.
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My first question is from Orange Walkabout with Scotiabank. Please go ahead.
Hi, Good morning, I was wondering if we can get some more color on the QB two progress we thought you disclosed production of only 3000 tons in.
In Q2, yet the comment was made in the presentation that line, what is operating well or expectations can you give us an update on what the status of line, one is and sort of what the issues have been.
Yeah. Thanks, very much for the question Aurist I'm going to hand that one off to to read.
Hey, good morning, Laura.
We've we've had some delays.
In construction and commissioning in the second quarter that we've addressed.
Things like the required rework, some some adjustments and modifications not not uncommon.
As you know we've been built.
Building an commissioning this thing all along what's the thought in mind, the long term reliable performance. So.
We've addressed things rather than.
Then perhaps them and so now that you know now that we've got it actually up and running.
Strong in June and selling concentrate down to the port getting it filled or getting your getting it off the market. We have all of those things in place now.
And those those adjustments and modifications that we made online one have all been made online too so were you.
We're commissioning late June now with with the full knowledge.
Of everything that we addressed on line, one and that is going very very smooth.
Very positive for us so we're.
You know were in a situation now where the.
The second half of the year the productions are going to be heavier weighted towards the fourth quarter than the third quarter, but very confident that we'll be at full production rates by the end of the year.
Just on that Red can you give us an idea of where throughput is right now on line more in terms of tonnes per day.
Yes.
We've hit design capacities.
Periods of time so.
As you Commission all of this equipment like the <unk>.
The concentrate pipeline in the filter plant we have to adjust.
Throughput is work commissioning those those components.
We don't have a lot of storage space either.
The.
At altitude or poor so the throttle as we commission. These other components as throughput, but when when everything is wide open and running it runs very strong according to design.
We're very.
I'm excited about the performance.
The plan.
These adjustments that we made in the second quarter not uncommon there were no.
Fatal flaws you know everything is sized appropriately empowered.
Appropriately. So those are all significant chunks for us to give us the confidence that.
This thing will perform as designed we've seen it for periods of time performing as designed in.
You know as we get everything else Commission.
I'll just have more and more of those days.
Strong together and that's how our forecast is built.
And just finally read what gives me the confidence, though that I mean since things are delayed and you've kept guidance for this year what gives you the confidence.
Of the 2020 for guidance.
Which I assume it's the low end of that three year of 285000 tonnes like.
Are you seeing any constraints that will impact the ramp up next year.
No no not at all.
We did see constrained source, we'd be we'd be flagging those signals.
Those.
Again, I want to repeat that.
<unk> is very well designed.
It performed as designed.
We've made a lot of adjustments that are for the long term benefit.
Of the operation we're not.
Catching things or more leaving things to be modified in the future where I didn't identify them.
In the second quarter addressed them in.
And then the run of blind one in June and July indicates that that all of that is very strong very sound very solid.
Thanks, Brett and good luck.
Okay.
Yeah, Thanks, Fred and ours, just to reiterate overall the reduction in guidance that we've communicated today is due to delays in construction and commissioning not ramp up.
It's that that gives us the confidence that we will achieve our full rates of production before the end of this year.
That again is why we don't expect any impact Oh carryover into 2024, and while we have retained that guidance.
The next question is from Carlos de Alba with Morgan Stanley . Please go ahead.
Yeah. Thank you good morning, everyone.
Oh QB two.
So.
When do you expect the operation to turn profitable.
You'll give it given everything that it wasn't discuss.
The previous question.
Yeah, Carlos Thanks, very much for that question I'll turn that one over to Crystal. Please.
Hi, Carlos Thanks for the question I think as we've indicated as a result of that you know the change in accounting treatment, where we have to record the results through our earnings rate friendly sort of get go rather than waiting until we've achieved commercial production has an impact on that or on the profitability.
Haven't really commented on or guided to what that May look like I think you know we do expect it to be true to be up to those full production rates by the end of the year.
And expect to be generating free cash flow into into 2020 for them, but that accounting treatment is really going to preclude us from generating substantial profitability in 2023.
Understood. Thank you.
Crystal and so on on.
On the expansion of QB two now are the mill expansion given the.
The recent changes.
Having become law, yet but might become.
Loss soon and that increased the tax royalty for copper operations in Chile and.
Have you now under this new paradigm these new scenario.
The law is the possibility of moving ahead with these with this operation with this expansion because I'm not so sure and if you could remind us that would be great. If the taxes stability agreement that you have for QB. Two also applies to these expansion or it doesn't.
Yeah. Good question Carlos.
We assume that the the bill that's been announced will be passed into law and therefore of course, we've modeled the impact on that across all of our operations and future projects in Chile.
We have a stability agreement in place with comment onto koyo, which runs through to 2027.
And as you know we have a 15 year stability agreement for QB two now the design for the <unk> mill expansion old T V N E.
<unk> is designed to be an expansion of QB two not a separate project and for that reason, we think it should achieve the same tax stability protection as QB two.
That will ultimately be definitively tested through our engagement with government.
But either way call offs as we look at the economics of Q V M E with or without the stability agreement. It looks attractive of course, it looks more attractive if we have the cover of that agreement and that's something we're working through now.
The permit application that we submitted in the first quarter of this year for T. V. M. A is running along very well and we've had a questions and inquiries from from the relevant authorities that we revert at all and we see that moving along exactly as we would expect so I'm very pleased with progress so far.
Thanks, Yes, and if I may squeeze just one more on QB two any comments on the poor time to get the and where would you suspect that part of the project to be ready for you to ship concentrate out of the country.
Yeah, Let me pass that went back to red.
Yeah, Carlos first of all just a nod to our marketing and logistics team they've got a great set of alternatives.
Programs for us to truck concentrate.
Out of the Port we've already proved that up it's working well and so we've got a strong sales mechanism in place.
In the interim.
The Dirty work is progressing well.
Wrestling away. This this construction project from the Wild Pacific Ocean, It's Ben.
It's been quite an interesting project for all of US who were we're making progress and.
Should be shipping concentrate out of our own port facility by the end of the year.
Great. Thank you very much alright, good luck with everything.
Thanks Carlos.
The next question is from Lucas pipes with B Riley Securities. Please go ahead.
Thank you very much operator, good morning, everyone.
Jonathan I really appreciate it.
<unk> on the strategic side earlier today and I know there is not there there is a process, but I just wondered if you could maybe frame up our preference.
On the on the steelmaking coal side.
A partial sale where would that fit in strategically with that solve the objectives that you've laid out. Thank you very much for for your color on that.
Yeah. Thanks for the question Lucas you know as we said previously we are looking for a a separation here of coal from the metals business something that would be considered a simpler and more direct.
We have a range of parties engaged right now who've expressed interest in the steelmaking coal business and of course, they have a range of proposed transactions.
They are bringing forward.
It's a good confirmation as I mentioned before of the value of that business and it's great that we have a competitive process. That's it's running its course here.
I'll focus will be to maximize value for shareholders of course, while also ensuring a sustainable future for the benefit of employees communities indigenous groups et cetera.
There will be a range of considerations that we have to bring to the table here as we make those decisions to ensure we are taking care of all of those stakeholder groups appropriately.
And that is something that we're working through right. Now. So we have deliberately sought to keep a very open mind here with respect to to what will create the greatest value. We do that through the lens of you know that all of the perspectives of our shareholders and we look forward to speaking to them again in the coming days post the quarter and I'm sure we'll learn more.
[noise] about their views in that regard.
But look we're working very diligently through this process I don't want to say anything now to sort of prejudge or preempt what the outcome might be.
We'll take the time to get this right and do the very best we can for our shareholders, but needless to say, we're not sitting on our hands and wear with progressing this as quickly as we can.
Thank you very much for that perspective, thank you.
It is.
I Havent market related question on the coking coal side as well on that on the call as well.
Yes, Lukas I mean, we are we made a change as you know recently in the organization real after many many many years of phenomenal contribution here at check in Honesty's requirement of retirement, and we appointed Ian Anderson as our new Chief commercial officer, but a real is on the line and I'm sure would love to talk to you about.
The the current status and outlook for the the met coal market, so real with that over to you. Please.
Alright.
Well I will Miss your comments very much and I wish you all the best in your retirement.
Well, thanks, a bunch Jonathan.
Lucas we really appreciate your comments.
So just just to give you.
Sure it inside into our outlook for steelmaking coal.
I guess at a high level. If you look at the demand side versus what is happening with coal production Hot.
Hot metal production is up 60 million pounds, when you compare to 2019.
The pandemic.
And when you do the same comparison for coal from the key exporters, it's actually down 35 million tons. So that kind of put in perspective, the level of tightness that we're seeing in the market no more more specifically steel prices.
Our improving compared to the lows of last year, that's in response to better demand from various sectors.
We are seeing some.
The patients from China, as well looking at policies to support the economy.
And in India.
Steel production is also continuing to increase towards the end of the government's target of reaching 300 million tons of installed capacity by 'twenty through 'twenty one.
And then on the coal supply side.
Fly is still struggling and still down compared to last year, that's the fourth consecutive year.
Reduction in terms of seaborne exports. So yes, it remains open.
Overall, a tight market and as a result pricing is continuing to be substantially above.
The long term average going back to Pat.
Yeah.
Real I I, all I really appreciate that and I hope you keep an eye on on the coking coal markets. Even after October again best of luck in retirement. Thank you.
Thanks, a bunch Lucas.
The next question is from Liam Fitzpatrick with Deutsche Bank. Please go ahead.
Yeah.
Hi, everyone I have just one quick one for myself just on the ECR sale process I appreciate it's difficult to give much color, but there's a lot of interest in this at the moment in terms of timing is it your hope of your expectation that before the next set of numbers in October that we.
Could get a fuller update in terms of fuel your next steps on this business.
Yeah. Thanks for the question Lee and we are working on this very actively right now we're engaged with multiple counterparties as you would imagine there is a you know a detailed.
Data room, and due diligence process, that's working its way through which.
Which we will run to its conclusion as I've said before we're not sort of sitting on our hands here, we were taking a very active and diligent approach to moving this forward as quickly as we can but also ensuring that we take time as we needed to deliver the best outcome for shareholders and stakeholders, So I won't commit.
Right now to timing Liam because of course, that's also a function of the counterparties on the other side.
Of this process, but suffice to say, where we've been very active and continue to be very active in this work.
Okay understood. Thanks for the color.
Yeah.
Okay.
The next question is from Lawson Winder with Bank of America Securities. Please go ahead.
Thank you operator, and good morning, John and Brad Crystal in rail and also congratulations on your retirement I just wanted to.
Hopefully as a follow up on the coal separation again.
Just based on your conversations.
With potential interested minority interest is it getting to the point where the.
The minority interests could actually add up to a majority stake in coal.
Yeah. Thanks, Thanks for the question Lawson.
You know that there is a lot of interest whether that's for the whole of the business. All four components of the business you know as you know previously with.
With the the transaction, we announced earlier in the year for separation Nippon steel with active and <unk> at that point in time with respect to to their interest you know again there are a number of structures that we're looking at here in a number of different forms of transaction that we will have to compare and trade off against one another.
I'm not going to preempt that nobody probably sort of commenting on what will be more or less attractive because of course, there's far more to it than that than just valuation as you know in these circumstances is the allocation of risk and that is the long term implications for the business beyond the transaction all of which we have to be cognizant of in the decision making.
But suffice to say there is significant interest in its broad based in terms of where that interest is coming from.
Okay. Thanks, very much and then and then maybe just my follow up would be on Chile.
So you've highlighted again at the Q B any feasibility study is expected to be completed in the second half and so.
My question that would be would you expect that to be released with our Q3 23 resolved and then assuming the economics are.
As compelling as you currently believes they are.
Is the regulatory environment in Chile.
Ah you're sufficiently comfortable with that to move ahead, whether or not you have.
You have the.
The same tax benefits as the existing.
The agreement with TPG.
Yeah listen.
We are working through the completion of the feasibility study, which we hope to have done.
In the second half of this year, so you know it.
Italy will be done by the end of the year in parallel of course, we need to get the permit.
The amendment to the existing permit to allow us to to construct this project. So so those two things are outstanding before we would make any sanction decision I'm actually going to hand over to Amparo just to give you a bit of a lay of the land with respect to the regulatory environment right now PARO as our vice president covering a South America.
At the highest level I would just say, we're pretty comfortable with it based on what we see but let me invite John to add some color to that.
Okay. Good morning, everybody and guests and as Jonathan said their regulatory process of the D. I E, which is declaration of impact is that he is calling and the way and we the process has been smooth and we are now preparing the second round of financing. So we we don't foresee.
Any any issues impacting the approval of that would be I E.
Okay fantastic. Thank you both for those responses.
Thanks Lawson.
The next question is from Chris <unk> with.
With Jefferies. Please go ahead.
Thank you operator, guys. Thanks for taking my question I have actually a couple of questions on QB. Two one is just maybe more of an accounting question in the so the capex budget or guidance for the project is unchanged at $18 $2 billion in your investing activities table in the earnings release, you show QB two project Capex and you show the.
Our ramp up Capex does the Capex for the project include the ramp up Capex. That's my first question.
Crystal last one for you.
Yeah, Thanks, Jonathan and thank you Chris There is a portion of our project capital that is related to that but that separate bucket of capital that we've categorized there.
It was really in relation to the accounting treatment and how are we have to look at those costs that we're incurring during that sort of commissioning phase and and breaking those out between what goes into inventory versus what goes into cost of sales and what what should continue to go into it into capital. So those arent included in the in the project piece, but when we develop that project.
Capital budget.
Budget. There is obviously something you know our capital associated with ramp up that was built into that but this is really in relation to the accounting treatment.
Okay. So the ramp up Capex really I mean honestly, we're very close to commissioning, but if there were if the ramp it takes longer than you expect today.
Ramp up Capex would obviously continue to rise, but we should not look at that as being additive to the project Capex in other words, that's just basically pre commercial production operating costs being capitalized for yourself.
Okay. That's yeah.
Yes, that's the right way to think about it and we don't guide to that number but I don't expect that number to be substantially higher than what we've incurred already given as you know we were largely through the ramp up phase.
Got it actually I'm, sorry, I, just I wasn't sure exactly how that worked my second question is just if we look at it I think weird yeah.
If we look at if we look at QB, two and its entirety and we consider the.
The delays in some of the Capex increases over the life of the project.
With the project assuming that you hit your targets going forward in terms of production and operating costs and Capex going forward would it meet your hurdle rate based on your copper price assumption or do you need the mill expansion now which is obviously much higher returning project.
Project in its entirety to actually meet your hurdle rate. So there's QB two in and of itself meet your hurdle rate based on what you've built so far and when you expect to happen going forward.
Yeah. Thanks, Chris.
Of course, you know one of the major changes that's occurred since we started building. The project is the the long term outlook for copper prices.
This was sanctioned and based on the returns we communicated at the time, we were using $3 15 for the long term copper price here.
There's a range of views as to what that price should be in future, but I think everybody recognizes that wouldn't be sufficient to incentivize the capacity that we're going to need to do even go some way to filling the expected gap between supply and demand a few years.
So that's a long way of saying you know.
If you look at the the additional Capex that we've incurred if you factor in you know some inflation in unit costs, which we of course have communicated as we updated our own unit costs for the market you can still get a very strong return on QB, two using quite a reasonable copper.
So the answer is yes, but you know in addition to seeing inflation in operating costs exceeding Susan Capex. You know you you have to adjust the copper price assumption commensurately to go with that but it is still a project that looks good in its own right and it doesn't require the mill expansion to maybe you can.
All mix wood.
That's perfect. Thank you for the help I appreciate it and good luck.
Thank you Chris.
The next question is from Bryce Adams with CIBC. Please go ahead.
Yeah, Hi, thanks for the call.
To ask on new range are listed as a copper growth opportunity on a few slides.
So just an update on the permitting process I think the water permit was revoked in my but was that an air permit as well a rundown on the payments there would be appreciated and then if permitting is a current hurdle shouldn't you range be moved from a near term to a longer term opportunity.
Yeah, Thanks for that Bryce I'm going to hand, you over to Tyler Mitchelson Who's our S V. P of copper growths and of course, he's a he's very close to the situation with dependent you're referring to.
Perfect.
Hi, Bryce Thanks for the question, Yes. The 404 permit was the wetlands permit which is essentially the water discharge permit.
And it was being contested in court and Indiana, We got the decision in May that that was revoked by the Army Corps of engineers, So right now.
A bit of a step back to understand what is the pathway forward to get that permit reinstated. So there's a multiple approach to that including engagement with stakeholders, particularly the first nations groups, there as well as the EPA and the Army Corps of engineers and state and federal regulators to understand what is our pathway forward.
Word from that.
So we don't have the definitive answer but it is a critical permit for us to be able to move forward with the project.
So putting it all together do you.
Think that it would be that as it could be in production. This decade or does it go into next decade.
[laughter] very difficult to say at this point in time as this.
As Ben stated by a number of people. This is a bit unprecedented in the U S to actually revoke a permit in the context of no violations to the permit conditions in it or anything.
We're in a bit of uncharted territory right now so over the next few months, we're going to work through what is the pathway forward and we'll be able to have a much better sense for what the timeline is on the project.
Okay, and sorry, if I was cutting off.
No I was I was just going to say price I mean, I think you know similar to many of the projects. We have and this is common across every operator in the industry is that the the permitting piece is a is one of the greatest uncertainties that to a certain extent is beyond our control. It's you know it's an advantage there.
Therefore, as I have multiple projects.
Because you know because of those time lines as you identify with therefore very happy to have the.
The Zephyr and I'll put them in hand.
We will submit the pin it to San Nicolas.
Shortly and of course, we have the Q V M. A pyramid in train us on PARO described in his is moving along well.
Ultimately even with permits in hand, we still then have to look at how we optimize the development.
<unk> of capital in such a way that it leaves space for return to shareholders and that we're directing the organizations project capacity project construction capacity those things that will generate the highest returns.
So just having a permit to say theres not necessarily guarantee that any project would be the fifth cab off the rank because we will always take a portfolio perspective to the way we deliver the greatest value.
Okay, maybe just last one follow up on these projects, but on that waterfall chart in slide 15.
How do you see like when you're preparing a child, which when you put on the left is that like the most probable project to be advanced or is it just more random.
Yeah, I mean, I wouldn't I wouldn't read into it necessarily in that first phase where you see those five projects have some niche <unk> mill expansions after an hour et cetera, because of course offer now is the one where we have a permit but zephyr now where you know redoing feasibility and we've got some engineering to be done San Nicolas we havent yet.
Put in the application.
Vacation for the Purion H and <unk> mill expansion of course with somewhere between the two so I wouldn't read into that too definitively in terms of the sequence in which these things happen. The point, we're trying to communicate here is all of these things are in the mix and what we would call the near term here from a project development.
Capability and delivery and we will look at that on a portfolio basis across some of the range of range of factors I referenced in my remarks earlier, but it's a it's a great position to be in because of the risk off things like permitting having multiple projects here are that we can you know except one moving back in time, because there'll be other.
Is that still exist in that in that plus timeframe gives us the option to continue to invest in growth.
As if we were a single project, operator, or even a two project operator that might be a very difficult thing to achieve.
That's great I appreciate the discussion thanks, so much.
Thanks, Brian .
The next question is from Timna Tanners with Wolfe Research. Please go ahead.
Great. Thank you I wanted to follow up on that last question just to understand slide 16.
16, almost cash costs, if you could just remind us when they were last updated and I. If if it wasn't that recently like what do you think they might look like roughly and if you were to update them just high level.
Yeah. Thanks, Timna Tyler do you want to comment on those.
Yeah, those cash cost there they are probably the most recent studies that we've done some of those are dated and as we're moving through its Jonathan saying, we're moving through feasibility updates and.
For the majority of these projects and we'll update those as we complete the final feasibility numbers, but as you.
I noted you are.
Seeing inflationary impacts across the board. So we anticipate those will go up but I can't tell you what they are at this point in time, but we'll have much better information as we work through the feasibility and the steady process and update.
Okay fair enough. Thanks for that and I have a question just for Crystal I'm wanted to touch base on the working capital just because it continues to see pretty high inventories and just I'm assuming of course that has to do with the QB two ramp up but how do we think about the cadence of that normalizing and cause the working capital Yeah. Yeah, you haven't.
First as much as we might have expected so any timing guidance that would be great. Thanks.
Thanks for your question you are correct. There is a build in working capital in relation to Q V. So I think you can expect that to come down.
Overtime.
The recipe here.
Okay, great. Thanks again.
I will now hand, the call back over to Mr price for closing remarks.
Thank you and thanks to everyone for joining us today.
However, if you need further details or context here. Please please reach out to the IR team they will be very happy to help and we look forward to seeing you. All soon so thank you very much and have a good day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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