Teck Resources Ltd (TECK) 2002 Q4 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to Fording's year-end 2002 conference call. At this time all participants are in a listen only mode. Following the company's prepared remarks, there will be an opportunity for analysts and shareholders to ask questions. If anyone has difficulties hearing the conference, please press star, zero, for operator assistance at any time. [Unintelligible] that this conference call is being recorded. This call is also being web cast and an archive will be available on the company's Website at www.fording.ce. I will now turn the conference over to Mr. Jim Gardiner, President and Chief Executive Officer of Fording. Go ahead Mr. Gardiner.

Thank you operator, and thank you everyone for joining us today. With me on today's call are Jim Popowich, Executive Vice President, and Allen Hagerman, Vice President and Chief Financial Officer. I will be addressing two subjects today. First, I will comment on our financial results for the past year, and I will then update you on our proposal to convert into an income trust. Before I continue, Allen Hagerman will read a brief statement. Allen.

Thanks Jim. I remind participants that certain statements made on today's call may be forward-looking. Forward-looking information is, by its nature, subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those suggested today. Risks, uncertainties, and other factors that affect the reliability of forward-looking information are discussed in our public filings with the Securities Regulatory Authorities in Canada and the United States.

The media may monitor this call in a listen only mode. They are free to quote any member of management, but I ask them not to quote remarks from any other participant without that participant's permission.

Thank you Allen. The year we just completed was one that included many successes, but also a few disappointments. Our income from operations in 2002 was $146m. Unusual items, including the write-down of our Mexican operation, expenses associated with our reorganization and responding to the shared offers, along with the expensing of the book to capital cost, contributed to a net loss for the year of $71m or $1.38 per share.

Net income before these unusual items was $79m or $1.54 per share. This compares to net income on the same basis of $97m and $1.85 per share in 2001. In our metallurgical coal business, difficult and protracted negotiations resulted in higher prices for our principal product, hard coking coal. Our average U.S. prices increased 10% in 2002 compared to the prior year. However, being a price leader during these coal negotiations, along with other factors we've discussed throughout the year, negatively affected our sales volume.

We responded to reduced sales volumes by scaling back production. The influence of fixed cost on a reduced production schedule, and longer haul distances and pre-stripping activities while our plants were shut down, increased our cost of sales in 2002. While we did experience lower sales volumes and higher costs, higher coal prices helped our Mountain Operations contribute significantly to our income from operations in 2002, which at $146m was one of our best years ever.

Negotiations for the 2003 coal year have just commenced, and we are not in a position to comment on these negotiations, or to predict their outcome. Indications are that seaboard hard coking coal markets remain balanced insofar as supply and demand are concerned. The supply of U.S. and European based hard coking coal continues to fall. Steel production in Asia is running very strongly. We feel Fording coal is competitively priced and well positioned for the global seaboard hard coking coal market.

Our much-improved foreign currency hedge position for 2003 will, in itself, give us a big lift in margin. The accident at Westshore that destroyed the smaller of two coal ship motors earlier this year, continues to have a minimal, if any, impact on coal deliveries. We expect to be able to meet all of our contracted sales, providing vessel scheduling is balanced. We continue to work closely with our customers and the railway Westshore and matching terminal, to facilitate efficient loading.

We were also successful last year in the competitive bid process by Trans Ulta, and were awarded the operations contract for the Whitewood and High Mill mines as of January 1, 2003. These contracts would have significantly improved the financial results of the Perry operations. However, as part of the upcoming plan of arrangements, these operations will be transferred to shares in Ontario Teachers'. During the last year, income from operations of our Prairie mines was down slightly from 2001, due to the closure in that year of our Mildred Lake operation.

Our industrial minerals operations during 2002 continue to reflect the poor condition of the economies of this principal market, the U.S. and Europe, and our decision to exit some uneconomic low priced markets. Sales volumes were down, but average-selling prices increased over the previous year. Given the operating results of our Mexican operations since start up in 1998, and some uncertainty regarding the pace of improvement, we have written down the investment in this operation by $140m. We have maintained our product development efforts with wollastonite, and continue to work with customers to broaden the scope of applications for the use of this industrial mineral. We are confident these initiatives will bear fruit when combined with improvements in the U.S. and European economies, will bode well for the industrial minerals operations in the future.

Our financial position remains strong. Net debt at the end of 2002 was $136m, an increase of about $8m from 2001. Our operating results for the year allowed us to fund a number of initiatives without significantly affecting our debt level. During the year, we invested $50m, primarily in sustaining capital, including the [unintelligible] and the Mountain Operations, and support equipment for the Whitewood mine. We bought back nearly $40m of our shares during the first three quarters of the year, $40m that is, and we paid $28m in dividends to our shareholders. We also increased the funding of our pension plans by some $20m; to bring our pension assets in line with our pension related liabilities.

Looking to the future, our most significant achievement for the past year will be the completion of our plan of arrangement, should our shareholders vote in favor of it, at the special meeting on February 19 and the cart craft approval shortly after. The plan of arrangement will encompass a number of things. First, Fording will be converted into an income trust. The Fording Coal partnership will be created, in which Fording will initially own 55%. Teck Cominco will own the remaining 35%. Fording, Teck Cominco and Luscar, owned by Sherritt and Ontario Teachers', will contribute their respective [inaudible] for coal assets to the partnership.

Fording will sell its Prairie Operations to Sherritt and Ontario Teachers'. Fording will retain its industrial minerals operations. Fording and the partnership will establish new credit facilities. Fording will consummate a long-term court agreement with Westshore and will become a 46% owner of matching terminals. Fording, Teck Cominco, Westshore, Sherritt and Ontario Teachers' will pay $35 per share, up to $1.05b for Fording shares. Fording shareholders will also receive over 21m units in the new trust.

Bringing together all of the current metallurgical coal properties in Canada will create a partnership capable of net production of over 25m tons of metallurgical coal annually. The Fording Coal Partnership will have the scope and scale to insure that Canadian metallurgical coal can remain competitive in world markets for decades to come. We expect significant and sustainable marketing and capital synergies to be realized in both the near and long term. The partnership will be able to offer top quality products to all of the steel making markets around the world, and will be a more cost effective competitor in those markets.

Teck Cominco will serve as managing partner of the partnership. This role encompasses such matters as strategic overview, approval of business plans, and the timetable and maintainment of synergy. On behalf of the Fording Trust and Tech Cominco, I, along with the team here at Fording, will lead the management of the operation, the marketing functions and the execution of the strategic planning. We will be working quickly to bring about a smooth transition on all fronts, once the plan of arrangement is approved.

All of us at Fording are looking forward to the challenges and opportunities ahead. We are on track to complete the plan of arrangement by the end of February. The vote, and special meeting of the shareholders, is scheduled for February 19. All parties are working to finalize the various agreements and obtain the approvals necessary to set the arrangement.

Competition clearances in two jurisdictions must be obtained for the plan of arrangement to be closed by the end of February. A short form pre-merger notification filing was made in Canada on January 29 and an advanced ruling certificate was requested. The 14-day waiting period expires on February 12. A notification to the Germany Federal Cartel office was made on January 28, and steps are being taken to obtain clearance of the transaction in advance of the 30-day waiting period, expiring February 27. That concludes our prepared remarks operator. We can now take some questions.

Thank you. One moment please. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star, followed by the one on your touchtone phone. You will hear a three tone prompt to acknowledge your request. Your questions will be polled in the order they are received. If you would like to decline from the polling process, please press star, followed by the two. Please insure you lift the handset if you are using a speakerphone, before pressing any keys. One moment please for your first question.

Hello, operator?

One moment please. The first question comes from Jim Hoffman, T. Schoenfeld. Please go ahead.

Hi, it's Jim Hoffman at T. Schoenfeld Asset Management. On the volumes, can you just give us a little bit more flavor for what you're seeing? Is it steel manufacturing inventories coming down, product substitution, market share changes? Thanks.

Well as far as the steel inventories, I think the main picture, if you like, in the Asian markets, is the impact of China and their very rapid advancements in steel consumption in China is causing all the Asian steel markets to be running flat out this year. I think that's the most predominant feature that's going on. Certainly in North America we're seeing a rebounding of the steel industry here, coming off of the lows of a year or so back and the bankruptcies and whatnot, certainly our sales for metallurgical coal in North America are improving, and we're going to have a much better year in our North American markets.

Europe is going along at about the same pace as it was, we're not seeing a lot of change there, but the predictions for this current year for steel production and especially blast furnace steel, is up in all of our market areas.

Hello, Mr. Hoffman?

We'll proceed with the next question. The next question comes from Catherine Sterritt of Scotia Capital. Please go ahead.

Good morning. Can you describe what your negotiating process on those coal prices will be? I recognize that right now that the three companies have to negotiate it separately, and can't really act together until the transaction closes. But do you have a strategy to try and wait until after you close to negotiate one price on behalf of your organization? Or will the process force you into negotiating something separately? I'm just wondering your sense of timing and how the negotiation process is going to play out during the transaction.

Yes well our own strategy at Fording, Catherine, is carry on as best we can under the circumstances, and negotiating our own deals based on Fording being Fording. Obviously with the transaction closing at the end of February it's hard for our customers and ourselves not to have our minds on what's going to be. The negotiations so far are proceeding rather slowly on all parts. There's been one round of meetings in Japan, and we understand a second round of meetings may be scheduled in Japan with some Australian suppliers in about two weeks. So as things are progressing here, I'd be surprised if market negotiations are concluded before the end of the month, or before our transaction is actually completed. But we are certainly ready to make any market arrangements or deals for the coming year that we consider to be in our interest.

But generally I'd say that you'd consider it a positive to be able to conclude negotiations after the close of the deal, so that you can negotiate on behalf of the entire company.

Well I would say that as far as we're positioning ourselves, we think our coal is very well priced in the markets, and we'd be negotiating probably from a similar position in terms of our own expectations in the market.

OK. I just had one other question. You're in the process of negotiating new credit lines for the income trust, and I wondered what the status of that was?

Catherine, it's Allen Hagerman. Those are put in place, they're fully underwritten, the syndication process is just in the process of being completed. They've gone very well, and we fully expect, on closing, to have all the facilities we need.

Oh, that's great. Can you give us a sense of what the terms were, just on the rate?

I prefer not to do that, given that those are confidential, but they're market type rates for companies of the equivalent credit worthiness. There will be two operating lines of $120m each, that are extendable and fully revolving, one for the partnership and one for Fording, and then Fording will also have available to it $300m term loan that has to be taken out over the next three years.

OK, that's great. Thank you very much.

The next question comes from David Gagliano, Credit Suisse First Boston. Please go ahead.

Thanks. Good morning. I just wanted to ask a couple of quick questions on the operations. It looks to me like your unit costs came down quite a bit in the fourth quarter, and I was wondering if you could give us a sense as to, first of all, how you achieved the substantial reduction in unit costs, sequential unit costs; and secondly, if you could give us a little sense on where you expect those unit costs to go in the future, with the addition of the Luscar assets.

OK, on the first part of that, we did have a reasonable cost month in the fourth quarter, given the amount of shutdowns that we took. The reason the costs were better than previous, in months where we were taking shutdowns, was that we took very extensive shutdowns, not just of the processing plants, but also in the mines and on staffing areas. So we kept our costs very, very low and so the detrimental effect of losing the volume wasn't so significant.

Looking ahead of course, I mean obviously our costs are up this past year over the previous year because of those volume effects, and we're anticipating that we're going to get our volumes back much more in line, and would expect our own cost, therefore, to be reduced. As far as the other operations, I mean we haven't got too far into that. Obviously the Cardinal River mine that we'll be taking over, is in a phasing out if you like, in that it's mining out its inventory, or its remaining coal reserves.

At the Elk View mine I don't think we're anticipating too great a change, and the Lime Creek operation, which is a high cost operation, was looking forward to reduced strip ratios by the plan that they had, where their cost should be coming down. But we haven't got final plans in terms of putting all of those assets together. Certainly our trust will be to be balancing out our sales, and moving sales to, obviously, the lowest cost options in all of those operations. So certainly one of the synergies will be that the operating costs all combined will be lower than what they would have been otherwise.

OK. And then, just if you could just give me a little more color on the process with respect to the antitrust, measure the competition clearance, what exactly happens on, you know, I think you said February 12th, which is tomorrow, and also at the end of the month with the German authorities as well?

My understanding, David; it's Allen Hagerman, is that the Canadian one, we go through the waiting period tomorrow. We're still looking for a clearance certificate from them and we hope to have that before the end of the month. So that shouldn't stop us from closing, even if we don't have the clearance certificate. And in the case of Germany, the waiting period again is over on February 27th. So, they'll have to give us indication there.

As we look forward, we fully expect to be able to close on February 28th here.

Great, thanks very much.

Your next question comes from Haytham Hodaly, Salman Partners. Please go ahead.

Good morning gentlemen. The first question, I guess, is in regards to the level of distributions. But before we get on that, can you outline what you're seeing so far in terms of deliveries so far in the first quarter? Where do you expect it to be? I know in the quarterly release you said similar to the last couple of quarters. But, I just want to get a better understanding of where you expect that?

Yes, our sales that we've--the coal that we've actually sold in the first quarter, Haytham, I think we pointed out in our press release is 4m tons. But the way customers have been taking deliveries through the course of this year they're substantially behind. We're anticipating that the carryover is probably going to be somewhere around 600,000 to 800,000 tons or thereabouts.

As far as how things are going in the quarter here so far, we had a bit of a hiccup in January, following the port issue. We lost a vessel out in January. But, we're seeing January and February running similar to tonnages experienced through the year. And then, we have a big March scheduled. And it's going to be a matter of how many of those vessels can actually get loaded in the month of March. So, I think the guidance, if you'd like, that we've done for the purposes of calculating the first distribution was based on 3.2m tons in the quarter. Anything else, Allen?

It was based on 6m tons pro forma for all of the mines. And the first quarter distribution would be a dollar-[inaudible] being the period from closing to the end of March, approximately a month, plus $0.74 cents special distribution.

OK, so you're still pretty comfortable with that number?

Yes.

The second question I guess would be with regards to the $25m in synergies that will be realized, of which most is expected to be realized in the first year, could you just outline again where you expect that first $25m in synergies to come from?

Well probably, a large part of it is going to be in operations. And, especially, as I've already said, the ability that we'll have to be putting priorities on our lowest cost production, there're certainly going to be synergies there in the reduction of the overall unit costs. We'll be able to get working on transportation and logistics improvements right away, and on inventory spare parts, purchasing improvements and all of those things.

Probably, some of the marketing synergies will come a little bit later on. It will depend, I suppose, on the pace of negotiations and whether negotiations result in the three companies ending up with sales similar to what our forecasts would've been as a stand-alone; or whether we get enough time to actually start bringing home some of the synergies on getting better blends and a better cost and price advantage, if you'd like, on certain blends to specific customers that have priorities for certain qualities.

So I think largely, though, that the initial synergies will come from operational cost savings.

Thank you, gentlemen.

Let me just point out, in our expectation for the final three quarters, we did assume the $25m in synergies. We do believe it's reasonable, but I think we also pointed out in our disclosure that in some cases there may be some costs to achieving some of those synergies. And we've still got to work through the specific operational plans to maximize our distributions in the last three quarters of the year and have it still well in the early days.

But overall, you know, we've had enough of a chance to look at synergies and the opportunities. Once we get working at this on all fronts, I'm very confident that the $75m that we talked about in sustainable synergy is going to be--we should be able to achieve that without question.

Thank you very much, gentlemen.

Ladies and gentlemen, if there are any additional questions at this time, please press star followed by the one. As a reminder, if you are using a speakerphone, please lift the handset before pressing the keys.

The next question comes from Jacques Wortman, Griffiths, McBurney. Please go ahead.

Yes, good morning gentlemen. I have just a quick question. It appears that there is a bit of a disjoint between the steel product, which appears to be strengthening, and coke and coal production, with inventories building as recently as November in the case of BHP in Australia. Do you see the global coal production as being better in line with the steel demand? And, how much of an overhang of inventory do you estimate there being at this time as we go into the 2003 coke and coal negotiations?

I guess the one question we have in our own minds is what the inventories of met coal are in our customers' yards? We think it's certainly been shrinking by our analysis.

In terms of producers' inventory, it's a mixed bag. We certainly have inventory, but we're obviously carrying a very disproportionate share of that inventory. Most of our competitors have low, and in some cases, no inventory whatsoever, a couple of major Australians, and also an operation or two here in Canada. They have very, very low inventories.

As far as BHP goes, I think they had a building of inventories earlier in the year, but in December, the numbers for BHP and Australia in general have dropped substantially. We understand that they probably dropped again, a fairly major drop here in January. So, our sense of it is that these inventories are being drawn down here fairly rapidly, as we're coming to the new coal year.

Certainly in China also, there's a real shortage of high quality coking coal, so much so that that coke is getting very shortly supplied because of the shortage of the metallurgical coal in China. Coke prices have almost doubled from where they were a year or so ago.

Thank you very much.

The next question comes from John Hughes, with Scotia Capital. Please go ahead.

Thank you, operator. I have just a couple of quick questions, maybe one similar question, with a different way to ask it. On the EBITDA, this is specific to the fourth quarter numbers; the EBITDA to sales and margin looks very strong, at 25% to 26%. And, that compares to Q3 numbers in the range of 21% to 22%. I guess my question is, without any change in volume going forward as an assumption, and no change in realized price, as an assumption, are you going to be able to maintain that level of margin at the EBITDA to sales level?

Well, the first thing I think you've got to think about, John is that exchange rate. If there's no change in the price, we've got a very large gain from the exchange rate moving from $0.70 cents down to around $0.65 cents. But certainly, as good as our costs were, they were in a quarter with still some very substantial shutdown costs. I think with the volumes that we were looking forward to at Fording of 14m tons of sales and the production that would be needed to run at that kind of a sales level, we'd be looking for better prices in, or better costs I should say, in the year ahead, as compared to the fourth quarter of 2002.

If you excluded the impact of foreign exchange and looked just more at the operational side, would you anticipate that margin could still be held in the 25% range?

Our cost-of-goods-sold in the fourth quarter for Mountain online operations was just under $46.00. You know, if I go back John to 2001, which was a pretty good year in terms of production, our cost of sales was in the $46/$47 range. So I mean, I guess there's no reason to anticipate that we wouldn't be able to have our costs in that range. In fact, if production volumes increase more, we may be able to bring it down.

Part of the issue in the fourth quarter, you've got to remember, is we come out of shutdown in the summer, which is Q3. So, Q3 costs are typically a little higher than the full year. Quarter-4 costs are usually about as good as they get in the year.

The other impact that we had is we had a draw down of inventory, and we don't inventory all of our costs. So, in the periods of time when production exceeds sales, cost points in the income statement are slightly higher than periods in which production is less than sales.

You know, if you think about it John in terms of the income trust going forward, obviously we'll be reducing inventories at Fording, and emphasizing production at the lowest cost operation, which is Fording River, and spreading vacation shutdowns and things like that around to other operations as well. You have to think that the Cardinal River mine is phasing out. So, in terms of the production from that mine, it's certainly going to be down from the previous year.

So, there are going to be opportunities to move tons to the lower cost mines. Overall, we should be then able to see improved costs for sure at the Fording operation.

In terms of the inventory situation, you know that draw down in the fourth quarter, can you give us some direction on two points? One is, what you view as a sustainable or a "normal" inventory level? And where are you today relative to that level?

Well, normal is with a capital N, I guess we'd say it's somewhere around a month's inventory, that would be normal.

A month's sales.

Yeah, a month's production from our summer operations would be a normal inventory, a very low inventory is where we were about 18 months ago, when we got down to 400,000 or 500,000 tons in all of the ports and the mines. That's an extremely low inventory and starting to cause problems with having coal availability.

Normal would probably be closer to somewhere between 1m and 1.5m and right now, we're over 2m tons at Fording.

Are you significantly over 2m?

I think we're closer to two than three. Let's put it that way.

OK. Last question, well two questions I guess, but in terms of the 18.5m tons going forward for the last three quarters for this fiscal year, can you give us a breakdown on where that 18.5 comes from? Is 11 coming from Fording? If I take 14 from Fording for the year and take the three in sales, expected 3.3 or so, for Q1, like, can you just give us some direction in terms of what you expect out of some of the assets--?

I think our own numbers John were 14 for the year for Fording, was going to be our sales target. Elk View was 6, so that would leave 4.5 for the two Luscar operations, if you took a full year John, with 6m in the first quarter.

What actually happens here will depend on the optimization plans for those various mines going forward, and what makes sense for both meeting our customers' needs in terms of coal quality and producing at the lowest costs. Let's just say, too, I think--would point out to everyone that our sensitivity to volume in the newer arrangement is going to be a lot less than it was when we were Fording alone. I mean our volume sensitivities--at Fording we were losing volume basically from our lowest cost mine, or from the lowest cost mine.

In the new situation I mean we've got--one of the mines that we'll be taking over is a very high cost mine with a low margin. So by moving tonnages around, or losing some tons, I guess, and moving some tons, we can certainly minimize, if you like, any volume effect and won't be nearly so sensitive to that criteria.

And one last question, more marketing related, on the steel front in the U.S. we're seeing a real consolidation phase underway, rationalization perhaps to come, but yet to be seen. Is there any--I'm just wondering on your views in terms of potential decline in metal exports out of the U.S., is there any sort of threat to that export number, either going up or down, given some of the structural change we're seeing with the U.S. steel producers?

I think we've seen the worst of it in terms of closures of some of the coke oven facilities that affected demand there. In terms of the coking coal supply in the States, and last year it dropped, the sea-borne exports of coking coal in the States dropped about 4m tons. As you know, it's been steadily declining from where it was 30 to 40m tons, four or five years ago, it's down now to something well under 20m tons.

And we don't see any signs at all that that can come back. In fact, I think the tendency, or the prediction would be that U.S. coking coal continues to decline. And I might say that we've completed our North American business, if you like, in terms of this new year. We should be up something around half a million tons, or something like that, as we would see the numbers, this year over last year.

So, I think the situation in North America from our point of view is at least stable, and probably something better than that going forward.

All right, thank you gentlemen.

You have a follow up question from David Gagliano, Credit Suisse First Boston. Please go ahead.

Hi, just a quick one, related to the previous question from John, which was on the sales line of expectations, the 18.5m tons for the last three quarters. Could you give us a breakdown, if you could, of how much of that you would consider pure spot business, vs. things that you pretty much have a good feel that you're going to have contracted but you don't know the price yet, but you still are certain that it's contracted?

Well, if we just looked at our own numbers David, as I said our North American business was pretty well completed. Our Asian business, our arrangements with [inaudible] are completed. China Steel, we have a long-term contract; Japan we have a co-called Evergreen agreement, where our tonnage is supposed to be very steady and stable.

But over time I think we said that 80% or thereabouts, of our business is what we consider long-term. And, I don't think I'd change that number very much. Most of our sales that were in the $14m that we're projecting for ourselves, almost all of that right now, is a continuance of business, or business that we already have, put it that way. Almost none of it is coming from anticipated spot sales at this time.

Great, thanks.

The next question comes from Julie Lerner, Metropolitan Capital. Please go ahead.

Hello, Miss Lerner?

Sorry.

Go ahead, Miss Lerner.

There's no further question.

Mr. Gardiner, there are no further questions at this time. Please continue.

OK, well thank you very much operator, and thank you for attending our call this morning.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.