Teck Resources Ltd (TECK) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Teck Cominco first quarter 2004 investor relations conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. This conference call is being recorded on Tuesday, April 27, 2004. I'd like now to turn the conference call over to the Director of Investor Relations, Mr. Tom Merinsky. Please go ahead Mr. Merinsky.

Thanks very much Laura. Good morning everyone and thanks for joining us today at the first quarter 2004 Teck Cominco investor conference call. With us today from Teck Cominco is Norman Keevil, Chairman of the Company; David Thompson, Deputy Chairman and CEO; John Taylor, Senior Vice President and CFO; Howard Chu, our Controller; Doug Horswill, Senior Vice President - Environment and Corporate Affairs; Michael Lipkewich, Senior Vice President - Mining; Roger Brain, Senior Vice President - Marketing and Refining; and Peter Rozee, Vice President - Commercial. Other members of the management team are present, and can be -- will be asked to respond to questions as needed.

This morning, David will review the results of the first quarter of 2004. Following his comments, we will open the lines for questions. Please note the call is also being web cast and can be accessed at our website at www.teckcominco.com. A set of slides have been prepared to accompany David's commentary today, and these are available via the Internet at our website and also can be accessed by clicking on the web cast link.

Before we start, I'd like to remind everyone that some of the information in this call, in the slides, which accompany our commentary and in the press release is forward-looking information. This forward-looking information is subject to risks, uncertainties, and other factors as described in our annual information form under the caption Cautionary Statements concerning forward-looking information. Please treat this information with caution as many factors might change, which may cause future events to unfold differently than originally anticipated. Teck Cominco does not assume the obligation to update any forward-looking statement. And at this point, I'll turn the call over to David Thompson, Deputy Chairman and Chief Executive Officer.

Thanks Tom. Good morning ladies and gentlemen and welcome to the first quarter conference call. I'll start the presentation on slide 3, which are the highlights of the first quarter. This slide compares the earnings for the first three months of $96m with the restated numbers for the first quarter of 2003, which is $5m. The restatement is due to the asset retirement obligations and the expensing of stock options in 2003.

Going on to slide 4, which shows you the overview for the quarter, the $96m of earnings is a new record for us, but equally important, our quarterly cash flow is at $195m, and that's $42m higher than we attained in the fourth quarter of last year, and is almost four times that of the numbers for the first quarter of 2003. In the quarter, we acquired 33.6% interest in HVC from BHP, and we accounted for that just in the last month of the quarter. So, we only accounted for that in March. We took the cash that we received from the date of the transaction, which has been backdated to January. We took that in as a reduction in purchase plan.

The Elk Valley Coal Corporation announced that they would go ahead with the Cheviot project -- that is Stage 1 of the Cheviot project, which has a capacity of 1.4m tons per annum, and we expect to have that on by the end of the year. Net debt was reduced by $143m for the quarter, and our net debt to debt-plus-equity ratio was down by four points from 29% to 25%. Slide 5 shows the averages of prices, first in US dollars and Canadian dollars. On the left hand side, you'll see the US dollars. These are LME prices for zinc and copper, running gold, fixed gold, and the contractual coal prices for coal in Canadian dollars. Whereas, zinc was up to a 37% in US, it was only up 20% in Canadian. The highest run, of course, was copper, up 64% in US dollars, 45% in Canadian. Whereas in coal, in Canadian dollars, we were down 6% on price drop against first quarter of 2003.

On slide 6, we show the operating profits by refinery and mine. Operating profits were $183m for the quarter and that compares with $48m in the first quarter of 2003. The three major areas, first the Antamina, which, of course, wasn't consolidated in the first quarter of the last year, so we see there $35m. Then the other two major areas are HVC, where profits improved by $57m to $65m for the quarter, and Red Dog, which converted a loss of $8m into a profit of $38m. So, those three account for the $135m improvement in the operating profit.

Slide 7 shows the detail on trail. Trail, despite the explosion, has increased its profits this quarter from $11m to $15m; $2m comes from power. Power sales were up from a 181 GW to 234 GW, and also price was up from $38/MW to $42/MW. The power profits rose from $7m to $9m. On the metal operations side, we increased from $4m to $6m, that's despite having to spend $8.5m on the repair after the explosion, and almost all the spares costs were borne by ourselves, and a small amount was borne by the insurance, because they are high deductibles at trail. We did receive one of the first payment on our business interruption insurance in the quarter, which is $4m. We have an outstanding claim for a further $10m, and we hope to settle that in the second quarter.

In terms of the reasons for this improvement on the metal side, first the treatment charges, although, down on the base, escalate with the Zinc price, so that has a major impact on profitability. Premiums were up on zinc and lead. Our specialty metals are up particularly due to indium, and fertilizer for this season looked as though it's going to be profitable, whereas, it was a loss last season, although, we get the major impact on fertilizers in the second quarter. On the other side, the impact of the explosion took our lead production down by 6,500 tons, and silver was reduced from $4.9m of sales, unlike in the first quarter of last year, to $3.3m in this quarter. Well there is an improvement on the first quarter and if we haven't had that expression, everything considers to be better than you are seeing here. Coming on to slide 8, you'll see Cajamarquilla. Cajamarquilla's operating profits fell from $5m to $4m for the quarter. That's due to a problem we have on the roasters. We were out there, we had a 11-day shut down on the roaster as a result of brick damage, bricks fell in on one of the walls, that was repaired but as a result of that, our sales were down 12% in the quarter, sales went down from $32,000 to $28,000. Slide nine shows the Red Dog. Red Dog, our operating profit was $38m. That's our lowest sales for the quarter $132,000 against $147,000 last year. Our production is also down this quarter from a $144m to $130m. That's mainly due to the problems that we have had with our lines, it just had glogged up or plugged and they are being cleared in April and as a result of that, we should be back to normal production in the -- for the rest of the second quarter and there onwards. In terms of our remaining sales for this year, for this shipping season, we have -- we estimate about $90,000 to come in the second quarter of the year as against $132,000 in terms of the first quarter and that would leave us about $23,000 net for the fourth quarter. So, our sales will go down as in the second quarter and then pick up again in the third quarter as our shipping season resumes.

Moving on to the slide. Slide 10 Highland Valley Copper. Highland Valley Copper produced the largest profit from any of our mines for this quarter. As I've said, although we have only accounted for Highland valley from March, if with that, you take them the two months of January and February of which -- we took -- we had paid for that transaction. That would have boosted our profits for the quarter by a further $11m or maybe $.06 per share. But that $22m was taken in against the purchase price. In terms of our sales, it was high for this quarter $45,000 against $31,000 last year. Molybdenum was up also. Production was up a million pounds and our sales were up $200,000. The Molybdenum operations generated about $16m to the bottom line to the operating profit this quarter against an estimate of $6m for this time last year? So, Molybdenum was an important contributor to Highland Valley's profits. Going on to Antamina, which is on Slide 11. Antamina's operating profits came in at $35m and as I have said, we haven't -- we had equity accounted in the first quarter of last year although the relevant number there would have been $12m for operating profit for that quarter. This will cost you to price of copper particularly but also zinc. our sales will timmer-up to those of the first quarter last year for both copper and zinc. Zinc production was doing still high for this quarter at 67,000 tons. We see however that they are making good progress with the clearing of litmus, expect to be on schedule now in clearing them and to move increasingly into the higher copper from the second quarter, almost in particularly from the third quarter.

The next slide is Slide 12, which is Hemlo. Production there is down for the quarter at 122,000 ounces against 137,000 ounces in the quarter of 2003. Our operating profit is up by $2m from $6m to $8m, as a result of price but because of that drop in production, which is largely because of -- we were using the open pit mine and the underground method within due to constraints underground and our cash cost in US dollars rose by $54 to $285. The next slide is Elk Valley coal partnership. Our operating profits here are down to $15m for the quarter. Last year, of course we had only one month in this quarter and we have been experiencing typically operating earnings from them, Elk Valley of 20 or 21 or 22 per quarter, just the formation of the partnership. It is down particularly to manage cost in this quarter. The problems of the railway that we were short of inventory as a port, and as a result of that we had a severe backup, particularly in January and February, and it started to decline in March, our ships waiting to pick up their coal. That cost us $5m for the quarter. So, without that our operating profits would have been $20m, not $15m. Moving on then to cash flow. As you can see from this chart, we had a pretty steady increase in our cash flows over the last four quarters. We had $195m this quarter. CAPEX is at $32m. CAPEX is somewhat seasonal, and so we are normally low in the winter quarter. This was distributed really right across the company, it had jumped $8m or under $8m, $5m of Pogo, $6m of LPU, $4m Antamine, and $3m at Trail. We expect our CAPEX assuming that we are able to go ahead with Pogo, our numbers would be about 175m for the year. If the Pogo is stable on hold, then that will be cut by about $50m to $60m for this year. The liquidity of shares on slide 15, net debt has come down $143m for the quarter. Working capital, which normally rises at this time of the year was inflated by an additional $90m of cash that we have in our balance sheet,

out of the strong cash for this quarter. And our net debt directly is down 4.25%. Final slide, here is the corporate development. Run rate has started out a little bit more slowly than we wanted to. Had a couple of problems, one underground with a

crushes which was renovated, old crushes and they haven't performed too well. We are making some changes in April. We think that we will be

by the end of the second quarter, which is a couple of months late. The decision has been made to proceed with the Soviet line. We are building the road at the present time. Once that is completed, we will move the equipment over from Cardinal River to Soviet, and we expect to be in the production at the Soviet line in the fall of this year for the first stage of this project. The second stage would be, we believe if the market holds, would come in

and that would require new equipments. Lastly, the Pogo project. As you have probably seen, you have seen in our release. We have had to put this on hold, because there has been an appeal for our last remaining permit, which was issued by the MPTS, which governs the water at the site.

could hold this profit up for a year. We are hoping that there can be some resolution to this, but at the present time we have accepted the Governor of Alaska's request to meet with the State, the EPA, and the North Alaskan Environmental Center to discuss their causes for their appeal. That is what I would like to say at the present time and now I would take questions. Thank you.

Operator, we can move to the question and answer period. Please.

Yes, thank you. Thank you ladies and gentlemen, the question and answer session will now begin. If you wish to ask a question, please press one on your touch-tone keypad. If you are calling from a speakerphone, if possible please pick up the handset before pressing one. If you wish to leave the question queue, please press the pound key. When I announce your name, please ask your question.

Okay. Our first question comes from Alberto Aries from Goldman Sachs and Company.

Yes. Good morning gentlemen and congratulation on the strong cash flows. If you could please, David, give me an update on the Zinc markets? We've seen a significant increase in inventories lately and a lower volatility in the price. How do you see the fundamentals on the Zinc market changing?

Good morning. Well, we see the fundamentals have strengthened actually in the last three months in the different regions. Europe has been pretty flat this year, so far in the winter, although it's now I think experiencing the normal seasonal upswing. The states, North America is continuing to strengthen. This has been quite noticeable; we are having difficulty keeping up with demand, our stores have been buying off the LME warehouses and traders in the North America to cater to our demand. So, we see America -- United States really quite strong now. And the strongest market is of course China. We are not having a very big influence on the Asian demand or for countries all around it. So, countries like Japan have -- their demand has strengthened significantly this year. And China -- there is sort of forecast coming out of the first metal seminar being held in Beijing yesterday. Their government agencies forecasting a 12% increase in Zinc demand this year for China, which on their numbers would take them 2 million to 2.25 million ton of domestic demand and according to their comment they will be actually be short of Zinc metal. In fact, what we've seen in the first quarter, is first time ever we've actually seen them, China become a net importer of metal, not coming from the west. They are still selling to the west although their numbers are well down on last year. They exported 116,000 tons last year. This year they've exported 50,000 tons to the west, but that is counter balanced by their purchases from mainly Kazakhstan. So, Kazakhstan is now supplying metal into China to meet the Chinese demand. So, we've seen fundamentals on things very strong, what we've seen is and you referred to it as we seen inventories come out particularly into the buy. Inventories, which we believe probably, emanates from a trade and clearing in the past, probably produced in first half of 2003 and now coming out into LME. So, inventories have actually risen this year on the LME unlike any other base metal. But, I think that's due to old inventory coming out rather than the current inventory going in.

Just on the coking coal market we've seen significant price increases by a number of producers, an increase in prices in China as well. I know that you've contracted your price for the next 12 months, but how do you see Teck Cominco benefiting from this better pricing if possible over the next year or two years?

Prices, of course, will go up about $10 US from this coal year. We have to start shipping on that price from May onwards, but the mill is still clearing the 2003 contractual commitment. In terms of benefiting, I think we've seen extraordinary numbers coming out, where they have an average price of $80 US for this coal year, which is really, quit an incredible price. We don't imagine that those sort of prices will necessarily will be retained next year, but we can certainly see that the prices that we've set for this year that $52, $53 are now going to be low and there is further prices I think possible if these markets stays as strong or anything like as strong as they have been. We've seen a particularly, I think a particularly concentration of supply problems in this quarter so there may be some easing in supply later on, but the demand is very real.

Okay. Thank you.

Thank you. Our next question comes from Terence Ortslan from TSO and Associates. Go ahead.

Thanks.

So David, Highland Valley Moly production for this quarter was quite strong, that's a fairly stable ratio between copper and moly. What's the annual expected forecast for Moly production from Highland this year?

I think our forecast was about 8m pounds we think for the year.

I am sorry, I didn't hear that 8m pounds?

8m pounds a year.

So, given the Moly price increase, you're going to realize, substantially, higher price in the second quarter because there is a lag effect for your contract?

That's right. Yes, prices are still rising in Moly from the $8 that we got in the first quarter that's true.

Are you M minus 1, M minus 2 in terms of realizations?

Sorry. I didn't catch that?

Are you one or two months behind schedule in total?

We will have to come back to you on that one.

Okay. The other question is on Pogo. Is there any cross appeal or any legal avenues you can take in the mean time for you to pursue with this? Or are you just going to wait for resolution of that?

I think it's a bit early to say what we would do. What we had was the final permit approved by the EPA. So, any amendment to that permit would cause a significant delay. The way the law is structured there, if you amended the permit, you'd have to go back through the IS, and go right through the process we've just been through. So, for us to move forward, we've to have that permit, and the appeal has to be lifted. Anyway, unless

the environmental appeal board decides that it's -- that they're not even going to hear it, and then award us the permit. But then, of course, that opens the courts up. So, that's another area of uncertainty.

So, as of now, the mechanics of the system that were decided, at least on fast track by them, it'll take at least couple of quarters to resolve this issue on their part?

But if you did take the appeal process that the NGO is going through, that'll probably take about a year. In other words, if the appeal just -- if they get status, if they can have this appeal heard, if you take the time to involve to, you'll be talking about just over a year?

And if assume a year delay, David, then what'll be the keep up cost for the next year before you initiate the capital, again? How much would it cost to keep the project in order, probably, not very much, but just in case I am missing something?

We think it will probably cost about $8m for a year, something like that.

And so far Teck Cominco invested how much to the project please?

We have about $100m in.

US?

That's $130m.

How many? Come again.

Which one, John?

With exploration it was $120m to $130m.

Canadian or US?

Canadian.

What's the number?

The number I had was $120.

About a $120m.

US?

Canadian.

So far. Okay. And last question, on lead markets, any comment on that because obviously the survival (ph) people given the circumstances of what happened between you and couple of other producers, how long do you think the lead market is going to keep up, David?

Well, I think the lead market fundamentals are pretty good too. I mean we're in a seasonal, weak season right now. So, this is the season where all the -- the batches are coming back from the winter. The winter outages -- I would think that we'd probably see this price rebuild a bit by the fourth quarter. There is a lot less primary lead being produced in the world, and you've got the Chinese demand, which is very high.

Good, thank you.

Welcome.

Our next question comes from David Charles of Griffiths McBurney & Partners. Please go ahead Mr. Charles.

Yes, good morning. You had an excellent first quarter, David, in terms of your cash flows, and you also mentioned that we can assume a one-year delay on Pogo, your CAPEX will be down substantially this year. If you were to maintain similar cash flow rates for the rest of the year, what are you going to do with the cash that you're going to generate? Are you going to pay down debt? Are you going to, I don't know, increase your dividend? Or are you going to go and buy something?

Well, we're not going to go on holiday, David. What I said about Pogo is - this project is delayed, we are still hoping that it won't be delayed. We're hoping that there's going to be some resolution here and that we'll be back on track with this project if we can get it in the next few weeks. In terms of other things what we -- as I said we've got several projects that are underway, which are not that capital intensive, so yes it's true that we would be building up cash balances, but I think when we've actually got that cash balances, we'll worry about that problem then. As it is this is really a normal business we're looking at. We're looking at the exploration properties, we're looking at the

, we're always looking at the acquisition. That business development is still going strong, but we won't be driven just by the fact that we've got cash.

But do you have anything on the table at the moment that you're looking at seriously?

I wouldn't tell you if I had it, David, so the answer to that is no comments.

No, I was just wondering, you have a selection, obviously your projects, and maybe you would be further along on some than others?

There is always a number that one is looking at, at any given time, but very few of them ever come to fruition.

And on the debt side, is there any other debt repayment that you might be able to make?

Yes, we have two debts due in 2006. One is the convertible -- which is callable. The other is a straight debt, which you'd have to pay a premium to get out. So, the possibility is still there, if we want cash to reduce long-term debt, but we would really want to see ourselves repositioned in the long-term debt market, so that we'd have debt way ahead of us.

Okay, thank you very much.

Welcome.

Thank you, our next question comes from David Muller, Maxima Investments Managements. Please go ahead.

Good morning. Could you comment more on your exploration program, in particular Morelos Norte? As you have seen in your annual report, you are supposed to be coming out with a revised resource estimate sometime in 2004. I wondered if you could be more definitive and some order of magnitude where we are now and whether that could be; two or three times revision, and you also commented in your annual report about the Pebble property. I'm confused there, I thought that we had sold that or had an option to sell it outright with no royalties or back end for $10m?

Firstly, on Morelos, there is drilling going on there at the moment, both on north

and now we've moved south of it, but that program is under way. I think that will be probably over in the next month or two, and at that point we will be in a position to start redoing the resource calculations. In terms on Pebble, my memory of that was that we do have backing rights to fresh discoveries that they make beyond the original - But I will have to check that agreement.

Is there any other things you can tell us about the exploration program? Is Mr. Daley there or?

He is traveling at the moment, he is not there at the moment. So, the exploration program is getting to, obviously, coming back to season at the moment right now, but I don't think there is anything specific to report.

Thank you.

Thank you. Our next question comes from Mr. Ernie Nutter, RBC Capital Markets. Please go ahead, Mr. Nutter.

Thank you. Good morning gentlemen, I just wonder if you could elaborate on the issues or the temporary problems you have had up at Red Dog, were those pipes freezing or what sort of remedial efforts have you been able to put in place, and hopefully stop that sort of stuff from recurring again?

The pipes were not freezing. It was most tailings lines and the pipes inside the mill had a heavy coating of precipitate on them. This is caving that occurred as a consequence of high dissolved solids in the process water, and a level of those dissolved solids has been relatively high for many, many years. So, this is a gradual build up of scale in the pipes, both in tailings and in the process. We did bring equipment onsite in the latter part of March and early April. We were very successful in cleaning out all the tailings lines by using what is referred to as a PIG, because the line is under pressure. We just forced through a piece of equipment that de-scales the pipe when you force it to several times to clean it right out. That was very successful. Inside the concentrator, we have used various high-pressure systems, and have been reasonably successful in cleaning those out as well. Right now, the mill is down and we think that by the end of this month we will have sorted out most of problems within the mill. It will require ongoing care to make sure that we don't have, we don't encounter the same problem again. On the longer term, we will be looking at how we might be able to reduce the soluble, dissolved solids in the water over time.

Thank you.

Thank you. Our next question comes from Mr. Steve Bonnyman, CIBC World Markets. Please go ahead, Mr. Bonnyman.

Yes, good morning. Two questions please. First, there were some management changes at Fording and some severance charges that were incurred there. Have they been fully accounted for within the quarter or will they show up in another period?

Well the way we handled the change of control agreements was to really to bring them into our -- at the start was to bring them into our cost of purchase. So, we assume that all change of control agreements would trigger in the three-year period. They are already accounted for.

Okay. So that those were already covered under charges taken?

Yes.

Second question, could you just walk through dilution calcs for us in the quarter. Obviously, we've seen some, what were previously non-dilutive instruments become dilutive?

Yes, the biggest one I think, I'll ask John to speak to. The biggest one is the exchangeable debenture, which is the 2024 debenture, which was where Cominco's shares held by Teck were converted into an instrument and then that was in this merger, was reconverted into Teck shares. John, can give you some number.

The details of the $0.04, $0.025 relates to the exchangeable which David mentioned, and $0.07 each were for share options and the convertible that we have as well.

Fair enough, I'll try and follow up with you offline on that. Thanks, John.

Thank you. Our next question is Mr. Terence Ortslan from TSO & Associates. Please go ahead, Mr. Ortslan.

Thanks. It's good to be paying taxes now, that you are making a lot of money, but the deferred portion on the tax rate for the year, any revisions on that please?

Revisions in future quarters?

What's the expected tax rate going to be John, for the year?

Well, our book tax rate assuming these income levels remain the same. It should be in the order of 35% for book taxes. On our current taxes, generally we pay mining taxes, but we haven't been taxable federally or provincially, although this year we should start to become taxable federally.

Okay. If you take the number in the first quarter, I think there was about 15% to 20% was current?

Right.

Would you think that you are going to be averaging up 30% current or so?

Yes. I think, that we will increase assuming these income levels today. That will increase because we will be coming, we will come into federal taxation at least in Canada.

Okay. Thanks for it John. Just Doug, I guess you are there. With respect to the March 2004, I am trying to kind of, Canadian Government tabling the -- I'm just reading through this, I think I read about three times, I don't know at the end of the today, how long this will take to do it, $13m is going to cost and then the question is, you are supposed to identify the risks of this issue and then who is going to pay the bill, like what is the engineering explanation for this?

I have a little trouble interpreting your question Terry.

I'm having a problem in asking the question because I don't understand the statement by the Canadian and US government?

Well, the situation is that Canada, first in January issued what they call a diplomatic note, which is a form of communication between two governments, a formal communication asking the US government to resume the order and go back to the table for negotiations with us in respect to matters dealing with Lake Roosevelt. Subsequently, Canada and the US met, officials met from the State Department and Department of Foreign Affairs with supporting individuals from other groups. Then following that, Canada tabled a proposal toward a memorandum of understanding between the two countries, anticipating that should an agreement of that sort be reached that Canada would enter into a contract with us, by which we would undertake work at Lake Roosevelt and the work would be in the form of a risk assessment to determine what if any risks, unacceptable risks exist at that site to human health of the environment. In terms of the timing in the -- there is a little path forward, we simply don't know.

The $13m is going to be approved by who?

That is the estimate of the offer that we put on the table with the EPA during negotiations last fall.

Right. And that still is part of the discussion, whereby you will incur that expenditure to identify the risks of that assessment?

We've indicated to Canada, to the Canadian government that we stand behind that proposal and we don't know at this stage what shape or proposal would actually emerge from the Canada-US discussions, but we maintain our commitment to that earlier offer.

Okay. But Teck Cominco agrees with this bilateral agreement?

Well, we haven't seen it yet, because it doesn't exist. We certainly agree that the process is the right one that the US legislation, and the environment legislation does not apply across the border. That's our view, the view of our council and the view of the Canadian government. At the same time, we have indicated that we are prepared to stand behind the offer that we made originally.

Okay. For me to assess this. If the $13m was incurred over a period of time, and the agreement is, the conclusion will be to deal with any risk identified by that assessment, that means whatever the risks are, who will pay for it? That's my question.

The $13m program was a five-year program for studies. So, that would be incurred over five years. If there were risks determined that needed attention, then we would have to look at that. We would have to be responsible for that. That was the offer we made, over what period of time and how long it would take and how large they are, we simply don't know.

Okay. So, we will hear more about this in the next couple of months?

Well, maybe. It may take longer than that.

Okay. Hopefully. Thanks Doug.

Thank you. Just a reminder, if you wish to ask a question, please press one on your touchtone keypad. If you're calling from a speakerphone, if possible pick up the handset before pressing one. Mr. Merinsky, at this time, there is nobody in the question queue.

Operator, thank you very much. David?

Thanks very much ladies and gentlemen, and we look forward speaking to you, to you again in July for our second quarterly conference call. Thank you. Good-bye.

Ladies and gentlemen, this concludes the Teck Cominco conference call. We thank you for participating and ask that you please disconnect your lines now. Thank you from

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