Teck Resources Ltd (TECK) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Aur Resources first-quarter results conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Friday, May 5, 2006 at 9 AM Eastern Time. I will now turn the conference over to Mr. Jim Gill, President and CEO. Please go ahead.

Thank you very much. Good morning, everybody and welcome to the first-quarter conference call. We'll follow our usual format where I'll review the technical results, following which Ed Guimaraes will present the financial results and after that we'll take questions first from those attending on the telephone and then from those present here in the room.

The first quarter of this year has been another record one for Aur with earnings of $47 million and cash flow from operating activities of $76 million or C$0.91 per-share. I would like to remind everyone that Aur is a U.S. dollar reporter so all dollars are U.S. dollars unless stated otherwise.

Copper production was 55 million pounds from the Andacollo and Quebrada Blanca mines which, due to very high prices of copper, generated record revenues of $135 million. With continuing high metal prices Duck Pond is nearing production and the positive feasibility study for the Andacollo hypogene copper gold deposit 2006 is shaping up to be the best year ever for Aur.

Turning to the production highlights; in the first quarter metal production was 55.1 million pounds of copper, our cash operating cost per pound of copper sold was $0.73. Mine operating earnings were $96 million and cash flow from mining activities was $86.1 million. Sustaining capital expenditures of the mines were very low at $200,000 in the first quarter.

Looking at the mines themselves, Andacollo in the first quarter of 2006 was a little more difficult than normal at Andacollo from an operating standpoint. We moved 4.1 million tons of rock at a strip ratio of 2.3 to 1. 0.9 million tons of that material was heap bleach ore at a grade of 0.75% total copper and 0.3 million tons was dump leach ore at a grade of 0.38% total copper. The resulting production was 11.7 million pounds of 100% LME grade A cathode, about 800,000 pounds lower than our budget for the year.

The lower production was due to longer leach cycle times and lower recoveries of much more highly altered ore than we had expected during the first quarter. Our cash cost per pound of copper sold was $0.75, again higher than our original budget due to higher labor costs, energy costs and the appreciation of 12% in the Chilean peso. In addition, the higher costs were also related to the impact of inventory drawdowns related to the higher altered ore. And this impact was really due to the difficult leaching cycle time.

Sustaining capital expenditures were $200,000 during the quarter mainly on truck overhauls. We also spent $320,000 on the heat bleach expansion project and $1.1 million on the dump leach facility construction. There were no lost time accidents in the first quarter. The mine itself is running well and we expect improved performance as the year progresses. However, as it takes time for the impact of the difficult leaching ore mined in the first quarter to work its way through the system, we expect our 2006 production to be 49 million pounds or about 2 million pounds below our original forecast.

On the cost side we expect improvements for the balance of the year with 2006 costs now forecast at $0.69 per pound of copper sold. Operating cash flow is expected to be $87 million at a copper price of $2.42 a pound in the second, third and fourth quarter, another record year for Andacollo.

Turning to Quebrada Blanca, the Quebrada Blanca mine hade a strong first quarter of 2006. We mined 8.4 million tons of rock of which 2 million tons was heap leach ore at a grade of 1.31% copper and 1.9 million tons was dump leach ore at a grade of 0.56% copper. Production was 43.4 million pounds, just about 0.5 million pounds less than our original budget. Cathode quality was essentially 100% LME grade A. Copper sales were 42.1 million pounds and our cost per pound of copper sold was $0.72, $0.03 higher than our original forecast due, as I said before, to labor, depreciation of the peso and energy cost. Cash flow from operations was 65 million in capital expenditures was $65,000 and capital expenditures were less than $50,000 on some small items at the mine.

In 2006 we expect Quebrada Blanca to produce about 176 million pounds of copper as budgeted at a cash operating cost of approximately $0.73 per pound of copper sold. Capital expenditures are expected to be as budgeted at $8 million of which about $4.5 million will be from the maintenance and $3 million on engineering and construction projects. Operating cash flow at a copper price of $2.42 in the second, third and fourth quarter is forecast at $262 million for 2006 and of course it would be much higher at levels anywhere close to today's prices. 2006 will be another record year for Quebrada Blanca.

Turning briefly to our two development stage projects. The Duck Pond copper-zinc deposit is on schedule to begin production in the fourth quarter of this year. The ramp has at this time advanced to about 1500 meters from the collar and definition drilling from underground is now in progress with initial access to the ore expected to be available in July. The concentrator building is fully enclosed and the grinding and flotation equipment installation is advancing as scheduled. In the first quarter capital expenditures were approximately $11.3 million.

Total three commercial production capital expenditures are now estimated to be about $94 million which is $15 million higher than our original feasibility study estimate of $79 million back in 2004. This increase is due to changes in the scope of work of $14 million including $8 million to purchase rather than lease the mobile fleet and $2 million to accelerate the definition drilling and underground development to allow us to more efficiently operate the mine in the first year or so. There was also $13 million of actual higher costs related to the construction of the concentrator and other facilities.

These higher costs of course will be partially offset by $12 million of net preproduction -- net precommercial production revenues which are netted against the capital costs in the accounting world. In January of this year we entered into forward sales contracts to hedge 256 million pounds of our zinc production to produce from Duck Pond during the period July 1, 2007 to December 31, 2011 at an average price of $0.72 per pound of copper sold.

Looking at the Andacollo hypogene copper gold deposit, the feasibility study for this large copper gold deposit which directly underlies our currently operating Andacollo mine in Chile was completed in April. The study indicated that a copper price of $1.20 a pound and a gold price of $400 an ounce, the deposit can be developed to produce on average 151 million pounds of copper and almost 58,000 ounces of gold annually over a mine life of 21 years and provide an after-tax rate of return in excess of 15% on the $336 million of preproduction capital. Our capital payback at those copper prices would be 5.1 years and we can achieve initial production in late 2009.

They mine plant itself calls for the open pit mining of 423 million tons of ore at an average grade of 0.38% copper and 0.13% grams gold. The ore will be processed in a flotation mill at the rate of 55,000 tons a day producing on average 254,000 tons of copper concentrate containing byproduct gold. Annual production in the first ten years will be higher than the average overall at 174 million pounds of copper and 66,000 ounces of gold per year. We continue at this time to optimize this project and are confident that the formal production decision will be made in late July.

Looking briefly at business development, Aur's expenditures on its exploration projects and the identification and evaluation of new acquisition opportunities were $1.8 million in the first quarter of this year. Drilling is now in progress on the Eldorado gold silver project in Southern Argentina. Progress on resolving our land issues at La Verde continue to be slow but we're hopeful that drilling will be able to recommence to evaluate this discovery later on this year. We're very active in our search for development stage or producing projects and this is not just in the Americas but also out of our London office in Africa, CIS countries in Eastern Europe. We do have a number of assets that we've identified and that are now under evaluation.

That's pretty much it from the technical side and I'd now like to turn the meeting over to Ed Guimaraes who will take you through the financial results for the first quarter.

Thank you, Jim. Aur had another excellent quarter from a financial performance perspective with strong revenues, earnings and cash flows. In fact, record earnings were achieved in the quarter. As a significant copper producer Aur continues to benefit from higher copper prices which averaged $2.24 per pound in the first quarter of this year. Before getting into the numbers I would like to again remind everyone that all figures are in U.S. dollars unless otherwise stated.

Please turn to the consolidated statements of operations. Net earnings were a record $46.8 million equal to $0.48 or Canadian $0.55 per share in the first quarter of 2006 compared to net earnings of $33.3 million or $0.35 per share for the same quarter last year. Mine revenues were $135.1 million or 40% higher than the $96.5 million for the same period in 2005 largely due to the fact that Aur realized an average of $2.51 per pound of cathode copper sold in the quarter, an $0.89 per pound higher realized copper price than for the same quarter last year. The realized copper price per pound of $2.51 was comprised of an LME average copper price of $2.24 per pound plus cathode sales premiums of $0.07 per pound, plus quotational period pricing adjustments of $0.20 per pound.

Looking at expenses, mine cash operating expenses were $39.2 million for the quarter compared to $38 million last year due to higher energy assets, labor and transportation costs and the 12% increase in the value of the Chilean peso relative to the U.S. dollar. Aur's cash operating cost per pound of copper sold was $0.73 for the quarter. There were no unusual items this quarter; all other non-mining expenses before taxes and non controlling interest with the exception of the ENAMI copper price participation and interest income were essentially on budget and essentially the same as in the corresponding period in 2005, so I won't over them in detail.

A copper price participation expense payable to ENAMI in early 2007 of $4.3 million was accrued in the first quarter of this year. No amount was accrued in the first quarter of last year as copper prices at the time were below the required threshold price. Interest and other expenses and revenues were positive $4.6 million in the first quarter of 2006 compared to positive $3.1 million in 2005 primarily due to higher interest income earned as a result of higher cash balances and a higher average interest rate.

The provision for taxes was $15.7 million in the first quarter of 2006 compared to $7.3 million in 2005 as a result of higher earnings in 2006. Current income taxes totaled $14.7 million of which $11.6 million related to Quebrada Blanca and $3.1 million related to Andacollo. Chilean specific mining taxes totaled $1.4 million of which $1.3 million related to Quebrada Blanca and 0.1 million related to Andacollo. Non controlling interest on the income statement related to the interests of Aur's partners in the Andacollo and Quebrada Blanca mines was $18.5 million in the first quarter compared to $5.7 million in 2005.

Turning to the consolidated statements of retained earnings, Aur's retained earnings at March 31, 2006 were $301.5 million. This is $46.8 million higher than at December 31, 2005 and with the result of net earnings for the period. The retained earnings are also after the payment of $12.4 million of dividends equal to C$0.15 per share paid to Aur's shareholders in January of this year.

Turning to the consolidated balance sheet, total assets on the balance sheet were $815.9 million at March 31, 2006, a $52.6 million increase from December 31, 2005. The Company's current assets were $482.6 million at the end of the quarter, including cash of $402.3 million compared to $435.9 million at December 31, 2005. Aur's cash exceeded the $125 million of senior unsecured notes by $277.3 million at March 31, 2006. The cash increase after the payment of $12.4 million of dividends to Aur's shareholders and the $10 million copper price participation payment to Teck Cominco was principally the result of the high operating cash flow from the mines.

Property, plant and equipment increased by $16.2 million to $307.1 million in the first quarter of 2006 as the amount of expenditures on property, plant and equipment, primarily the $11.3 million incurred at Duck Pond and the accrual of an additional $10 million copper price participation amount payable to Teck Cominco in January 2007, exceeded the depreciation and amortization for the quarter.

Total liabilities at March 31, 2006 were $323.3 million, a $13.2 million increase from December 31, 2005. Current liabilities were $137.3 million at March 31, 2006, an increase of $43.1 million from December 31, 2005. The increase from year-end was impacted by $31.3 million of the $125 million senior notes liability being reclassified as a current liability because the first scheduled principal repayment of the notes is to be made in March 2007.

Also contributing to the increase was the accrual of an additional 15 million payable to noncontrolling interest as well as the accrual of a $4.3 million price participation payable to ENAMI by Quebrada Blanca in 2007. Other liabilities as shown on the balance sheet totaled $185.9 million and were $30 million lower than at December 31, 2005 primarily due to the reclassification of the $31.3 million in senior notes from long-term to current liabilities in March of this year. Shareholder's equity increased by $49.4 million to $492.7 million at March 31, 2006 on the strength of Aur's high earnings for the quarter.

Turning to the consolidated statements of cash flows, cash flow from operating activities was $76 million, equal to $0.79 or C$0.91 per share in the first quarter of 2006 compared to $43.8 million or $0.46 per share in the first quarter of 2005. Financing activities totaled $11.3 million in the first quarter of 2006 of which $12.4 million pertained to dividends paid to Aur's shareholders, $0.9 million pertained to repayments of capital leases and partially offset by $2.2 million of proceeds received on common share issuances.

In the first quarter of last year financing activities totaled $11.1 million of which $7.8 million pertained to dividends paid to Aur's shareholders and $3.2 million was for payments to noncontrolling interests. Investing activities in the first quarter totaled $23.7 million of which $13.9 million was for investments in property, plant and equipment including $11.3 million at Duck Pond and $10 million pertaining to the 2005 Teck Cominco copper price participation that was paid in January of 2006.

In the first quarter of 2005 investing activities totaled $10.7 million primarily for the $10 million Teck Cominco copper price participation for the 2004 year that was paid in January of 2005. Aur's cash balances increased by $41.1 million in the first quarter to $402.3 million, equivalent to C$4.65 per share as at March 31, 2006. That completes my review of Aur's financial performance in the first quarter and I will now turn the meeting back to Jim.

Thanks a lot, Ed. While the first quarter of this year was an excellent one thanks in large part to the high copper price and, as you know, yesterday we declared a $0.15 dividend comprised of our regular semi-annual dividend of $0.05 and a $0.10 special dividend payable on July 1st of this year to shareholders of record at June 1st. We also during the quarter were registered and listed for trading on the Santiago stock exchange. We're the first Canadian company to be in that position and we're looking forward to having a lot of Chilean shareholders in our group.

We expect now that 2006 is going to be a record year for Aur overall. Production is expected to be 225 million pounds of copper at an average cost of $0.72 per pound sold and a copper price of $2.42 in the second, third and fourth quarter. Our revenue is now forecast at $563 million, our operating profit at $374 million and our net earnings of $191 million or D$2.29 per share. Cash flow from operating activities will be $310 million and cash balances are expected to rise to $491 million at the end of the year of which $444 million would represent Aur's share.

The copper price is to remain at these high levels and average $3.00 a pound in the second, third and fourth quarter. This would have a positive impact of course and our net earnings would rise to $263 million or $3.16 a share. Our cash flow would rise to $429 million and our cash balances would rise to $593 million or a little over C$7.00 a share at the end of the year. So things are pretty upbeat in our business right now and we're very happy about that. So on that note we'll turn the -- open the floor for questions and we'll start off with anybody who's on the phone who has anything they'd like to ask.

(OPERATOR INSTRUCTIONS). John Hughes, Desjardins Securities.

Just one or two quick ones. On the QB in the quarter, could you, Jim, let us know what the soluble grade was?

Yes. I can tell you the soluble copper grade for the heap leach ore was 1.13% copper and for the dump leach ore it was 0.31% copper.

And are those grades expected in the second quarter as well?

They go up and down, but on average they'll be pretty close to that.

Okay. And then just on QB again, the inventory number is -- I don't think we've seen it this high in terms of volume anyway since this time last year. Does all that flush through into the second quarter as well in terms of sales?

It will flush through by the end of the year.

Okay. And in terms of the hypogene and the July date for formal production decision, in the event it's positive at that point in time, how would you visualize -- like when would the spending start and how would you anticipate financing the $336 million in CapEx?

The spending is underway at the present time. We think first of all that the deposit will get a positive go-ahead. In terms of the financing, at copper prices significantly below the current levels we would extend below those in the forward curve for this year next year. There will be very little money required that Andacollo will not have in its own cash balances and generate between now and when that capital expending is required. We will report more on the final details of that when we make our formal decision, but the expectation is that financing this will be very simple and involve very little in the way of non (indiscernible) Andacollo cash.

Very good, thank you.

Tom Meyer, Raymond James.

Good morning. Have you hedged any fuel costs at Quebrada Blanca and if not do you have any plans on hedging?

We haven't and we don't.

Okay. And then just looking at the year-over-year increase of $0.10 a pound in your cash cost, what fraction of that $0.10 increase would be the energy component?

Probably about $0.03 a pound.

Okay. And on to exploration, a two-part question. Clarification, have you dropped the [Las Sinesis] properties in Chile or do you have plans on revisiting them? And then the second part is with the Eldorado drilling in Argentina, is this a project you want to dress up for sale or could we see Aur get additional precious metals exposure with this project if it pans out?

Certainly we haven't dropped Las Sinesis, we're working on it. We just haven't -- we're not in a position to report results yet. But we are -- we still maintain our interest in that project. With respect to Eldorado, the gold project in Argentina, we are going to be continually drilling on that project during the balance of this year. We haven't made any formal decisions on what we'll do with the project. Obviously we'd like to see what the results of the drilling program are first. We're not opposed to selling an asset if we can get the kind of gold multiples that people seem to be getting in the marketplace, but if it looks like it's something that we could develop and operate on ourselves we're very prepared to do that also.

Okay. Thanks very much.

David Charles, GMP Securities.

Good morning. Given the structure that you have for your cost at the Andacollo hypogene, I'm just wondering, Jim, if -- I assume that that's related to the fact that the grade changes from year 10 and beyond. Could you give us some sort of maybe a quick outline or a rough number that we could use basically to forecast this as we go forward?

Well, I think what we said is that the cost in the first 10 years is going to average about $0.78, and then overall the whole mine life, based on the feasibility it's about 86. The worst part of that is because as you get deeper into the mine later the amount of material -- the strip ratio gets a little bit higher and your costs go up because the grade of course does drop off in the later years.

I think the key for this really is that in the early years it's when you get your money back on this project and that's part and parcel of what we're going to the working on between now and when we make the formal production decision. But there's no question that the real key to making this deposit into a very good return after-tax project for us is the fact that the capital costs of 336 are very low for an operation of this size. And that results from the fact that we've actually pre stripped the whole thing with our mining operation for the Supergene.

But can you give us some idea of what the grades are let's say for the first 10 years and then afterwards just sort of on an average basis?

The average grade in the first 10 years is going to be about 0.45 copper and 0.15 grams per ton gold.

And then for the second 10 years roughly?

The difference between 0.38 for the whole life and 0.13 and 0.44 and 0.15 for the first half. I haven't got them with me, David, but it's obviously got to be below 0.38 and below 0.13.

Okay, that's fine. Thank you very much.

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

Thank you. I guess we'll take any questions from the room here.

On the listing in Santiago, I don't really understand why you've done that and (indiscernible) to acquire certain assets in Chile you need to be listed in Chile and that's why you did it.

I don't think that's why we did it. I don't necessarily believe that that is the case actually in terms of being able to acquire. We've never had any indications that we can't acquire any project because we're not listed there. We got listed there for several reasons. One was because people thought that it would be an opportunity for Chilean investors to be involved in the copper business and there was only one other listed company in Chile and it was totally [illiquid]. And because we have such a significant part of our asset base in Chile the institutional investors were interested in being able to participate in the copper business which is a huge part of Chile's economy by having access to it.

Secondly, we're not very well-known in Chile. And by becoming better known and getting to know the institutions, the banking people and things it increases our flexibility in terms of future financing because when we're listed and we're completely public there and everybody can understand us better and know us better then we can talk to the banks and other institutions if we need to finance part of a big acquisition out of Chile.

A second question too. Lots of talk about natural gas going into Northern Chile and the situation in Bolivia and potentially I think second half of this year for maybe some of that natural gas to get restricted and power problems arising in Northern Chile as a result. (indiscernible) talked a bit about that. Do you have any --?

Well, I think one of the nice things about Quebrada Blanca is that we have the ability to produce most of our power with our own power generating plant. So while we are subject to higher oil prices like everybody else is, we do draw an awful lot of our power from our own power. So we're not nearly as captive to the power grid and supply from northern grid.

Secondly, my understanding is that while if gas restrictions are there, there are alternative ways for the power to be generated. Using coal or using oil would cause prices perhaps to go up, but not necessarily the availability to be that restricted. So for us, Quebrada Blanca -- it's not really a very significant concern.

Ray (indiscernible) Partners. I've got a good question on the Andacollo hypogene project and I wanted to know what kind of dollars you're using in there. For example, site operating costs $4.40 per ton, whether it's U.S. dollars --?

They're all U.S. dollars.

Real 2006 dollars?

Yes.

I had a question, the ENAMI price participation payment or accrual in Q1. Is that just one annual accrual? Is there going to be another one next quarter?

That's just a quarterly accrual.

So we're looking at a similar accrual in quarters going forward now on?

That's right. And at a $2.42 forecast copper price for the balance of the year we'd be looking at approximately $17.5 million payable to ENAMI --

For the full year?

-- for the full year and payable in 2007.

17.5?

That's correct.

And that would be accrued equal amounts each quarter?

That's right, it has to be accrued as the revenues are realized.

Okay. And what's the trigger price?

The trigger price will be approximately $1.50 next year.

$1.50 for 2007?

For 2006.

And what percentage above that do you pay that, 10%?

10%.

So next year it will go up by 3%?

That's it roughly.

On ENAMI, I'm assuming you have to wait until May '06 to pay the 2005 payment because it would take that long for Chile to give you the inflation rate for that year?

The inflation rate is actually based on the U.S. GDP.

Not their own?

That's right. And that's not available until the end of February. And by the time we put everything together and ENAMI has a chance to review the calculation as well and the amount and we sign off then it's paid. And for this quarter, this last quarter they just haven't been around, they haven't been available. They've mostly been preoccupied with other things I guess.

Well, we also end up having to have the audited financial statements by the shareholders of the Company (inaudible). And the shareholder approval doesn't come until the end of March or the end of April. So it's only at that point that the actual numbers are locked in and then the calculation can be (inaudible).

But typically with the April of the following year.

And that's real cash going out the door?

That's correct. Paid by Quebrada Blanca. We're in this position now where all these copper price participations that we thought we'd be more than happy to pay at the time we did this transaction and bought it. We're having to pay them now and of course it's only -- we're making so much more money ourselves, we're paying them but there's a lot of profit for those guys now.

How about ENAMI in Q1, is that QB or Andacollo? The 4 million.

That's QB.

Is there an Andacollo as well?

There is an Andacollo one, but the Andacollo one is structured a little bit differently where it's actually based on dividends being paid. So until the point when dividends are paid by Andacollo to the shareholders, at that point, depending on the price at the time, we could participate in that.

(inaudible)

That all depends on (multiple speakers) that's right.

It depends on the copper price.

But obviously a post 2009 event?

Sure it would be, yes. And if it's a five-year payback.

Any other questions? Thank you very much, everybody. We'll carry on with our business and see you at the next quarter. Thanks.

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