Teck Resources Ltd (TECK) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the UTS Energy third-quarter conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session; instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS).

The Company may make forward-looking statements during this call. These statements are based on UTS' expectations and are subject to a variety of risks and uncertainties and other factors which are inherent in a predevelopment stage oil sand mining and extraction enterprise that could materially affect UTS' results. A representation can be or is being made with respect to the accuracy of the projection or the ability of UTS to achieve the projected results. The Company assumes no obligations to update any forward-looking statements.

I would like to remind everyone that this conference call is being recorded today, Thursday, November 2, 2006 at 9 AM Eastern Time and will be available for playback on the Company's website. I will now turn the conference over to Mr. Dennis Sharp, Executive Chairman. Mr. Sharp, please go ahead.

Thank you very much, operator. Good morning, ladies and gentlemen. My name is Dennis Sharp; welcome to the UTS Energy third-quarter conference call. I'm joined today by Will Roach, President and Chief Executive Officer; Wayne Bobye, Vice President and Chief Financial Officer; Howard Lutley, Vice President Mining and Extraction; Martin Sandell, Vice President Engineering; and Daryl Wightman, Vice President Resource Development and Business Strategy.

Before turning the call over to Will to provide an overview of the corporate developments from the quarter ended September 30, 2006, I'd like to say a very few words. The focus of UTS Energy has been almost exclusively tied to the Fort Hills Project since the Company's inception. While Fort Hills remains the leading project and most important asset for our company, we have recently taken steps to broaden our asset base with the acquisition of other oil sands leases.

This exciting development marks an important point in our evolution as we commence the process of expanding from being a single project Company. I will now turn the presentation over to our President, Will Roach, and he can offer you an update on our two priority areas. William?

Thanks, Dennis, good morning, everyone, and again thank you for joining us today. As Dennis mentioned, we've really had two primary activities over the third quarter which really had started a long time before that. But it really is the ongoing work on Fort Hills, which I think most of you are very familiar with, and the strategy of building a land position with our 50-50 partner, Teck Cominco. Both areas have had, I'm pleased to say, some very positive developments this quarter. So what I'd like to do is firstly turn to Fort Hills and I'll try and tell you which slide I'm on before I start talking about it.

So I'm now moving on to slide number 5 for those of you who have vision of our website. We have continued to make good progress on the Fort Hills project with our partnership, Petro-Canada and Teck Cominco. And we're happy to say that our long held belief that the resource really is substantially bigger than we had in our resource estimates is coming to fruition. And I've invited Daryl Wightman and Howard Lutley specifically to join this morning should we have any questions on that part of the presentation.

Moving to slide 6 and specifically the resource estimates for the Fort Hills project -- the Fort Hills mining team really has completed an extensive review of the impact of higher oil prices on economic bitumen resources within the Fort Hills leases. As we've indicated in the past, we are pleased to say that these studies have determined the producible resource within the new mine plan; it is probably within the range of 4 to 5 billion barrels of recoverable bitumen.

This is a really substantial increase from the current best estimate of our independent resource evaluator, GLJ, which held at the end of last year 3.5 billion barrels. The mine plan will undergo further refinement to obtain the optimal design under the current business environment. This work is scheduled to be completed by the end of the year or in the first quarter of '07 and that will be matched with a new independent resource evaluation alongside.

This slide also breaks down the estimates of bitumen resources for Fort Hills along with the UTS working interest. Now you should note that the project was approved by the AUB originally in October 2002 on the basis of a 2.8 billion barrel resource in an oil price environment of around US$20 per barrel WTI. This puts into context the magnitude of the new estimates of the recoverable resource around 4 to 5 billion, particularly when you recognize this does not include -- I should emphasize that, it does not include any of the new lands recently acquired by the partnership to the north of the already approved leases.

Moving to slide 6 and the somewhat challenging subject of costs. The partnership will, as we've said for a long time now, complete the design basis memorandum for Fort Hills. This will now occur in the first half of '07 which is a little later than we originally thought. And this is -- at that time the partnership will be able to update both the scope, timing and the cost estimates for the project.

We recognize we're operating in an economic environment that presents a number of challenges on costs that have been widely reported. Capital costs for projects, as this chart shows, have increased significantly over the last decade or so. And what we'd like to do is just give you a feel for where we think Fort Hills will end up. But I would emphasize that these cost estimates will be confirmed in the first half of '07.

This chart shows you the trend of costs which was used in the recent Petro-Canada -- the operator investor day on October 4th in the blue tranche. It also shows some discrete points and projects through time and I just want to talk about two. I'll firstly talk about the AOSP project, the Shell operated Albian oil sands; they came out for their expansion number one with a cost estimate range of between $100,000 per flowing barrel and 128,000. This project we believe is for technology which is a [hydrogen] addition, and I'll talk a little bit more about that. But we in the Fort Hills project have gone for Delayed Coking along with that set of the technology of choice for about 90% of these types of projects. And we believe that will be substantially less capital intensity per flowing barrel.

I've also talked a little bit about Syncrude Stage 3. That project was an extensive Brownfield engineering project while they were continuing to produce significant volumes on that site, whilst also going through extensive revamps of particularly their instrumentation system and other pieces of equipment while they were doing that. So we would argue strongly that those two points are probably the upper end of that range and hopefully not representative of what we would expect to see on the Fort Hills project.

Moving to slide 8, this is a slide we used in our Q2 presentation and this just compares the two technologies, the hydrocracking and Delayed Coking technologies -- one which is used by the Albian process and one by Fort Hills. This shows you get a great different yield but you also have a very different capital intensity for the two projects. Accordingly we think that the Delayed Coking technology will probably be between 20 and 30% cheaper or less expensive per flowing barrel and also will have some advantages in the operation sphere due to using lower amounts of hydrogen per barrel of synthetic crude oil.

Moving to slide 9, we're giving you some guidance here on our estimates of costs and we've developed a better feel for those since our Q2 conference call. Though I will emphasize again until such time as the partnership capital cost estimates are available, UTS' notable guidance for the first two phases is as above. And this really is -- for Phase I we think the best number to use right now would be about $90,000 per flowing barrel of SCO and we believe that Phase I will be about 140,000 barrels of synthetic -- that's something that we hope we'll confirm in the DBM in the first half. Phase II about 80; there will be some pre-investment for Phase II per flowing barrel of SCO and an estimated production level of around 100,000 barrels a day giving a combined number of around 86.

On the funding of this I should just emphasize -- and I've got a chart a little later on to talk about it -- but the funding for this in the earnings structure, $2.5 billion is already in place of which UTS is required to fund $100 million of that. And we believe that will put us through till the end of 2008 to be fully funded.

Moving to slide 10, this is a pretty complicated chart, don't intend to go through it fully, but what we've got here is the matrix showing the capital intensity along the x-axis, as I would call it, for per flowing barrel of synthetic crude oil versus a WTI price down the y-axis, and it shows the internal rate of return of the project that UTS would see in a project of that nature. And what you can see there that you have some fairly robust rates of return for a wide range of capital intensities and if you look down the $86,000 per flowing barrel you can see at an oil price of $45 WTI flat, you will get an 11% rate of return.

Moving on to slide 11 this covers these funding position and I'll just try and explain the earnings structure, how it actually works. Firstly, Petro-Canada paid out 55% of their $2.5 billion; in addition, they paid $300 million of UTS' costs and they get reimbursed by Teck Cominco $125 million for a total spend of $1.55 billion or 62% of the spend to earn 55. Teck Cominco spends 15% of $2.5 billion plus $350 million of our costs and they also pay $125 million of Petro-Canada's. Therefore Teck spends 34% to earn 15. UTS spends the remaining $100 million, which represents 4%, to earn 30%. After the $2.5 billion spend the partners go heads up on the working interest and this results, of course, in differentiated economics for both UTS, Teck and also Petro-Canada.

The right hand column shows the spends in the partnership as of the end of Q3 and, as you can see, we are about 12.5% through the earn-in right now. And as I said, on the current productions we should be completely funded under this arrangement in the project till the end of '08 or beginning of 2009.

Moving to slide 12, this is the pacing item in the project, the upgrader schedule. And this really is driving the project sanction date. I'm firstly pleased that the major milestones in this schedule have been maintained through all of the study work over the last year and a half since Petro-Canada joined the project and we're looking forward to first oil in the second half of 2011.

What has changed is the understanding of how long it will take to get the approval for the upgrader. And given the busy environment, we think we will get that sometime in the middle of 2008 when we submit the regulatory approval documentation at the end of this year or beginning of 2007. In addition to that, we also see that we're going to have to order some long-lead items at the beginning of 2007 and the extent of that is currently being considered by the partnership. The key message is we've got 40 months to execute the project, post sanction; first oil date still remains the same notwithstanding the revised project sanction date of mid '08.

Moving to slide 13 now, I want to move on to a slightly different topic which is talking about UTS' new land acquisitions with Teck Cominco. Now this slide tries to give you a 3-D depiction of the overview of the land in relation to where Fort Hills project is. And we're pleased to advise UTS and Teck, through a joint bidding agreement, have been successful bidders on several oil sands leases on the west side of the river, as shown here -- mainly adjacent to a lease we already own with Teck Cominco, lease 311.

Moving on to slide for teenagers you a bed of a more detailed picture on our leases and a blowup of the land recently acquired around 311. You'll see also that we believe some of the lands we've acquired are more suitable to in situ due to the higher level of overburden. But we've also acquired now mining leases adjacent to 311 which total about 34 square miles of mineable lease.

I'll just move on now to the next slide on slide 15, which really gives you the reason why we've been proactively chasing these lands. Participation in these land sales has really been driven by the positive preliminary drilling results on lease 311 as summarized above. We undertook this in the first quarter of 2006, having only purchased the leases, I would add, in December 2005. So I think we should congratulate the team here, and particularly Daryl, for getting those six wells in on lease 311 in the first quarter of 2006.

I'm happy to say all of those wells in Canada oil sands -- moreover, four of the wells encountered mineable quality oil sands with a thickness of between 25 meters and 35 meters of oil sands at a depth of between 15 and 40 meters. So we think it's very mineable and Howard may be able to add some to that if there are any questions on that topic a bit later.

While the results are preliminary, they really gave us the necessary information to aggressively bid on the land surrounding 311. If these lands are prone to be perspective, the combination of these leases we believe have the potential to provide a sufficient resource for a stand-alone project. We've contracted three drilling rigs to perform an extensive core program on these prospective lands in the first quarter of 2007.

Moving to slide 16, we're just trying to give you a feeling for the magnitude of the amount of lands we've acquired in this partnership with Teck Cominco, and it's really quite extensive. From the slide clearly you can see that the acreage around -- outside Fort Hills now exceeds our acreage within it. We've got about 141 square miles outside Fort Hills and 95.5 square miles in Fort Hills. We've also got a great partner in Teck Cominco; really first-class cold weather miner. And who out in the first instance carried UTS' share of the land acquisition costs which is around $45 million. And this is against a future transaction on lease 14 and we've got -- the details of that can be found in the MD&A and we're happy to take any questions on that in a moment.

Moving to slide 16, we've just tried to give you a view here of the long-term growth potential we think we've now got in the Company. And before I start, obviously as you go up this chart it gets more speculative as the time moves further out. But just to give you a quick summary, it's a pretty extensive opportunity set we now have within the Company. Phase I Fort Hills, if it's 140,000 barrels a day, gives us net 42,000 barrels a day; Phase II net 30,000 on top of that; and then Phase III a further 18,000.

And then if we include lease 14, which we delineated earlier this year and we hope to delineate later next year, we see a further increment and then with exploration on top. We potentially have within the Company the scope to get in the order of 150,000 barrels a day of working interest barrels by the end of the next decade.

Moving to the near-term milestones on slide 18, we've got a whole bunch of things coming up, and I thought it would be a good idea just to give you a feel for what's coming up on the project, Fort Hills and then what we may expect in our exploration delineation activities. So on slide 19 we've got a menu -- big first half of 2007 where we have the conceptual decision making in Fort Hills done and sizing and, most importantly, the cost estimates and scope for that project completed.

Then of course, in parallel to that activity we have the application for the Sturgeon County upgrader, which, as I said earlier, is the pacing item for the project. That should be done at the end of the year or the beginning of '07 and our coverage estimate, as I said earlier, is in the first half of 2008 and this really drives the project sanction date. But we do not think that changes the overall first oil date. We'll complete the DBM in the first half and then of course those cost estimates will be available.

Moving on now to the delineation exploration program, you can see the near-term milestones on slide 20. These include a drilling program of about 90 wells this drilling season. And that is about 90 on lease 14 to we believe completely delineate that lease. As you know, we published those results earlier this year and we believe we've got a continuous resource there. This is really infill drilling to prove that up and we think if that's successful it will prove it up in terms of more closely to the P10 estimate which is around a mineable resource of 400 million barrels we think.

Moving on, we've already contracted three drilling rigs in total -- two to do the work on the other leases and that work will progress in the first quarter of 2007. So overall we're very pleased with the quarter and we continue to progress the Fort Hills project with a really strong partnership with Petro-Canada and Teck Cominco. And we look forward to confirming the resource size at Fort Hills and have every reason to believe it will be significantly higher than the 2005 independent resource estimate of 3.5 billion. We think, as I said earlier, it's going to be between 4 and 5.

Moreover, we've successfully acquired extensive lands outside the partnership -- the Fort Hills partnership with Teck Cominco and, most importantly, those lands around 311 where we had really encouraging drilling results in the first quarter of this year. And as I said earlier, the goal really is to delineate a resource base we hope that puts -- be sufficient to be become an independent project in its own right. I'd like to now hand it back to you, Dennis, and open the floor thereafter to questions.

Thanks very much, Will. We'll go to the question-and-answer session and I would like the operator to come back on and explain the procedure. Operator?

(OPERATOR INSTRUCTIONS). Philip Skolnick, Genuity Capital Markets.

Good morning. Just a couple questions. In terms of the notional cost estimates that you have out there, are those more of worst case scenarios? Are you hoping to maybe beat those? And also, what kind of oil price environment assumption would that be under if oil prices came back at $50 and stayed around there, what would you think it would be?

Will, would you like to handle that, please?

Yes, sure. A predictable question and we tried to cover that off in two charts, Phil. So I would refer you back to slide 7 which shows you the trend that, as I said, Petro-Canada showed, but also the historical performance of costs. So we think that 90 is a number that is reasonably conservative, Phil. And as you can see, the oil price is plotted on that chart, and that assumes a pretty busy building environment. So I wouldn't like to give you a specific oil price that that relates to, but it's certainly the current environment we're in.

I would hope that the project could certainly beat that, but I think that there is also going to be a degree of conservatism that the partnership introduces into the way we estimate these costs. Because historically oil sales projects have really disappointed in terms of their performance against the budgets they've put out.

So I think you're in a more mature environment from both the engineering contractor's perspective and also the oil companies. And we're really trying to give you the best guidance there. But in terms of the way we look at it, we certainly look at that as good guidance for the current oil price environment and we also -- we hope that the project will be able to deliver to those sorts of levels.

Okay. And in terms of providing a cost estimate, is there going to be one for both Phase I and II or is it just going to be for Phase I?

I think that we're going to have a pretty good estimate for Phase I. I was listening to Neil Camarta of Petro-Canada on their investor day, and we obviously talk quite a bit about this. His real driver here is to get a very good cost estimate, that's why it's going to take us a little longer, because we've got to get the scope nailed down and a good handle on what we're actually going to do in Phase I. And that's going to include probably quite some pre-investment for Phase II. So I think we'll have an estimate for Phase II at the same time. It will not be of the same accuracy, but it will be a pretty good handle on what we're going to do, Phil.

All right, thanks.

Jenny Mikhareva, Orion Securities.

Could you please elaborate on the effect of last winter's drilling program as well as the potential impact of leases 437, 438 as well as 311 on your resource estimates down the road?

Jenny, before I turn it over to Will and Daryl, we're still learning a lot in the area and a lot more detailed work has to be undertaken. But back to you, will and Daryl.

I'm going to break that up Jenny; you sneaked a few questions in there. What I'll try and do is I'll talk about the drilling program on Fort Hills -- because there's been an extensive drilling program there; lease 14 and 311. I'll ask Howard to deal with the 437 and 438, but before I go to him I'll ask Daryl just to give you a feel for how excited he is on some of the results on 14 and 311.

So I'll start with Fort Hills. 90 wells were drilled on Fort Hills last year. And I'm really pleased to say that the results of those really were pretty encouraging. They well defined some of the trends we saw going further north, but also were very encouraging in the way in which we'll be able to dispose of saltwater from the field. So I think the Teck Co guys are pretty excited by those results.

On lease 14 we've talked extensively. We've still got a big range on those reserves -- or resources, sorry. But we think that it's a continuous deposit. And I'm going to let Daryl take that one. And then on 311, all I can say is that we're really encouraged by those six wells. It looks like a good mineable thickness at relatively shallow overburden levels of 15 to 40 meters. Obviously only six wells, needs a lot more drilling out.

And then on the 437 and 438, I really have to hand that one to Daryl. So I'll go to Daryl and then we'll come back to Howard on the -- sorry, we'll go to Howard on the 437 and 438 stuff, and I'll go to Daryl thereafter on the drilling results and some more technical detail.

Good morning. This is Howard Lutley speaking. I'm Vice President of Mining and Extraction for UTS Energy. Looking as those two leases, leases 437 and 438, which are contiguous with the Fort Hills project at the north end and we're required by the partnership on that (inaudible) February of 2006. 438, which is the western most lease, has some additional resource potential. We don't know the magnitude of that and that's going to be explored this year. But any additional resource potential on lease 438 would be additive to the 4 to 5 billion barrels that Will mentioned earlier as our resource base on the main leases 58 and 52 for the Fort Hills project.

What we see in lease 437, which is to the east of 438 and, again, contiguous with the Fort Hills project, is that it is quite likely to give us potential room for (indiscernible) to be positioned and waste dumps. We certainly have in preliminary indications at this time that there won't be a great deal of oil sands potential on that lease. It didn't give us additional development flexibility for the overall Fort Hills project. I'll turn it over to Daryl Wightman to respond to the other questions remaining on 311.

Good morning. This is Daryl Wightman. As Will said, the 28 well program that we conducted on lease 14 this past winter was very successful and we've nailed down the fact that we've got a very good mineable resource there with, again, very limited overburden. The estimates that we currently have are really dictated by the well spacing. Our well spacing is generally from 700 to about 1100 meters and so the bulk of our resource right now, which is coming out at the probability P10 and the high estimate of 594 million barrels, that's mainly because of the sparse drilling spacing.

So what we're going to be doing at our current P50 estimate is 243 million barrels. When we drill this winter we're quite confident because of the correlateability of the oil sands that we have that the number -- our best estimate is going to be moving significantly towards our P10 or our high estimate. So we're quite pleased with the results that we have on lease 14.

Lease 311, as Will said, we drilled six wells in March of 2006 and we were hoping to get more wells in than that, but we were lucky to get those six wells in in the spring. We encountered oil sales in all of those six wells and we were very pleased in that four of them have mineable oil sands of between 25 and 35 meters in thickness. And the overburden was very thin, ranges from a low of 15 meters to a high of 40 meters. So again, a very perspective lease from the mineable aspect.

And if we take -- as a rough rule of thumb, if we have 25 meters of oil sands, that yields about 100 million barrels of oil in place in a section. So our results were -- 25 was the minimum, up to 35. So for every section that we hit that's going to have 25 meters of oil sales, we will have about 100 million barrels of oil in place.

So that gives you some idea for the potential of lease 311. If we have nine sections, half of 18, with 25 meters in thickness we would have approximately 900 million barrels of oil in place. And of course, if we have more sections than that that contain mineable oil sands the number will go up. I think that should cover it.

Thanks, Daryl. I'll just add that obviously that was really the driver for getting those additional lands around 311, Jenny.

Great, thank you. Also, just to follow-up on Phil's question, what sort of contingency are you assuming within your capital cost estimates?

That's a great question and we'll be able to nail that down pretty carefully at the end of the DBM, Jenny. But I would say at this stage the contingency levels in there -- and I'm looking at Martin Sandell who should really answer this. And I'll hand it to him now. But I would say it's between 20 and 30%. Martin?

It's actually a little bit lower than that, about 15%. But as Will Roach said, we still have to go through our basic evaluation on the cost and we'll (inaudible) contingency after that.

And I would add then that Martin of course is much more cautious than me, but -- and never wants to agree with me, particularly in public. But the reason I gave a slightly higher number, just to clarify that, is that we have -- you have a combination of factors going on. You've got people estimating things using today's mindset and environment. You've then got people inflating those costs at various rates over a time period, anywhere between 3 and 7%. And then you've got people adding contingency onto that number, Jenny. So I'm not sure it's appropriate to add contingency either at the beginning or at the end of that process when you're looking at escalation. So that is a real challenge for the industry right now.

Fair enough. Thank you, gentlemen.

Mark Friesen, FirstEnergy Capital.

Thank you, good morning. A few questions for you. The first one I'll direct towards Will and Wayne. In the press release there was mention of -- I'm referring here to the lease purchases with Teck and the financing of them -- there was mention to non-interest-bearing loans, but then there was also mention to a 6% interest rate being used. So I was wondering if you could further explain the financing arrangement.

I'll have a shot at that and then be corrected by Wayne, if that's all right, Dennis.

That's fine.

The financing arrangement is pretty straightforward, Mark. Teck Co carries UTS in the acquisition of these lands against a future notional transaction on lease 14 to acquire or to earn into 50% of lease 14. And as you've heard, we think that's a 400 million barrel resource. So what has happened is that they put the money down to buy the leases and there is no interest payable on any of those funds.

We then have the right to delineate lease 14 and then when we've fully delineated lease 14 we advise Teck we have done that and we advise them also what we believe is a fair market value of that lease and they then have a year to elect whether they take the option of 50% of lease 14 at that time or they ask us to repay them the monies we owe them. And if they ask us that they get paid exactly what we paid for the -- owe for the leases and we have 180 days after that time to repay them.

So the earliest that we could imagine delineations complete is the third quarter of '07. So the earliest they could request repayment, which would be with no interest, would be 180 days after one month of the date that we announce we've fully delineated the lease. And on the interest rates, I'll hand that to Wayne because I'm confused by that.

Mark, it's Wayne Bobye here, Chief Financial Officer. What we do for generally accepted accounting principles, because we don't pay any interest on that loan. We take a treasury rate and we use 6% to discount that loan and put it on the books that way.

Okay, good. The next question I'll direct back to Howard and Daryl. Going back to lease 311, Daryl, you just made some sort of generic references to what resources could be in place per section at a given thickness, but I took those as sort of being more generic type comments. Looking at the corehole results that you did provide -- now this is very, very early and a lot of extrapolation, but how would you react to a specific number on that lease maybe being in the 575 to 650 million barrel range is kind of where my meatball math dropped the number out?

I first want to just reiterate or reinforce what you said, that we have to drill more wells and we've drilled -- we've only drilled six wells, one per section. So all of the comments made are in that context. We do need -- you have to drill wells, you don't have the answer until you drill the wells. So we have to drill more wells. This is very preliminary. However, the fact is we drilled six wells, two-thirds of which -- four out of the six have hit mineable oil sands and those mineable oils sands are of a significant thickness -- 25 to 35 meters in thickness in each of those four wells.

So the example that I gave was just the well of 25 meters, if that 25 meters exists throughout that section it will have at least 100 million barrels. If you wanted to take the ratio of two-thirds, which is 4 out of the 6, and apply that to the 18 wells you'd wind up with something like 1.2 billion and that's using the lowest number, the 25 meter rather than the 35 meter.

But what the real number is I cannot tell you because no one knows, we have not drilled those wells. What we do know is that it's very perspective. We've hit oils sands at a much more shallow depth than perhaps many people would have ever expected. And we've encountered significant thicknesses. So I would prefer to leave it like that. Will would probably --

I've got to say something, sorry. Mark, can I add to that? The way that we looked at it -- and Darryl is right, these are just indicative that we've got a resource potential there and we're going to explore that in the first quarter vigorously. I think that's the first thing. And the minute we got these results we booked three drilling rigs last year and planned on trying to increase our land position. So that was how positively it was viewed in the Company.

But if you take the 18 sections in lease 311 and the additional 8 sections to the west which are mineable, the other sections we have there you start encountering Birch Mountains and a higher overburden, so any potential there would probably be in situ of some type. If you take those 8 sections plus the 8 sections to the north you have 34 sections that are potentially mineable resources.

If you assume 50% of those 34 are perspective then you see that you have 17 perspective sections and you just assume a very simple arithmetic of 25 meters mineable section on each one of those and you can quite easily convince yourself you've got a resource of anywhere between 1 and 2 billion barrels here. Clearly we have to drill it and we're not selling (indiscernible) right now and we're just saying that we're very excited and that's why we aggressively bid for those lands.

Okay, that's great color. What do you think you need for a stand-alone project?

We surely would like two, I think that's a good number and I'm getting whispered in my year that of course you can do it a lot less if you have it as a satellite with an existing production. But I would also add that lease 14 is only 6 miles to the south. So we think we've got 400 in the bank and we think we've got prospectivity here to certainly get towards that number. And we've got some in situ acreage to the west of us that will need delineating as well. And that isn't in the program right now because we'll need a different rig to do that.

Okay. If I could just keep your ear, Will, for a while, and Dennis too. I think you forgot to highlight where area 4 is.

I'm sorry, what's area 4?

You highlighted an area 4 with the additional --

Dennis, do you want to take that?

I'll take it purely on the basis that we have not been very specific about some of the other lands and that's in response to ground land sales that are forthcoming throughout the remainder of the year. So we don't have much to say on that, Mark.

Okay. Do you have anything -- keeping the location confidential for the moment -- do you have anything to say as to the possible character or potential of those leases or maybe even the likelihood of adding additional leases?

I'll answer it in my very simple concise commentary, no comment.

Thanks for the comment, Dennis. I appreciate the update.

I got a fairly strong hint there.

Thanks, guys.

Robert Plexman, CIBC World Markets.

Good morning. I had two -- I'll call them partnership-related questions. First of all, regarding your arrangement with Teck whereby they're carrying you through the acquisition of the land, is this part of an ongoing agreement that's going to -- we'll see on future land purchases or does it relate to what we saw recently?

Will, before you respond to that, for those of you who had a chance to listen to Don Lindsay, I think Don clearly left the impression that Teck is very enthusiastic about their go-forward strategy in the oil sands and we're excited with Teck and I'll you respond to the specific, Will.

Good morning, Robert. We've now been in several lease sales with Teck and we have an arrangement to look at lands with them and that will continue certainly throughout this year. And it will come down to whether or not we're successful in that partnership to look at other lands. Does that answer your question?

I think I get the picture on that one, thank you. And then the second question, just on the big partnership structure -- UTS is trading at quite a significant discount to my estimate of net asset value and you have two partners who have growing cash flow and free cash flow. I was wondering, is there anything in that partnership agreement that would preclude them from making an unfriendly bid for UTS either before or after -- or I guess after the earn-in, but prior to the earn-in period?

Let me respond to that. Robert, you've been in this business for many, many years and, as you know, as a public company you're always exposed to that possibility. There are some restrictions, but those restrictions are somewhat minimal and we think we have a terrific partnership and we've seen no indication that either of our partners would like to have us for dinner.

Okay. Thanks, Dennis. If I can ask one more -- with the increase in the resource potential of the project, does that translate into a higher production or does it mean a longer reserve life when you look at it at this point in time?

This is your question, Will.

It's both, Robert. We think the ultimate potential of the project will be around 370,000 barrels a day of bitumen production which is substantially higher than certainly has been approved in the regulatory process which sits at 190 right now. So any number I give you there would be subject to further review and regulatory approval. And also we see that the lands to the north are as yet undefined in terms of their potential. I think there's a 300 well program planned for this winter on 437, 438.

I'm pretty optimistic actually about 438 providing us greater resource. And then obviously the lands, as Howard said, on 437, if they are barren, do present the opportunity that allows us to desterilize some lands in the original Fort Hills area, which would extend the profile as well.

Okay. So in that case, I'm trying to understand why Petro-Can would say at their investor day that there's still some discussion about sizing of the upgrader. And I guess that has to do with costs and availability of people and supplies, but wouldn't you naturally just assume going to the maximum upgrading scale given that potential?

I think, firstly, I will not speak for Petro-Canada, I will only speak for UTS, so you'll have to ask Petro-Canada why they would say certain things.

Fair enough.

So having said that I'll now speak to UTS and we see a lot of challenges in the execution of these projects. And what I think you're going to see in the partnership is certainly a strong push from UTS is to optimize the sizing of the upgrader to maximize the ability of the partnership to execute the project. That might mean that you sacrifice in the first instance some capacity to make it a very executable project and control those costs.

And I think that's something that Neil Camarta spoke quite extensively on at their investor day. We certainly talk a lot within the partnership on that. So I don't think it's as simple as saying let's get as big as possible, as quick as possible, Robert. I think it's all about let's design a project that's very executable, gives us a lot of chance to deliver it on time, on budget and gives us a good platform then to build Phase II and Phase III.

That's really helpful. Thank you.

Thanks, Robert.

Michael Wohl, JPMorgan.

It's actually [Jonathan Mogel]. All my questions have been answered. Thank you.

Good morning, Jonathan.

Jonathan, well done.

There were a lot of good questions out there before me. But I do apologize if this was asked because I was sort of on and off the call, but the method you went about with Teck, is this something we should expect more of going forward and how will this be accounted for? Will this be accounted for as debt? And once again, I was off the call for a bit so I apologize if those questions were asked already.

Jonathan, I'll try that and then hand it to Wayne. But we obviously -- we're optimistic in the relationship with Teck and obviously the results initially very encouraging in 311 and have propelled us to buy some other lands around 311 and also other lands that we haven't declared where they are. Pretty clearly we're looking at building a land position here to grow the Company. And also, it's a great way to work with a company like Teck who has an extensive cash flow and an appetite to look at upside associated with oils sands.

And the beauty of it is that we've focused on mainly looking at mining oil sands where in the relationship with Teck, if we discover a mining resource they operate and if we discover an in situ resource we operate. So it's almost a unique partnership certainly within the oil sands where we've got a mining company bringing their particular skill set to the table to be able to value assets. We're very optimistic about it. And it really comes down to whether we're successful in lease sales and whether there's a continued appetite within the partnership to do it. But so far there's clear evidence of that.

Well, I'll just add on that that we're providing Teck with all of the technical up-front database and decision-making. So it works extremely well because of our knowledge base in the oil sands.

And I'm going to ask Wayne to answer the question on how the loan or whatever you want to call it (multiple speakers).

Just one more question before you get to Wayne. I hope you don't mind me asking this question on the call, but it almost seems like you meet people out there that have a worry of UTS has to raise equity and capital cost expansions, it's just going to press it further and it reduces peoples' NAVs. It seems that if you really play your cards right you could actually avoid that for quite a bit of time. Is that a safe assumption?

I think the way we like to look at it, Jonathan --

Or at least delayed until it's actually favorable for you as opposed to being forced to do something.

We think that buying these assets is good business from a number of different perspectives. We think it's accretive in terms of the resource base and will create value. And if you can get the exploration right you create very large amounts of value very quickly. We think that in the time frame that we need to put the financing together this will give us flexibility in two ways. We hope the market will react to that and be positive and therefore our share price will go up and thereby minimize any dilution when we do need to raise the equity in late '08.

In the event that doesn't occur and we're still creating value finding hydrocarbons and we're delineated in that time frame, we think that they then may present an opportunity to get funding into the project in a range of different ways because we've created value in the asset sense. Does that help you?

Great. Yes, thanks.

Wayne, do you want to talk about the debt or whatever it's called?

Sure. Jonathan, we have that booked on UTS' balance sheet as a non-interest-bearing loan and we've done that and we've discounted that at 6% because there is no -- that's GAAP to present value of that loan.

Okay. I know it's not a huge amount, but in the event that Teck decides that they want to bid for it or -- sorry, that they want to exercise their option for the 50% and let's say they're on the sidelines, when deciding fair market value they kind of have you over in terms of that if they decide that they're not 100% sure, then all of a sudden you're going to have 50 million of debt. And if you went ahead and did more transactions like this it could be more. So isn't there some sort of conflict in terms of how you would deal about what fair market value is given that you'll -- at that point in time you really will need them to exercise that option?

Let me take that, Dennis. Firstly, the option is ours to call and we can only call the option when we've fully delineated lease 14. The earliest we can fully delineate lease 14 is drill all the wells this winter and that's by no means certain because we have a prioritization exercise going on right now with Teck with their full agreement on what wells we need to drill in the number of leases we've just acquired.

Let's assume we fully delineated in the first quarter, and by that I think we need to drill about 90 wells in lease 14. We then need to get the core analysis done and then we need to build a mine plan around that. So by the third quarter '07 we would have that done. We would notify Teck that we've had it done and they then have a month to get back and say we either agree with your fair market value, we don't agree -- and they've got a year within that date to decide that.

The earliest they can say they want to say no to that opportunity and call to their debt is one month. So let's assume that that occurs in September, we then have 180 days to raise that finance. We internally have obviously established a discipline that we will not buy land in excess of the 50% value of lease 14 that we perceive. And Dennis, I wondered if you wanted to comment on that?

Just for a point of clarification, should Teck and UTS decide prior to the full delineation that it's in our mutual interest to in fact exercise that agreement and they acquire the 50%, that is something that would be available to both companies. But as Will said, we're in fact in the driver's seat in this, but we do want to maintain a clear partnership and a beneficial partnership with Teck Cominco so that option is there that it could happen sooner.

Okay, great. Thank you.

Rafi Khouri, Salman Partners.

Good morning, gentlemen. Just a couple of clarification questions on the internal rate of return chart -- nice chart by the way. Is that before tax or after-tax, your calculations?

After-tax.

And then a couple more questions. One, around your Phase III -- now I'm assuming that that's pending the new resource confirmation of 4 to 5 billion barrels?

No, it might not be. Obviously that helps, but we're pretty confident that Phase III is really a decision around whether we gasify or not and that really is what's involved in Phase III. And I can give you a bit more color on that if you want from Martin Sandell.

Essentially the Phase III expansion would be the addition of a gasifier -- an asphalting gasifier, as Will said, and (indiscernible) the asphalting unit, and that asphalting unit would debottleneck the process to add the additional capacity. So really the decision for Phase III is very much one that's built around the offsetting long-term gas prices versus the capital of the gasifier unit. So that's really the key decision at that point.

And you should note that the table we're referring to on slide 10 does not include any investment or returns from Phase III. It actually -- depending on your view of gas prices -- makes a pretty significant difference.

Okay. And final question. Just to clarify the comment in the press release, the capital cost being based on pre engineering work generated internally by UTS. Now you talked on that quite a bit, but as an engineer I'm a bit confused by what you mean by preengineering work?

I'll try it and hand it to Martin. We have site of all of the work that's being done by Petro-Canada in the partnership. And we obviously hire our own consultants to look at that. And we obviously have our own view of how that's developing. And that really is the short hand term for what we put there. Martin, would you like to add to that?

No, I think that's fine, yes.

Does that help you?

Yes, so it's pre DBM work rather than preengineering work?

It's the DBM work that we've seen thus far, it's pre finalization of it, but we obviously have a running check on what's going on and we take our own advice.

Perfect. Thank you very much.

Thank you.

Operator, we're moving on to almost an hour, so hopefully we can wrap this up within the hour.

Mark Friesen, FirstEnergy Capital.

Just a quick follow-up question to the additional lease sales. Looking at the leases west of 311, it does transition into the Birch Mountains. I was wondering if you have a sense of the depth of the oil sands deposit that you would expect -- the expected depth that you would think is there. In other words, is it more of a transitional stage or do you think you actually have deep enough deposit there for in situ development?

This is a good geological question for Daryl. Do you want to handle that, Daryl?

Yes, I will handle that. We fully expect that those will be at in situ depths. The top of the MacMurray formation will be at greater than 200 meters depth and probably go up to, perhaps, 300 or 400 meters, probably 400 meters. So, in other words, quite a bit deeper than say for instance Petro-Canada's MacKay operation, which is an in situ operation. It is a commercial operation that exists right now. So the depths are definitely an in situ, and we would see no problem with the depths.

Okay. There were three other leases around there that you didn't acquire. Did you bid on those other leases?

Now, Mark, you know that's an internal discussion.

But it's a question.

We know it's a question; we prefer not to answer that question.

Sure, okay. And my final question is the leases that you didn't talk about or haven't given too much definition to, were those acquired at the same time?

You're persistent on that, aren't you?

Yes, I'm pretty persistent.

I'm also quite persistent and we said that we acquired them in the third quarter.

Okay. Thanks very much. That's all.

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

Ladies and gentlemen, if there are no further questions, we've had a good -- I think a very stimulating hour. I'm appreciate of the work that our people have done on this. Needless to say, you can sense from the commentary that Will is very, very excited. I try to contain my excitement and the others in the organization have to be guided directly by Will. But we've had just a very exciting few months and hopefully we can turn these resources into reserves. And I would like to thank you all for joining us today and this concludes the conference call. Thank you very much, ladies and gentlemen.

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