Teck Resources Ltd (TECK) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the UTS Energy first 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. The statements are based on UTS's expectations and are subject to a variety of risks and uncertainties and other factors which are inherent in a pre-development stage oil sands mining and extraction enterprise that could materially affect UTS's results. No 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 obligation to update any forward-looking statements. I would like to remind everyone that this conference call is being recorded on Tuesday, May 15, 2007 at 7:00 MST and will be available for playback on the Company's website.

I will now turn the conference over to Mr. Dennis Sharp, Executive Chairman. Please go ahead.

Thank you, operator, and good morning to those of you joining us on this call this morning. I am joined today by Will Roach, President and Chief Executive Officer of the Company; Wayne Bobye, Vice President and Chief Financial Officer; Howard Lutley, Vice President of 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, let me take a moment to recap some of the major developments at UTS over the past few months.

As progress on the DBM continues with Fort Hills, our lead project, we have been making considerable advances in creating value in other areas of the Company. Last month we entered into a letter of intent with Teck Cominco in which Teck Cominco will acquire a 50% working interest in Lease 14 for CAD$200 million based upon a rate of approximately CAD$1.00 per barrel. The agreement with Teck Cominco capped a period in which we jointly acquired a considerable land position in partnership with them. UTS now has an interest in almost 285,000 acres outside Fort Hills, which is more than four times larger than the total acreage of the Fort Hills Project.

We have been active on some of those lands and in the first quarter, we completed 185 core hole drilling program on Lease 14, Lease 311 and the surrounding areas. Based on initial review of well logs, preliminary results are very encouraging and we look forward to more definitive results from our winter drilling program later in the year.

Will will elaborate on these and other important developments within UTS. Following Will's presentation, we will open the floor to questions. Will?

Thank you, Dennis. Good morning. I'd like to refer to a presentation that's up on our website and I'd like to refer to slide three, gives you the menu for today. I'll try and give you some highlights of the quarter and elaborate on some of the things Dennis just mentioned; talk a little bit about the business environment and then go through the key assets in the Company, namely Fort Hills Project, Lease 14 and the exploration lands. I'll try and finish with a menu of some near-term milestones.

Moving to slide number four, the actual highlights, we've made really good progress in the partnership operated by Petro-Canada at Fort Hills. And we are on track for communicating the key issues around scope and cost and timing of that major project.

Secondly, as Dennis said, milestone deal with Teck Cominco, I'll try and give you some feeling for that on Lease 14 of the importance to the Company, as that has, in fact, funded the next two year's exploration, cleans up the balance sheets, and also paid for the exploration lands; a fairly important transaction.

On the exploration now, I'll also give a little more color on some of the results around the 311 area and some idea of the scope of the drilling program in the next couple of seasons.

In addition, there's something we haven't said too much about, but we also acquired, in the quarter, five new leases on the Western fringe of our acreage on the west of the Athabasca River. And we believe there is a significant in situ potential in this acreage. This totaled another 45,000 acres.

Moving on now to slide five, where I'll just try and summarize the whole Company as we see it. Giving you an idea here of the Fort Hills partnership -- 30% working interest and the number of barrels net to UTS, about 1.4 billion from the best case. The Lease 14, now we have half share and we're hoping to get the resource estimate finalized in the fourth quarter. We, management, think around net to us 200 million barrels. And then really positive drilling results in the 311, an exploration area, and a substantial amount of unexplored land.

I think the key point on the bottom of the slide is also now very well funded in the Fort Hills partnership through to the end of 2008. And also very well funded in the exploration part of our business for the next two to three years, depending on the pace of the drilling program.

Moving to slide six, this is the business environment that we operate in. Since our last call, we've seen developments in the environmental area with CO2 legislation, both provincially and federally. We estimate that has an impact on our operations of increasing or decreasing the net back by between CAD$0.50 and CAD$1.00 a barrel depending on how the laws are interpreted. That is in addition to the removal of ACCA, which was announced prior to the last conference call, which we estimate as an additional CAD$0.10 to CAD$0.25 a barrel impact.

The big one we're waiting for is the results of the Alberta Royalty review. That's currently ongoing. And I note there's some reporting in the papers over the last couple of days of those hearings. UTS plans to present to those hearings.

So it's still a challenging environment. But finishing on costs, which I think everyone is waiting for, for the Fort Hills Project, I think we're seeing some clarity there and we'll be in a good position from the partnership to give an idea of the cost of the Fort Hills project scope handles timing. That really defines the financing that we'll need to put in place which is pretty significant and the level of pre-investment we intend to go forward on that project.

Moving on now to the Fort Hills Project and straight on to slide eight, you will see here the capital cost estimate. We haven't changed it since last quarter. We think the capital cost intensity will be around CAD$100,000 per flowing barrel or a total budget around the CAD$15 billion mark for the first phase of the project. We expect to see those numbers from the partnership, as I've said, at the end of the second quarter. So no news there. But really the key point is how are we going to finance those.

Moving on to slide nine gives you an idea of the status of the earn-in and gives you the details of the contributions being made by Petro-Canada and Teck Cominco on our behalf in the first CAD$2.5 billion of spend.

I don't wish to go through the numbers in detail other than to say we're about 18% through the earn-in in total, so another 82% to go. And we expect that funding to take us through to the last quarter or certainly the second half of 2008. So we've got between now and the end of 2008 to put in place the financing once we know the exact scale and cost of the project.

Moving on to slide 10 gives you an idea of the funding that we're going to have to put in place. We show this as a range because we haven't actually finalized the cost yet but that will be hopefully clarified at the end of June.

Earn-in is in place the first CAD$750 million and then we'll need to raise between CAD$1.25 billion and CAD$1.75 billion of equity and CAD$2 billion to CAD$2.5 billion of debt. The key here is of course, we do have to have some substantial other assets like Lease 14, which we believe will assist in the flexibility of rating this equity and also debt. And the key -- and I'll try and demonstrate this later in the presentation -- is that we will be able to fully evaluate the area around 311 discovery prior to putting the debt in place. This we believe, will give us a significant amount of flexibility, both in terms of the equity and also the debt.

Moving on to Lease 14 now. I just want to give you a little bit about color on the impact of the transaction. I said it in the opening, but I think it's worth repeating. The deal is based on a 400 million barrel [land] resource which is based on the evaluation currently ongoing, which we'll have finalized by the fourth quarter. The deal should close by the end of the second quarter. The actual payment made is cashed on the basis of 500 million barrel resource and underpinned at 300. So the actual range of renumeration we could receive is between CAD$150 million and CAD$250 million. That will be decided by year end, and as I said, the deal should close at the end of the second quarter.

Now the impact of this deal is really pretty profound. It's take all of the lands we purchased in the joint venture, cleans up the balance sheet, and indeed it funds completely two to three years of exploration, depending on the pace of that exploration. And you know, one of the key things that I think it does for us, it puts the benchmark out there for the value of the barrels on the Westside of the Athabasca River, which we believe we have a significant discovery just to the north of that.

Moving on to the slide 13, give you a feel for Lease 14 development options. We think it could be a 50,000 barrel a day bitumen production for about 20 years. There's a range of development options all the way from a stand-alone to a swap of divestment. This again adds to the flexibility of the financing plans that I alluded to earlier. By year end we should be in a reasonable position to assess both the cost of development and the best options to take that asset forward.

Moving on to slide 14. This just gives you a notional time line. I think what it communicates to me is that realistically we will be able to get a Lease 14 development in place, either as a satellite or a stand-alone development realistically by 2013. And we're well on the way, working on the -- having completed the environmental baseline study, doing the engineering work now for the feasibility. That should be available towards the year end.

Moving now on to the exploration land. I'd like to take you to slide 16, a pie diagram, just elaborating on the comment Dennis made at the beginning. We have a really substantial acreage position. And the first point I would like to make is that the entirety of the acreage position outside Fort Hills was paid for with half of Lease 14, which is pretty staggering when you look at it in that context; which has also provided for the exploration funding for that.

And the other point is we have made a major discovery in the mineable area in area two. And we have a significant amount of on trend acreage to the north in that area, potentially mineable. But also interestingly to the west with some in situ potential on the top of the Birch Mountains. We also have a significant area on the east of the river that is relatively unexplored, which we should be getting to in next year's program.

Moving on to slide 17. This chart shows you quite clearly the relative positions of the acreage, to the Fort Hills Project, area one, Lease 14 just across the river. And then to the North the area two where we have made a major discovery in the 311, 477, 468 and 470 area. The red on the screen shows you where we discovered hydrocarbons in 2006, which was, along with the exploration work we've been carrying out, the reason why we then purchased the acreage on both sides of the river; which we're pretty pleased to talk about.

Moving to slide 18. It shows you the 34 section area that I'm now going to discuss as the discovery around 311 where we think we've got between [two 20 and 34] mineable sections. I would add that all of the analysis we've done to date is based off logs and we're doing all the detailed core analysis by the fourth quarter of this year.

So if we move directly then to inset of that 34 section area on the slide 19, this basically shows the estimated thickness of mineable resource in red adjacent to each one of the wells and then the contouring around that. The key point here is about 60 wells in 34 sections, around two wells per section.

Only two of the wells did not find mineable hydrocarbons. And therefore, we have a statistically meaningful number of wells that we believe indicates that we have a pretty significant resource here. Up to 41 meters thick of pay. And as you go from east to West on the acreage, clearly the overburden increases as you encroach into the beginning of the Birch Mountains.

So very mineable resource. And also we believe something that we will be able to drill up next year into a contingent resource by drilling up about 300 wells in this area.

If you look at the bottom half of the map you'll see a red line going from the center of 311 to the southeast corner. And the next slide, slide 20, shows you a section based on logs through those three wells, giving you an indication that there is a thicker section on the west of the Lease in terms of reservoir section. On the east, the reservoir section appears to thin with the overburden thickening and the basin -- Devonian limestone, coming up.

You'll note that we have a significant amount of acreage to the West and also to the north. And this section really runs northwest to southeast. This gives us the degree of optimism we have for the adjacent acreage in next year's drilling program.

Moving on, the next slide, a little bit technical, actually shows -- slide 21 -- shows a log on the left hand side, but I think more importantly, what the actual cores from those sections of the well look like. At the top you can see a very rich oil sand and at the bottom, less rich, but we think potentially still very valuable but it's interbedded with mudstone. The key point here is that that may well be a very valuable mining resource. And we think that the evaluation of the course will delineate that volume metric over the next six months. So we should be able to get the estimates of the amount of mineable by the year end. This gives a good idea of why we want to do the core evaluation.

Moving on to the slide 22, it's a little timeline. We're linking back to the financing here. What we're trying to show is the amount of drilling we can do before we need to do the financing in 2008. So we should be able to get to a position where we have an additional 300 wells in area two and of a significant amount of delineation to the north and some seismic work to the west on the Birch Mountains. This will give us hopefully a contingent resource in that area, which will add significantly to the funding flexibility when we actually try to raise the money for Fort Hills.

Moving on to the end now of the milestone -- Fort Hills, slide 24. Everybody's waiting for the cost estimates. That comes out at the end of Q2. And then I think we can set Wayne seriously to work on the funding plan that then takes place over the next three to four quarters; which we are very optimistic about and had a lot of interesting ideas presented to us by a number of investment banks over the last quarter.

Moving on to slide 25, Lease 14, summarizing the highlights there. Basically [dual] closing in Q2 and resource definition Q4, which defines the price of that transaction. And also as importantly, virtual development plan and feasibility study and some costs by the year end, hopefully.

Moving on to slide 26 -- the big upside in the exploration area. Again, results of the core analyses of the key wells by the year end. And then also finalizing the drilling program and the extent of the delineation program and the rest of the acreage. So next year is a big drilling year for us.

Dennis, with that, I would like to hand it back to you.

Thanks very much, Will. With that I'd like to open the floor for question-and-answer session and ask the operator to come back on to explain how we will proceed. Operator?

Thank you, Mr. Sharp. (OPERATOR INSTRUCTIONS). Mr. Sharp, there are no questions at this time. Please continue.

Your call, Mr. Sharp.

Well, I assume everybody is very happy with what we have been accomplishing. We certainly, as management, are looking forward to having the opportunity later in the week to express our opinions and offer some guidance as to how the Company is going forward. It is our annual meeting on Thursday. And for those of you who are in the Calgary area, we certainly welcome you to attend that meeting. It's at 3:00 PM at the Calgary Petroleum Club and we would look forward to seeing all of you who can make it to attend. We don't have any surprises at that meeting but we're going to go into a lot of the work we've been doing in more depth. And certainly we would enjoy the opportunity of chatting with you. Ladies and gentlemen --

Excuse me, Mr. Sharp. We have a question on the Phone line, may we proceed?

Absolutely, operator.

[Zabida Merza], CIBC World Markets.

I apologize, I think I had an issue with the call, it didn't go through initially. I just had a question on Lease 311. And I understand it's a very -- it looks like it's a very good resource base. I was hoping you could give us an idea as to what size of a project do you see it could support. You say it's encouraging and you're thinking about a second stand-alone. Would there be a size in mind?

When we have these calls, we always keep our lawyer at the other end of the table. And she can communicate with us very quickly on things we should and should not say. I'll let Will talk a little bit more about that. But we're somewhat restricted in what we can communicate with the public. Will?

That's a great question and it is one that I would love to be able to answer very straightforwardly. Unfortunately, we don't have the drilling density yet on the Lease 311 area to be able to give you an estimate of the contingent resource.

I would however, point you to some research done by First Energy, Mark [Freson], Andrew Potter of UBS, and also Justin Bouchard at Raymond James. Those guys have all made estimates of their own. And I think they have used the following sort of analogy -- if you will recall, the area we have talked about is 34 sections or 34 square miles. And for each one section that you have that is mineable with a bitumen or of around 12 weight percent, and a thickness of around 25 meters. Remembering we've got a range of thicknesses on that Lease of between I think mineable 11 and 41.

You can expect from that 1 square mile around 100 million barrels of mineable resource. So that I believe is a reasonable proxy. And you'll, I'm afraid, have to wait until we finish the drilling in beginning of 2008 for us to give you a more detailed estimate. But I think some of the research may help you. But also that little algorithm may give you an indication of range.

One other point that's of interest, it has been our experience up to this point that the core analysis in fact expand the resource base. It generally gives us a little better understanding of those sections that are interbedded. As you realize with in situ operations, interbedded reservoirs are not suitable for in situ. And in mining, that's waste that can be thrown away.

So we look forward to those detailed analysis as we go into the fourth quarter. And we are looking forward to communicating that with you.

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

Well, thank you very much, ladies and gentlemen. This concludes the conference call. And I thank you all for participating. And as I said earlier, those of you who are in the Calgary area, look forward to seeing you on Thursday. It should be an interesting afternoon. Thank you again.

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