Teck Resources Ltd (TECK) 2007 Q3 法說會逐字稿

Welcome to the UTS Energy's third-quarter conference call. (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 oilsands mining and extraction enterprise that could materially affect UTS results. No presentation 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 Thursday, November 8, 2007 at 7 AM Mountain time and will be available for playback on the Company's website.

I will now turn to conference over to Ms. Jina Abells Morissette, Corporate Secretary of UTS Energy. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us this morning for our call. My role today will be to chair the conference call.

I am joined today by Will Roach, President and CEO of UTS; Wayne Bobye, Vice President and Chief Financial Officer; Howard Lutley, Vice President of Mining and Extraction; Martin Sandell, Vice President of Engineering; and Daryl Wightman, Vice President, Resource Development and Business Strategy.

We have had a very productive period since our last call. In this quarter we signed a memorandum of agreement with Petro-Canada and Teck Cominco, whereby each partner will earn an additional 5% working interest in the Fort Hills project, a transaction worth 750 million to UTS.

Subsequent to the end of the quarter we reached an agreement with a syndicate of underwriters for a bought deal worth a base of $275 million, plus an overallotment option of $41 million for a total of approximately $316 million. The combined transaction will significantly reduce our financing risk, affords us considerable financial flexibility to meet any future funding needs and allow us more time to demonstrate the potential value of our assets outside of the Fort Hills project.

Let me turn things over to Will Roach to elaborate on these and other developments.

Thank you, Jina and good morning, everyone. It is always nice to have your best lines taken before you start, but on this occasion, I'm obviously quite happy to do that in. As Jina said we are quite happy to offer commentary on what we think has been one of our most successful quarters.

During the presentation or during the conference call I'm going to try and follow our presentation that is up on our website. And before I start talking I'll try and give you the slide number we're working to. So hopefully you will have access to that and firstly I will draw your attention to slides 2 and 3, where there is a large amount of text, which I will assume everyone has noted about forward-looking statements.

So what I would like to do is guide you to slide 4, where we have a summary of the agenda today. And I think it is appropriate for us to start with the royalty review, give you a flavor of where we are at in that process and it is a process and it is not yet complete. Then I would like to elaborate, as Jina said, a little bit on the earn-in and the equity offering and try and position the impact of that on UTS. And then explain what that allows us to do over the next two years in our exploration assets. Then go on to give you a little flavor for the planning for next year, which Daryl and his team have been very busy on. I think we've got eight rigs reserved now with one in situ. And then finish up with a little view of what you should expect from UTS over the next year in terms of information to the market.

So if you move to slide 5, we're giving you our early view of what the impact of the royalty review is. And let's be clear, not yet complete. There is still some major outstanding issues. Firstly, the issue of potentially some upgrades to credit, which would improve the situation as UTS in the Fort Hills project has an integrated project, which includes an upgrader just north of Edmonton. And in addition over this period there has to be an agreement on the bitumen valuation methodology. I would also add that the recent corporate tax changes and reductions have not been included in the numbers on this slide and we believe will also improve the situation somewhat.

So I think the main point of this is that there is a recognition from the Alberta government that be cost of our business has not been affected greatly around the 55 to $60 a barrel range. Fairly clearly as you go up the WTI value, the royalties then payable increase. However, the projects at that stage are also increasingly attractive. So we think the situation as we understand it today not yet complete, is one in which we can still prosecute our business plan and accordingly we were quite comfortable with the outcome but watching very carefully now how it moves forward.

Having said that, let's move on to slide 6 and talk a little bit about some of the transactions Jina has summarized. The first one, the largest one, where I believe what we have done is we have right-sized our working interest in the Fort Hills project now, whereby we have farmed in a further 10% to Petro-Canada and Teck Cominco equally 5%. And they committed to contribute additional $375 million each for that privilege. And what this really means is that Petro-Can now have a 60% working interest after the earn-in, Teck Cominco 20% and UTS 20%. And the earn-in will follow the first earn-in we did and so there is a sequential nature. And we are now we believe totally funded to the $7.5 billion spend mark. And that you will understand when we talk a little more about the equity issue we just did; because the second earn-in we were required to put $250 million in during that period, which we just, subject to closing of that transaction, raised in the market.

So if you move on to slide 7, what we've tried to do here is put into context the latest transaction with the four transactions we have now done. One buying the asset from True North, a truly inspired move by Dennis Sharp, UTS led by Dennis Sharp, in 2004, where we bought in -- and I like to look at the price per percentage point. I think the price per barrel is going to be a little misleading as the resources have moved around significantly over this time period and will continue to move around as the commodity price increases and our plans in the mine and the project mature.

But what you can see is that since July of '04 when we bought in at 1.6 million per percentage point, we just transacted at around $75 million per percentage point. But remember over that period we spent quite a bit of money and so that's about $600 million. So the real price net to us increase is around $69 million -- the real price is around $69 million per percentage point.

Now obviously, this has been hugely impacted by the price of the commodity and what we've tried to do at the bottom there is show you the oil price at the date of the transaction. And you can see that that really is a pretty close correlation, as you would expect.

Let's move on now to slide 8 and just talk a little bit about the equity issuance and then I will try and combine the two transactions to explain what it positions UTS to be able to do. But basically we just did a bought deal under it and by RBC is believed with a number of other players, for $275 million. But this deal is not closed. The closing is on the 19th of November. And we have effectively done it in two parts.

Some flow-through for the exploration program, which I will talk a little bit about, but also the main point, putting the funding in that we require to go along side this second earn-in to take our funding out to the fourth quarter of 2009 for the Fort Hills project. At the same time you will remember we're fully funded in the exploration program via the disposition of 50% of Lease 14. So we have positioned ourselves we think very nicely for the next couple of years to grow the asset base on the exploration side before we put the remaining funding in place for Fort Hills.

So what does that do overall? Well on slide 9 I'm going to try and give you a feel for that in terms of the actual cost to UTS per flowing barrel of the first phase of Fort Hills. And this gives you an impression of how much leverage we now actually have in that first phase. So the equity contributions are $100 million from UTS in the first earn-in, 250 that I just discussed in the second and then we have a remaining amount of funding to do post the earn-in at $7.5 billion. It is the remaining amount between 7.5 and 15.2. So the total amount of money we will put into the project for the first phase is about $1.9 billion.

So if you divide that by the production capacity we fully expect to see through the system of about 31,000 barrels a day you see that that is a net cost to UTS of around $61,000 per flowing barrel.

Now the extremely good thing about this is it gives us very attractive economics when the market is seeing cost for these sorts of projects around $100,000 per flowing barrel. But what it also does it means that we're quite secured in terms of our ability to manage economically any potential cost overruns which we are hopefully not expecting because we think we have got a pretty robust budget. But that is one of the things that these earn-ins do for UTS as we go through the project.

On slide 10 what I tried to do there is summarize for you the spend to date and just a couple of really important numbers on this. It is a pretty complicated chart. I apologize. But basically the funding out to $7.5 billion, the UTS spend. The partner commitments but most importantly we've spent around $600 million to date in the partnership. That is where I got my 6 million per percentage point, invested since July. And then we are about 8% accordingly through the earn-in, so lots to go and UTS has already funded symmetrically alongside.

Slide 11 gives you another way of looking at the amount of money sitting around in the Company or cash equivalents via the earn -in. And the reason I have done this is to give you an idea of the actual value increase we have seen in the Corporation over the last three years associated with this project and hopefully now the delivery of some other exploration assets. So the combination of cash, cash coming in from the Teck Lease 14 transaction and also the earn-ins gives us about $1.7 billion of funding available to us. So on an undiscounted basis this is around 3.40 a share, just slightly higher, actually. So that is quite some progress. And then of course we've got a whole suite of assets on top of that cash value.

Moving to slide 12 this is the capital cost of the Fort Hills project. I'm sorry we have not got that on the top of the page. It is Fort Hills Phase I. $15.2 billion. This is not a new chart and showing the commitment there of $2.2 billion before sanction, which will hopefully be in the third quarter of 2008. Also showing pretty significant amount of unallocated costs of $3.4 billion associated with escalation and contingency. Again, we think a robust budget.

Now moving to slide 13, what we have put alongside there is the impact of the combined earnings to try and explain where all of our money is coming from. So in number one is $100 million from UTS then a combined contribution from Teck and Petro-Can at 650. And then earn-in number two, our contribution of 250 now in place, once the deal is closed, and 750 on top of that from Petro-Canada and Teck equally. This leaves us about $1.6 billion to fund for the Phase I, and we have about two years to put this in place. And I think Wayne is finally chomping at the bit now to get off to putting the debt in place. But don't forget we've also got a suite of assets that may be able to increase A, our debt capacity or contribute potentially to the financing of this remaining portion for Phase I.

Moving on to slide 14, that simply explains where we get the remainder of the funding from Phase I, the $15.2 billion budget net of the earn-ins remaining to be funded 7.7, our 20% share, $1.54 billion.

Moving on to slide 15, racing through this a little bit we're really just trying to point out where we're funded to off of this slide. Nothing has changed on the schedule. We're still expecting first bitumen production in the first half -- towards the end of the first half of 2011 and a staggered startup with the synthetic production coming in, in the first half of 2012. But what this gives you is a view of where we are funded to and one of the things I quite like off this chart is we've now got two years to sort that debt out. And if we can time it properly it will actually optimize the amount of carried interest that we end up with and hopefully reduce that somewhat to what we initially thought.

Moving on to the -- moving slightly away from Fort Hills, I want to talk a little bit about the exploration and delineation assets. So on page 17 we've got a really complicated chart that Daryl gets pretty excited by and shows the locations of the wells that we're planning to drill in the winter season coming up. With these broken out into priority wells, which clearly are located mainly in the 311 area where we have a major discovery already, the objective there is to reduce a contingent resource or a drilling density that would allow a contingent resource by the fourth quarter 2008. But most importantly we're exploring the 60 contiguous blocks directly to the north and also another 36 to the Northwest of that.

And we're going to be looking a little bit, first look at our in situ acreage on the West of this substantial discovery. So we are pretty excited by the program.

In addition to that we're going to be drilling a few wells on the east of the river. But in total we think if it's a cold winter we will hopefully approach around 400 wells.

This is a pretty exciting program. Three main objectives, really. One, producing a contingent resource in the 311 area. Two, understanding how far this trend goes north. And then three, trying to understand if we have got some in situ potential adjacent on the West.

Moving on to slide 18 so what does all that activity do for us? Well, it is pretty profound and again this links back to the financing. So this year we're going to get Lease 14 sorted out in two ways. Slightly complicated. Firstly, we're going to get a resource in the ground estimate on agreed cutoff with Teck Cominco. That will define the price of the transaction. And that report in draft has been received and we are currently reviewing it, so we hope to have that been data agreed with Teck within the thirty-day period.

In addition to that we're going to get an independent resource evaluation against the mine plant for Lease 14 such that we hopefully will have a contingent resource towards the end of this year or in January, depending how quickly that piece of work is done. In addition to that we're going to have a preliminary mine plan on the 311 area coming from the independent resource evaluator. As you can see from slide 18 we have got all the core analysis completed now and they are busily building the geological model on the bit shelves, and Howard has been stewarding that piece of work.

Then following the results of the drilling program in the fourth quarter next year we hopefully convert 311 area to a contingent resource, pretty important. That helps Wayne we believe in terms of managing the debt and perhaps increasing our debt capacity somewhat, depending on the turn of the market. Then of course we will also have the new areas drilling results, which hopefully will be put into the same position as the 311 area is this year given success in that. And also of the in situ potential will be understood. And then the following year another program will be based on the results of what we have just drilled. So pretty exciting and again remember the Lease 14 transaction allows funds to come in over the next two years to broadly fund this program.

Lease 19, what I'm trying to do there is just show you -- sorry, slide 20. That gives you an idea of the production profile that may be achievable from the portfolio. And the thing to note here is all of these assets shown Fort Hills phases one, two, and three, Lease 14 and 311 area, they are already discovered and we're going to be delineating. And we think that the 311 area if it's as big as we think, will certainly be able to handle the second phase, which is what is shown in red there in the top.

So we really have a pretty exciting in-the-portfolio set of opportunities and also note correctly that we're not showing any potential here for in situ yet. Daryl has made sure that we do not do that until we've actually drilled some wells. Although we have shot seismic over the area and have some degree of confidence that there is some prospectivity.

Moving on to slide 21, the year ahead, so what is going to happen? Slightly repetitive, I'm afraid. Lease 14 year-end we're having an investor day, and I think it's on December 4. We're going to the sharing some of the idea we have got about Lease 14 and also the results of the analyses that we have had done on it, both hopefully the contingent resource and the deal volume. And then moving through that the preliminary mine plan on the 311 area, just to give you an idea of potentially how big that could be, noting that we do not have the requisite drilling density to have a contingent resource yet. That is next year.

Then moving on back to Fort Hills, we are hopefully going to get the regulatory approval for the upgrader in the beginning of the third quarter, which will hopefully allow sanctioning of that project with a much better defined cost estimate then available.

And then on slide 22, I'm just repeating ourselves here. A whole whack of drilling data out of a very busy season. We show a range of wells. Obviously, it depends on how long the winter lasts and how cold it is. So ironically we're with the gas producers today and we're hoping for a long and very, very cold winter to get this program done. And then moving through 2008 we're looking for some data out of that program, which will come initially from management in probably the end of the second or beginning of third quarter, and then from the independent resource evaluator towards the end of the year. With that, Jina, thank you very much.

Thank you, Will. I would now like to open the floor to a question-and-answer session and ask the operator to come back on to explain how we will proceed.

(OPERATOR INSTRUCTIONS). Andrew Potter, UBS Securities.

I just wondered how likely is it that you will be acquiring additional lands? And second if you can talk at all about the drilling results you had last year on lease 840?

Good morning, Andrew, and I think you know the answer to both those questions.

Well I have to try every once in a while.

Daryl is looking at me and he is giving me the cut, cut say nothing. But very clearly, the results from the 840 drilling are going to be in the market one year after doing it, which I think is the end of March, Daryl, next year. And pretty clearly we've probably are not going to be sharing those because they are adjacent to open acreage, and that answers your first question.

(OPERATOR INSTRUCTIONS). Richard Wyman, Canaccord Adams.

A couple questions. One is with regard to one of your closing comments, Will, if winter comes to a conclusion in mid-March what kind of impact would that have on your drilling plans in the Northern part of your acreage?

Well firstly, I will let Daryl take that but we have given you a range of wells there are on the last slide; I think it was 300 to 400. But Daryl is in a better position to answer that than I.

Yes, Richard, that is a good question and that is why we have given that range as Will has stated. A lot depends on when the winter starts. We need an early start. If we get started in very early January, mid-March is actually pretty good. It is actually fine. A couple of our, the previous seasons have ended in approximately mid-March. So we need approximately two to 2.5 months to really get the results that we need and get the wells in. We have twice as many drilling rigs this year as we did last year. Last year we drilled 185 wells, and so if the weather is reasonable, I think that we will get a large number of wells in.

Can I add something to that, Richard? It is Will again. I think on the slide, Daryl, we have indicated some priority wells and secondary drilling wells. So we have already got in our head the ones we have got to get done first. And this obviously is not the most economic way of drilling. But it gives us from a corporate perspective the best chance of understanding the acreage. And Daryl and his team have done a really good job of doing this in previous seasons. So we are pretty confident we will get the coverage we need even if it's not a very cold winter. And then obviously the longer it goes on the more infill and confidence that we will have.

Okay. The next question I have relates to the preliminary view of what a Lease 14 development might be. I'm just curious to gauge whether a 50,000 barrel a day operation is sufficient mass for a mining (multiple speakers)?

Yes, well I'm going to ask Howard to take that but I'm going to have a go at it first. We have a number of different ways in which Lease 14 can create value for UTS. Firstly stand-alone and that could be a stand-alone just far as treatment going north or West -- sorry East. To Fort Hills, we have no agreement in place with them but that is something we're going to look at. And that could be a satellite back to 311. But pretty clearly it fits right in the Albion Phase III Pierre River acreage. And pretty clearly depending on their drilling results this year there may be an opportunity to do something there. But in terms of, does it make economic sense to develop a 50,000 barrel a day mine? Well with the commodity prices we currently see we think it does. Howard.

Yes, I do not think there's much to add to that. But we have done preliminary engineering work with Norwest on the mining and SNC on the process facilities. And certainly at $60 barrel with the first-half look at the economics it looks technically and economically reasonable to go on to the next stage and that is what we plan to do now is move to a more detailed stage of engineering.

So six months to a year from now we will have another view on that and that should certainly give us a better -- be able to answer that question with a little bit more authority for the 6 to 12 months from now.

And I will just add that at the investor day we're going to try and unveil some of the work we have been doing there. I'm pretty -- it is funny in the oilsands people talk about just a 50,000 barrel a day project, just 400 million barrels. That's a really substantial amount of production and a substantial project. And when you have commodity prices which are today at 90 plus or minus and there's a possibility that could go higher and people are now talking about floors in the short-term price of being around 40, then I feel a lot more confident spending money on engineering on assets like this. And I think that they will in fact become quite material.

Barbara Betanski, UBS Global Asset Management.

The question relates to your legal agreement between Petro-Can, Teck and yourselves on Fort Hills. It may be unlikely but should for whatever reason Petro-Can decide not to go forward with the project what your legal agreements are there? And -- yes, that is my first question.

Well the agreements are fairly explicit. But firstly I will not comment on whether Petro-Can are going to sanction the project or not. Pretty clearly, you have to speak to Mr. Brenneman on that one.

From a UTS perspective the agreements are clear and they are also on SEDAR. And basically it works as follows. There was an agreement in place to hold the leases because the approval was initially put in place to start the project and get on with the mine in 2002. So there is a lease potential agreement with the government in place, which we have collectively agreed to have in production by 2011. The actual agreement between Petro-Canada, UTS and Teck goes further than that and says within one year of producing 50,000 barrels per day, from that lease, we will have an upgrader available.

So the agreements are explicit, in our view. So we believe and we also think with the current commodity price and the attractiveness of the project that clearly that this is a go-forward project.

Okay, thanks. You have answered my second question as well, which was on the lease retention to 2011. So thanks very much.

Ms. Abells Morissette, there are no further questions at this time. Please continue.

All right. Well if there is no further questions, ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your line.