Teck Resources Ltd (TECK) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. 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's expectations and are subject to a variety of risks and uncertainties and other factors which are inherent in a predevelopment 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 projections or the ability of UTS to achieve the projected results.

The Company assumes no obligation to update any forward-looking statement. I would like to remind everyone that this conference call is being recorded on Thursday, November 6, 2008 at 7 a.m. Mountain standard time. And will be able to do playback -- available for playback on the company's website. I will now turn the conference over to Ms. Jina Abells Morissette, corporate secretary for 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 mining and extraction; Martin Sandell, Vice President engineering; and Daryl Wightman, Vice President resource development and business strategy. Now let me turn the call over to Will Roach to discuss our third-quarter activity.

Thanks very much, Jina, and good morning everyone. I am going to run through a presentation that is up on our website, and I am hoping everyone will have access to that and I will try and refer and my colleagues will, to the slide numbers when we are talking to a specific slide. I am going to draw your attention to, in addition to the operator, on the forward-looking statements. They are on slides two and three, and I would request that everybody takes a good look at those.

Moving on to slide four entitled Q3 2008 summary, number one, pretty clearly the major time-consuming activity and the biggest event in the quarter was the announcement by the Fort Hills Partnership of a significant increase in the FEED cost estimate for the fully integrated project. Martin is going to talk a little bit about more about that later and I am sure will cover off some questions and Howard will get involved in that, as well.

Reaction to that has been to galvanize the partnership into looking very carefully at those costs and looking for some efficiencies in the way we execute the project. And I am happy to say I can talk for the partnership on this issue, in that we are looking at a number of alternatives and this should allow a better usage of capital over the next couple of years. Obviously the capital markets for a company like UTS are pretty challenging right now. One of the good things is if we manage to defray some expenditure into the future it increases the duration of our earnings; whereby we have more time for [weighing] hopefully to access the capital markets. And depending on which way we go we think we are potentially funded into the first half of 2010 now, which would give these markets some good period of time to settle down and hopefully cure. One other point from the partnership is that I am pleased to say in every meeting I have been in there is a strong commitment in the partnership to retain the Fort Hills leases in good standing.

Moving on now to slide five, which is the summary part two, I think I am right in saying we've deferred taking an investment decision on the Sturgeon Upgrader until some later date. No final decision has been taken on that. I think what is happening is there is a lot of options being looked at within the partnership and by the individual partners. And hopefully they will be coming together on the way forward by the year end, which we'll be able to come back to the market with that. And the first step in that direction has been the announcement by the ERCB on the mine amendment decision, and I'm going to ask Howard to talk a little bit more about that later, which is very positive news in my opinion and it allows us to proceed with the revised mine plan through to a sanction decision.

Accordingly, I think that departments are still pretty focused on getting a sanction decision there pretty late in Q4, and that should allow us to move forward. And hopefully then book some reserves that I am sure Wayne will tell us how important that will be for any underpinning of financing later in 2009.

On the financing side, Wayne has been pretty busy, and he will cover off a little bit about this but not too much. But we have been talking to a large number of financial institutions and hopefully by the year end should be able to announce the lead group of financial institutions who are going to work with us to lead that financing.

On the exploration delineation side, Daryl's team has been particularly busy working with Teck to firstly determine how much we found last year and the year before, and we will have a bit of an update on that. But not too much today because that really arrived from the independent resource estimated in the first quarter 2009. And the key activity Daryl and his team has been doing is to define the core drilling program for this year anywhere between 200 and 300 wells. And I think that we are probably going to be at the lower end of that estimate.

Daryl will talk a little bit to that; given the tough times we are in we are going to try and husband our dollars. And the philosophy we've tried to adopt there is to develop a program that maximizes the barrels exposed for the dollars spent. And I am sure Daryl can take any questions on that later on but that has been quite an exercise, and I think it is going to reveal hopefully a pretty high upside per dollar spent in terms of barrels.

Moving on to slide six and I will just revert back to Fort Hills and then I'm going to hand it over to my colleagues, so what are we actually doing right now? Well, we are pretty busy and what we try to do is order these activities and what we think is the logical order that sort of helps you understand why we haven't been back to the market with a redefined cost estimate.

First off, we've got to define, we have to define the scope and agree it. And always remember we've got to have lease retention in the back of our mind there when we are defining that scope. Then defining the exact execution that should give us the best results; and by best results in terms of the capital efficiency when also aligned with the operating costs going forward. That is a continuing balance that Petro-Canada as the operator is looking at.

Then, of course, when you've got the execution scope you can really define what is a realistic schedule to expect. And again, recognizing lease retention is involved in that, once you've got those three things nailed down we believe then you can come up with a sensible capital. And most importantly operating costs for the project because obviously the overall attractiveness of the project is defined by those two criteria.

Howard is going to talk a bit more about this, but one of the substantial work being done up in the North now and I think he's going to try and talk us through a photo of some of what the site is looking like. And as I said earlier, the mine amendment decision which I think is pretty positive has just been rendered.

On the Upgrader side, the hearings were complete. We are still very focused on that, and we would still like to see the decision from the ERCB on the Upgrader application, and we expect that by year end. And we are pretty optimistic about that. So that is really why we, as a partnership are looking still at the late in fourth quarter for a final investment decision. And I think that that is still a pretty doable feat. So with that I'm going to move on to slide seven and ask Howard to pick up on that mine amendment decision.

Good morning, everybody. This is Howard Lutley. I am vice president of mining and extraction. As Will said, it is good news that we received the mine amendment decision. It is another important step forward in the execution of the project. As you may know, Petro-Canada, on behalf of the partnership, had applied for this amendment to expand the mine plan from the original footprint in the original 2002 approvals to allow for larger tailings and [put] in storage area and a larger mine footprint.

We are also looking for a change in operating practice, extraction operating conditions so that we can take advantage of learnings at the other operations, particularly Aurora to the south. And that was a minor change in operating temperature, and that has been approved. So essentially we got all the approvals we were looking for that allow us to proceed with the first 30 years of operations. And one of the conditions the ERCB put on this amendment approval was that we have to submit a revised mine plan and environmental assessment by December 31, 2009, which will then move us toward the development of the full 4 billion barrel resource. So overall we see this approval as a very positive step as we move forward to development of the project and the full life of this resource.

Moving to slide eight, as Will mentioned there is a considerable amount of development going on on the Fort Hills site. And you can see in this photograph this is an aerial photograph taken about three weeks ago now, so since that time of course there will have been further work and we are essentially looking northwest. So the Athabasca River is off to the bottom left of the picture, and the Fort Hills is off to the top right. So you can see there is substantial construction activity on the north side, and this is primarily the early works. So you can see obviously that there has been a lot of site preparation work, road construction, drainage, construction of a number of temporary ponds and permanent ponds for water storage and drainage of the muskeg.

And the leading construction work going on right now is installation of the infrastructure required for construction, but also permanent infrastructure such as fire water lines, sewage lines and anything that is buried that needs to be put in place prior to major construction beginning. Now if you look in the center of the picture you can see some blue pieces of equipment that look like cranes. These are piling, what is combination of cranes and tiling rigs and that equipment is working on the construction of the foundation for the primary extraction plant.

And then to the right of that you can see first towards the top right corner of the picture, you can see a large hole. That is the preparation of the foundation for the froth treatment plant. So there is substantial industrial construction work going on site.

Finally, in the very top center of the picture you can see a silver route construction. And that is the permanent camp that Petro-Canada is putting in place for 2000 workers. And that is the core area that will be the restaurants and communal areas at the camp. I think what we want you to take away from this slide is that things are moving forward, on site, significant construction and so far the work that has been undertaken is proceeding under budget and on schedule within the schedule that was expected for this work.

With that, I will turn it over to Martin to talk about the capital cost.

Thank you, Howard. Good morning, everybody. This is Martin Sandell, vice president of engineering and I will be talking to slide nine, and with regarding capital cost of the project. Obviously UTS has been very much focused on reducing the overall project costs. We've undertaken our own reviews in house and we have also commissioned an independent consultant to review the project cost, to search for cost reduction opportunities. And we have been working very closely with the partnership in doing that.

And we've identified a number of areas of opportunities where we believe cost reductions can be achieved. Firstly, in the area of contingencies, contingency -- much of the contingency we have reflects project risk and obviously we believe a significant reduction in risk in the current economic environment. And particularly due to announcements of project deferrals from Suncor and Shell, and that will impact on the availability of engineering, the labor, craft labor and equipment and materials delivery time. So we believe that there are factors there that can reduce the costs.

And obviously we've also seen a peaking of commodity costs such as steel and copper. We expect those to feed through into the bulk cost for the project and also the, again the economic environment will impact the costs of manufactured items such as equipment and piping.

On the question of labor rates, those are obviously tied to existing union agreements. So the rates themselves won't reduce, but we believe that the reducing economic activity in northern Alberta will create a larger labor pool, and that could lead to a higher quality labor force and result in improved productivity. So we would like to see that built into the cost estimate. And we also, with respect to the work that Howard described on the north side, we've seen performance that actually is significantly better than was forecast. So we expect that performance to be built into forward costs. And again resulting in a reduction in the cost.

And lastly on the question of owners' costs, that is something that obviously the partnership is in direct control of and so it is necessary to constantly review these costs and incorporate it as discipline into the execution of the project. Which doesn't impact the execution of the project but keeps the owners' cost to an absolute minimum. And working with our partners we believe it is possible to reduce a substantially, reduce the overall project costs for the North project and obviously it will be some time before all these factors are worked through the cost estimates that we expect to be able to come back to you within the next couple of months with revised cost estimates.

And I will now hand over to Wayne to talk about financing.

Thank you, Martin. Wayne Bobye, vice president of finance and chief financial Officer. Turning to slide number 10, UTS Phase I financing, assuming mining and extraction only that decision hasn't been taken. I'm going to focus on that part of it. The Fort Hills Partnership does not yet have a definitive cost estimate. But as Martin has elaborated, we are working through a lot of the costs, and this slide portrays a standalone mine for the extraction plant and infrastructure. And it is UTS's view that the costs associated with the mining and extraction project would be in the range of CDN13 billion to CDN15 billion, including FEED, CDN1.5 billion, contingency and escalation.

When you look at these numbers in the slide, you can see that after we take off the earn in and the cash that we have available, billion CDN7.5 billion of earn-in and the cash on hand, we've indicated we have about CDN315 million in the bank. Then UTS would be required to raise between CDN1.1 billion and CDN1.5 billion of funding in the market. And that would exclude fees, capitalized interest.

Now the good news on this we are talking to a banking group today and we intend on putting that group together. But as Will has already indicated, if this is the way the phasing goes with the project, then we are funded out into the first half of 2010. So we've got time to put together a group, and we've got time on our side for the financial markets to stabilize hopefully, so that we have more time and we are not rushing around right now to put would financing in place. But we are doing a lot of work with banks and we will be talking to rating agencies so that we get this thing ready to go and time it so to put our financing in place at the appropriate time. Now I will turn this over to Daryl.

Thank you, Wayne. Good morning, everyone. This is Daryl Wightman, slide number 11, the 2008, 2009 UTS Teck drilling program. The map is a topographic map or a map of ground elevation. The white area is high in elevation, and that is essentially the Birch Mountains on the west side or left side of the map. The green area is low and the blue is the lowest, which essentially is along the Athabasca River system. (inaudible) occurred within the green area; they are generally at surface mineable depths and where the oil sands extent under the Birch Mountains they are in situ depths because of the greater thickness of overburden.

The UTS-Teck land is outlined in yellow. For 2008 2009 we have licensed approximately 500 wells. Planned wells are in red, and the wells that have been drilled previously are in the blue represented by the blue dots. We expect as Will mentioned earlier, we expect to drill approximately 200 to 300 wells this year but we will probably wind up on the lower end of that range, closer to the 200 wells that we will drill.

Our drilling is concentrated in two main areas. One is the extension of the Frontier Project and the Frontier Project you can see to the west of the Athabasca River, you can see all the blue dots that are drilled there in lease 311 and 477 and you can see the range of red dots immediately north of that. So one area that we will be concentrating on is the extension of the resource that we have discovered in the Frontier for the Frontier Project extending that up into lease 610 and leases 840.

The other area that we are concentrating on is on the east side of the Pierre River. So on the southeast portion of the map or the lower right-hand side you can see the red dots in the lease 421 area. So we will be drilling a fair number of wells in that area, as well. So those are the two areas that we will be concentrating on. And really as Will mentioned before, the drilling is to maximize the number of discovered barrels per dollar spent on drilling. So we are really going to striving to maximize the value for the dollar spent on the drilling program.

And with that, I will turn it back to Will Roach.

Thanks, Daryl. I would like to stay on 11 just for a second to join together some of the activities that Wayne talked about and Daryl talked about. Pretty clearly the objective here over the next year is to build out the portfolio of assets to increase the number of bookable contingent resources. Daryl's team has been really very successful at doing that over the last three years, and if we are successful in this program we could end up with another significant addition to the resource bookable.

Why is that important? Well, that then translates into balance sheet strength to underpin the financing that Wayne is going to be looking to put together over the next nine months or so. The other point I would make is that this portfolio is now got three major discoveries, we believe. The Equinox or lease 14 area, the Frontier area around 311 and now extending pretty substantially north. And then on the east of the Pierre River, the leased material but the one I think Daryl probably had a glint in his eye over, which is in the 421 area.

So the good part about that there is adjacency of all those resources to other significant discoveries and we think that there will be two benefits from that. One, we build out the portfolio and if there is a recovery in the marketplace they act as greater ability to increase the funding capacity. However, if that marketplace does not improve as well as we want, they also present a range of different alternatives which may or may not include looking at asset dispositions if the value of asset dispositions remains higher than the perceived value of the company.

So there is a great importance and linkage between what Daryl is doing and what Wayne is doing in the market, and I just wanted to make that pretty clear. Moving on to slide 12, the year ahead. Well, we've got the decision on the mine amendment, which as Howard said is really pretty good news. Wayne talked about our banking relationships. I think we should cement those by year end and hopefully if we make an investment decision at the same time as that. Regulatory approval should be in the same sort of time frame, and then the reserves booking I guess is for the first quarter, Wayne.

The other good news is we get the Frontier numbers which we think are going to be a substantial increase moving towards the higher number and you can look at the ND&A for that one of the drilled resource last year, and also some initiation of some engineering work on that.

Finalizing the drilling program, those numbers we gave you well, our expectation of the UTS-TECK partnership's decision to move forward with that plan; not finalized yet but that should be finalized in the next month or so.

Early first quarter we should be looking at finalizing the DBM with Equinox. It will be pretty interesting to see what comes out of that piece of work. And then obviously all of that is underpinning Wayne's activities to put the financing together. And then the key point on that is we believe we bought ourselves some time. When we got the final cost estimate on the Fort Hills Project and scope we will know not exactly how long, but to the nearest quarter and then you back off that a couple of quarters to give us the end date of getting that financing together. Because we don't want to have our back against the wall when we are in that position to raise that money.

With that, I will hand the call back to Jina and take any questions.

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

(Operator Instructions) Andrew Potter, UBS Securities.

Just wondering how soon after the mine is sanctioned should we expect there to be a decision on the marketing for the bitumen, whether that is the Upgrader or just selling bitumen or supply agreement or refinery? Is that something that we can expect soon or something that unfolds over a period of a year or a couple years?

I think that is something that Petro-Canada are working very diligently on and let me remind you, Andrew, no decision and that has been taken yet in terms of the Upgrader, so those things are all being run in parallel. But on the presumption that we do decide to move forward with a mining extraction project pretty clearly the UTS Board of Directors anyway, are very keen to understand how that bitumen would be placed in the market. And I think there are a number of really good opportunities. So to answer your question specifically, it may happen contemporaneously with the announcement or it may be within the next year, and I'm sorry I cannot be more specific than that right now.

Sure. Maybe do you have any comments or any color that you can add to I guess your view and what some of the better options would be, whether that is just selling bitumen or supply agreement or looking at a refinery purchase?

I think the good news here, Andrew, is there are a number of different options. And there are a number of refinery expansions going ahead, which we believe will be if not short of product but seeking product to manage their supply. So I don't want to go through specifically this refinery this operator, but I can say that a number of those operators have approached the operator and indeed they've approached us. And I'm sure Teck as well; because we are in a good position and we have a lot of resources that will need a home. And I think the other issue is that the takeaway capacity is growing commensurately, as well.

Is the option on the table to actually buy a refinery whether the partnership or one of the partners?

I don't want to speak for the partnership on that one, and I think you should probably focus that to Petro-Canada. I can give you the UTS position on that. Right now we are looking to defray expenditure, Andrew, in this capital market and we think that making those downstream arrangements may make sense later on, but we need to define the project. Define what we've got to raise, get credibility back in the marketplace for the project going ahead and reestablish what I would describe as a more realistic share price for the asset set that we have.

Perfect. Okay, thanks guys.

Richard Wyman, Canaccord Adams.

Good morning, everyone. I got a few questions. First one is how much of the four billion barrels in the Fort Hills project has been given the approval so far, and how much is held up by the deferral of the decision pending? More data being provided by the end of next year?

Can I take that question and then you come back to the next one? Good morning, Richard, sorry; because I will lose the train of my thought if you ask me seven questions at the same time. That question I am going to give to Daryl but the first point I am going to make is nothing has been held up. Okay? The approval is in place for us to proceed so nothing has been held up. So, Daryl.

On the booking of the reserves comes from the independent auditor. So we really, that waits until the first quarter of '09. The 4 billion is the number that we have from the end of '07, December 31, 2007 from Sproule. So that is the contingent resource. That is what we have right now. We will be awaiting until the -- as Will said -- the first quarter of '09 to get the report from our independent auditor Sproule as to the breakdown. It will depend on project sanction and a number of other factors. So we don't have any numbers on that right now.

And we've always maintained quite a conservative stance on what we will be able to book there Richard, and we used to have a range I think of 300 to 600 and I was always guiding people to the lower number. And let me give you the rationale for that because I've always maintained it's pretty likely we will be able to book our working interest share of the production for 30 years out, because the design life of the plant is that. And if you do that arithmetic it is around 300 million to 350 million barrels. And the other resources would I think then fall into P2 and to contingent resource. So nothing has been held up, Richard.

Okay, on the presumption that the Upgrader is deferred into some point in time, with the approvals that are pending, is there a dropdead date that ERCB approvals have that if you don't sort of use it then you've got to go back into the process again? I'm thinking of the Upgrader one that is pending here shortly.

Not that I'm aware of, but I am not 100% sure on that. And we can get back to you, Richard.

Okay, and then the last question is in the Q3 release there was some comment about transferring operatorship to Teck. Has this been a planned thing for some time, and does it apply only to the lease 14 assets or Equinox, or does it extend to something beyond that?

This has been -- that is a good point -- what has happened is that in the initial agreement when we sought the funding for the land with Teck we agreed that we would run the exploration program. And if we made any discoveries in the in situ area that UTS would operate them. And if we made any discoveries in the mining area that Teck would operate them. So it has been planned from day one. And we are very pleased to say Teck has as of September the 1st taken over operatorship of the engineering facets of the Frontier and also the Equinox projects. And we are gradually working very closely with them on the handover of that. And Daryl's team is still running the exploration drilling for this season.

Okay. Thanks a lot.

(Operator Instructions) William Lacey, FirstEnergy Capital.

Will, this is a quick question on Shell's recent decision to shelve future expansion plans. Is there any implications as far as lease 14 and you guys as far as moving forward on development?

Good morning, Will. Interesting question. Well, I guess you really should be calling Shell on that one is my first response, because I guess the underlying presumption there is that lease 14 asset will be sold in the longer term or some transaction to merger into Pierre River. I certainly have not had any discussions with Shell on that issue, and I think that UTS and Teck is currently working on defining the asset base very clearly before we make any decisions of which way to go with that asset. I wouldn't like to conjecture about the pace or the development of Shell's assets. And you know if the oil price regains some strength over the next year or so, I'm sure they are going to be revisiting all of their portfolio. And I think the key thing, my understanding is that these assets very long-term, Shell has made a pretty big set of investments already, and have proved historically to be a pretty strong supporter of the Canadian opportunity set in a more general sense.

Absolutely. Okay. Thank you.

There are no further questions at this time. Please continue.

Thank you, ladies and gentlemen. This concludes the conference call for this quarter. Thank you for joining. Please disconnect your lines.