Teck Resources Ltd (TECK) 2011 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Teck's second-quarter 2011 results conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

This conference call is being recorded on Friday, July 29, 2011.

I will now like turn the conference call over to Greg Waller, Vice President Investor Relations and Strategic Analysis.

Good morning everyone, and thank you for joining us this morning for our second-quarter earnings conference call.

Before we start, I would like to draw your attention to the forward-looking information slides on pages 2 and 3 of our presentation package.

This presentation contains forward-looking information regarding our business, various risks and uncertainties may cause actual results to vary.

Teck does not assume the obligation to update these forward-looking statements.

At this point, I would like to turn the call over Don Lindsay.

Thanks Greg, and good morning everyone.

I will start this morning with a review of the results of the quarter, and then I'll turn the presentation over to Ron Millos, our Senior Vice President Finance and CFO, to address some more in-depth financial topics.

We do have a number of other members the management team on the call this morning and they, too, are available to answer questions.

So turning to slide 5, this quarter was a record quarter for revenues, for gross profits, and EBITDA on a normalized or clean basis, despite having adjusted our guidance for coal that was down later in the quarter.

The very strong quarter is a reflection of the strong fundamentals of our business, particularly in the higher prices for both coal and copper.

I would note that the second quarter for Teck is traditionally a weaker quarter for us because of the seasonality related to Red Dog.

Underscoring our financial position is our CAD3.4 billion cash balance, and that is after having already paid CAD177 million in dividends this quarter.

Since quarter-end, we issued CAD2 billion in aggregate amount of term notes.

We expect to use the proceeds for general corporate purposes, including anticipated capital spending and debt repayment.

Our net debt position is also about CAD3.4 billion, but it hasn't changed materially with our increased cash balance.

And finally, in coal, the benchmark contract price for premium hard coking coal for the third quarter has been settled at $315 per metric ton.

Our average price will depend on the volume of each product that we sell.

Turning to slide 6, Q2's record revenues stood at almost CAD2.8 billion, up over 27% from Q2, 2010.

Gross profit before depreciation and amortization was over CAD1.4 billion, which was up 31% over the second quarter of 2010, with expanding margins.

Second-quarter profit was CAD756 million, and EBITDA was just over CAD1.4 billion.

I would like to remind everyone that our profit is reported now under IFRS, and if you have not already done so, we urge you to go through the notes to the financials to become more familiar with the changes.

Slide 7, it shows our adjusted profit for the quarter, which removes unusual items in comparison to last year.

Adjusted profit of CAD663 million, or CAD1.12 per share on a fully diluted basis is almost double the adjusted profit-per-share last year.

We show our view of normalized or adjusted profit for the quarter on slide 8.

This quarter had 2 significant adjustments.

The largest was the sale of our interest in the Carrapateena project, which had an after-tax impact of CAD99 million.

The second is one-time after-tax charge of CAD26 million, related to the new 5-year labor agreement in our coal operations.

As usual, we have some modest adjustments related to the foreign exchange derivative losses.

Adjusting for these items, profit was CAD663 million for the quarter, or CAD1.12 per share.

Turning to our operating results for the quarter on slide 9, in our coal business, production and sales were down year-over-year.

Our production for the quarter was 5.8 million tons, and sales came in around 5.6 million tons.

The average realized price for the second quarter was $272 per ton, relative to the benchmark prices of CAD330 for the premium quality of the coal.

The wider spread between realized price and of the benchmark price was primarily due to the significant increase in the benchmark price this quarter, and the carryover a sales of some coal at prices from the previous quarter which were substantially lower.

Also, the deferrals from customers impacted by the March earthquake and tsunami in Japan resulted in the realized price being somewhat lower than previously expected.

Some of those cargoes have been pushed into the third quarter, and they will be still priced at the Q2 levels.

Second-quarter 2011 unit site costs were CAD73 per ton, not including the one-time costs related to the settlement of labor contracts.

The one-time cost related to those labor contracts amounted to about CAD40 million, or approximately CAD7 per ton.

A number of factors contributed to higher site costs.

First the increase in strip ratios, external mining contractor costs, and diesel, of course, all contributed to higher unit cost during the quarter.

It is important note that some of these are deliberate decisions that we make to maximize production given the high coal price.

We know that these decisions will increase costs, but it is the right economic decision for our shareholders.

Adding unit transportation costs of CAD33 per ton gave us combined costs of CAD106 per ton for the quarter.

We recognize that our site costs have increased significantly over the past 3 years.

Slide 10 underlines the increase in strip ratios, and how the change has impacted costs.

Although the strip ratio has been trending higher, we do expect it to decline and then stabilize in the near future.

The bars in the chart correspond to the amount of total material that is coal and waste material that we moved quarterly over the past 3 years or so and our forecast for the end of 2012 as well.

During the second quarter we moved a record amount of material.

This is a direct result of more equipment and specifically having larger haul trucks.

Speaking of which, we now have increased our truck deliveries by 5 more, to 42 new trucks by the end of 2012.

Of the 42, 22 new trucks have already been delivered.

Of our increase in costs over the past 3 years, about 35%, is to do with the strip ratios.

The logic underlying our expansion is really quite straightforward.

In order to produce more coal, we have to move more waste to expose the coal and prepare it to move to the wash plants.

More coal means more waste strip that adds to that coal production.

Hence we need more trucks.

This is the right economic decision for our shareholders given the tightness of the hard coking coal market, currently, and we expect in the future, and the associated high prices with that type market.

In our copper business on slide 11, overall production was up over 4% versus Q2 last year with cost rate up and capital production down, mostly due to the transition in Andacollo from capital production from cost rate production.

While we would have liked to have more, at least it was up; most other companies have seen copper production down.

Production of copper concentrate was up over 17%, mainly due to Carmen de Andacollo and to a lesser extent Highland Valley Copper.

The increase in production was slightly offset by lower production from Antamina, primarily due to lower-than-average ore grade.

Conversely, capital production was down 6,000 tons, or about 25%.

The decline is mainly attributable to the unusually heavy rainfall experienced at QB during the first quarter.

During the lag times involved in the leaching operation, this had an impact in Q2 as well.

Higher revenue on weaker sales volume was the result of substantially higher copper prices.

Copper prices averaged CAD4.14 per pound in second-quarter 2011, compared to CAD3.18 per pound in the same period a year ago.

Turning to slide 12, I would like to provide an update regarding the Andacollo concentrator.

As discussed in earlier quarters, we've encountered harder ore at Carmen de Andacollo sooner than anticipated.

As a result, there is a need for additional grinding capacity.

Consequently, we have plans underway to increase plant throughput to meet or exceed the original design plan.

The 3 main steps to achieve this include adding a small crusher to feed the pebble crusher, and that will be done by the end of August, next month.

Second, to increase the second SAG motor capacity by about 10% by the end of the third quarter this year.

And thirdly, to install a 20,000 tons per day pre-crusher plant by the end of the first quarter next year.

This improvement plan is already in progress.

It is estimated to cost about $15 million, and these plans are intended to increase throughput to meet or exceed the original design plan.

Finally, in addition to these improvements, we expect the feasibility study examining the expansion to up to 100,000 to 120,000 tons per day, and that feasibility study would be due in the fourth quarter of this year.

Slide 13 describes the challenges that we've had at our Quebrada Blanca mine in northern Chile, and our responses to do with those challenges.

Heavy rain in January and early February and a reduction in higher-grade heat leach ore due to instability in the south wall of the pit, continue to have an impact on production the second quarter.

The combined impact of these factors over Q1 and Q2 has been approximately 5,000 tons and 3,000 tons respectively.

More recently, unusual winter weather earlier this month brought more disruption.

However, compared to last time, the impact is temporary, and disruptions have been minimal.

We are doing a number of things to address these challenges.

We have stabilized the south wall of the pit by removing material weight and by taking a step out of about 70 meters, which leaves some more behind for later recovery due to be phase 2.

We are now mining below the filled area and will reach the ore zone in early 2012.

Quebrada Blanca is now transitioning from higher-grade heat leach operation to a lower-grade dump leach operation.

We are also experimenting with treating ripios, which is ore that has been leached already, but still has copper in it to leach.

Testing has shown that re-leaching of ripios can result in additional copper recovery.

We will re-leach ripios in 2011, and plan to include significant ripios in 2012.

We expect to produce about 150 tons this year, and as much as several thousand tons in 2012.

As well, modifications to the SX plants are being carried out to deal with lower-concentration leached solutions that come off the dump leach ore.

Slide 14 shows the current status of the expansion to the Antamina concentrator.

The project stands at 63% complete and the forecast cost remained stable at $1.3 billion.

In addition to the new SAG mill and ball mill, the new copper and zinc flotation cells are already in place.

And the target for operational readiness of the new facility is late Q4 of this year, with throughput and production benefits expected in Q1 of 2012.

Turning to slide 15.

As you heard from our partner in the Galore Creek project yesterday, Noble Gold had a very comprehensive release and discussion of project, so I won't go into a lot of detail.

This is a very large copper gold resource.

Potentially a very large producer.

The project plan has been simplified from that original vision to enhance the project to reduce risks.

There are number of things to be evaluated in the enhanced plan, which will be completed by the end of the year, and that will form the basis of the project description for feasibility study and to initiate the permitting process.

Turning to our zinc business on slide 16.

Zinc concentrate production for the quarter was approximately the same compared to last year.

At Red Dog, higher mill throughput resulted in 3.7% increase in production.

At Antamina, production declined due principally to a lower proportion of copper zinc ore.

As in previous quarters, I should note that even though we show Antamina share of zinc production in these figures, the financial results of Antamina are reported in our copper business.

Lead concentrate production was 29% lower than our first quarter last year due to lower feed grade and recovery, impacted by near surface weather ore from the aqualytic in Red Dog.

This issue should sort itself out as we get deeper into the ore body.

Consistent with last quarter, we had no sales of lead concentrate from Red Dog as we sold out in the last half of the previous year.

At Trail, production of refined zinc was largely higher than the same period last year, due to improved online time and higher plant throughput.

Overall, the zinc business contributed CAD156 million in cash gross profit this quarter.

In our energy business, we continue make progress across all of our projects.

At Fort Hills, engineering studies of both design and cost are ongoing.

The timeline continues to anticipate a project sanction decision by the partners in late 2012 or early 2013.

At Frontier and Equinox, we have recently completed a capital cost estimate and a design basis memorandum.

Which is the basis for regulatory application which we expect to file the second half of this year and that will kick off the permitting process.

The first 2 production trains are expected have a production capacity of 159,000 barrels per day of Bitumen, and should cost approximately CAD14.5 billion, with an expected accuracy of minus 10% to plus 30%.

The Frontier project has been designed for up to 4 production trains, and that's including Equinox as a satellite operation.

The total capacity of 277,000 barrels per day of Bitumen, costing an estimate of CAD22.9 billion.

At Lease 421 we completed a seismic program which assists in siting future drill holes.

Beyond that exploration is ongoing, and we hope to be able to declare an initial contingent resource in the 2012 to 2013 timeframe.

At our Wintering Hills Wind Farm project with Suncor, the project is proceeding on schedule, and is expected to be complete by year end.

I will now turn the call over to Ron Millos to address some financial issues.

I am on to slide 19, where we summarize changes in cash for the quarter.

Cash flow from operations was approximately CAD1.2 billion in the second quarter, which is up 48% from the same period last year.

Our working capital investment was unusually large in this quarter, but we typically see that investment and working capital in the first half of year, and I will come back to this on the next slide.

Capital spending and investments were CAD325 million for the quarter, including CAD104 million on sustaining capital, and CAD168 million on major development projects.

Our major development projects include CAD26 million for stripping on Highland Valley Copper's mine life extension project, CAD26 million for Antamina's expansion, CAD18 million on QB's hypogene project, and CAD68 million at Teck coal.

After allowing for minority partner share of cash, and the effective exchange rate changes, our cash increase in the quarter was CAD268 million, and we ended the quarter with just over CAD1.3 billion in cash.

With our bond issuer earlier this month, our cash balance currently sits at about CAD3.4 billion.

Moving to slide 20, I would like to touch on a large working capital change.

The largest single item relates to the factoring of our receivables, which we do to efficiently manage our cash balances.

We did not do any factoring at the end of June, and this resulted in a CAD150 million increase in our receivables.

In addition to the factoring, our receivables are also higher due mainly to the high commodity prices, especially coal, and the timing of when the sales actually occur, which drives the timing of the payment from our customers.

We have higher inventories, the largest of which relates to the cost of Trail's raw materials purchases due to higher commodity prices, particularly precious metals.

We also had higher inventory volumes at a number of sites, due to the timing of raw material purchases, and the timing of the sales of our finished goods.

We expect these to reverse in the normal course.

In addition, as you heard earlier in the presentation, some of our operating costs have risen, and these higher cost flowthroughs are in process and finished goods inventories.

The working capital increase also factors in an approximate CAD150 million reduction in payables rising from timing of tax and royalties payments in the first half of the year.

Some of the working capital buildup is temporary, such as the higher inventory due to volumes and the timing of payments.

Others related to higher commodity prices may last longer, as a further buildup or drawdown are somewhat dependent on the movement in these future prices.

Slide 21 shows our final pricing adjustments for the quarter.

Starting in 2011, our pricing adjustments are now included in non-operating income expense.

These pricing adjustments were previously included in our revenue or concentrate purchases as appropriate.

This is a presentation change only.

There has been no change to the methodology in how we calculate the pricing adjustments.

And our adjustments from previous periods have been reclassified for comparative purposes.

Total adjustments for the second quarter were positive CAD6 million on a pre-tax basis, copper and zinc both have small negative settlement adjustments this quarter to the small reduction in price.

Silver works in the opposite direction, as this represents settlements outstanding on the purchase of silver and concentrate at our Trail operations.

On average, we had about 3 million ounces of silver payables outstanding at beginning of the quarter, and with the price declining, we recorded a positive CAD15 million adjustment.

And remember, when analyzing the effect of price changes in the adjustments, refining and treatment charges in the Canadian/US exchange rate must be included in your calculations.

When trying to analyze impact on our net earnings, you need to consider taxes and royalties.

Slide 21, there are 2 charts there.

The top chart illustrates our updated debt maturity profile; the chart on the bottom our recent notes offering.

Our debt maturity profile remains very manageable with only $200 million due in September 2012, and about $1 billion due between now and 2015.

Earlier this month, on July 5, we issued $2 billion in aggregate amount, on 5-, 10-, and 30-year notes with about CAD1 billion maturing in 2017 and 2022, and CAD1 billion maturing in 2041.

We expect to use proceeds for general corporate purposes which may include our capital spending for project development and/or debt repayment.

We were able to place this bond issue at historically very low rates.

The chart at the bottom of the slide highlights that we executed this debt issued at an average funding yield which is in the fourth percentile of where rates have been over the last 20 years.

In our view, this represents a very good time to secure long-term low-cost money to help fund our expected investment program.

With that, I'll now turn the call back to Don Lindsay.

Before we close, I would like to update you on the status of our many development projects that we have underway.

So that's slide 23.

In coal, the feasibility study for the restart of the Quintette coal mine is proceeding, and is expected to be complete by the end of this quarter.

Assuming the results of the study are positive and development proceeds, the mine could be in production by 2013, at an annual rate of approximately 3 million tons per year.

At Relincho, the feasibility study is underway and is also expected be completed in third quarter of this year.

At Andacollo, a feasibility study for possible expansion is in progress, and is expected to be completed in the fourth quarter of this year.

At Quebrada Blanca, a full feasibility study commenced in 2011 and is expected to be completed by the end of the first quarter of 2012.

A positive feasibility study could potentially result in a decision to undertake project development with production in early 2016.

Continuing in copper, the Galore Creek pre-feasibility has been completed, and more work is being planned through the end of this year before a decision is made for full feasibility.

In our energy division, we are working on a pre-feasibility study for the Frontier Oil Sands project with the possibility of Equinox as a satellite mine.

This study is expected to complete in Q4 of this year, which will also be marked by the filing of a regulatory application.

So we have lots of exciting growth opportunities coming.

I look forward to reporting on the development status of these projects in the future.

In summary, the record results this quarter demonstrate the strength of our overall business and we expect further improvements as the year unfolds.

We are very well-positioned to pursue our strong growth potential.

We have a strong balance sheet and a focus on the strong and increasing cash flow from our business.

Our coal business is very exciting, with robust fundamentals and market prices, and we are increasing production for a very nominal amount of capital relative to others.

Our copper production will grow over the next year with the completion of the expansion of Antamina, and we are moving forward with several development projects to further enhance shareholder value.

As you have seen, we have number of other growth projects on the agenda as well.

With that, like to turn it over to questions.

So over to you, John.

Thank you.

(Operator Instructions) Thank you for your patience.

John, while we wait for the first question, I would just like to note for the benefit of people on the line, that a number people are calling in for this call this morning.

So if we pause for a moment in co-ordinating our response, it is due to the fact that we are in various locations, and we will be co-ordinating who will be responding to the question.

Thanks.

Thank you.

The first question is from Meredith Bandy of BMO Capital Markets.

Please go ahead.

Hello, good morning.

Congratulations on the results, gentlemen.

I was wondering if you feel comfortable looking ahead to next year.

You're still talking about maybe CAD32 million or above net coal production and 2013.

What sort of production would you think about for next year?

Well, this stage, we haven't put out guidance for next year.

I think we want to until we see the plant upgrades complete and working well and all of the equipment, the rest of the trucks delivered before we take a look at what production we can achieve in 2012.

But we are quite confident, in 2013, all of the equipment will be in place and the plants running smoothly, and the targets we put out there for the Elk Valley, and CAD28 million coming out of there, and another CAD3 million on average from Quintette will take us over the CAD30 million.

So, I would say wait until, let's see, somewhere into the fourth quarter when the plant upgrade are further long before we can give a clear answer on the question.

Okay.

Thanks.

And then on the cost side, you did give a lot of detail, and thank you very much, in the release about the increase and what was responsible for the increase.

How much of that could go away?

It sounds like the strip ratios are coming down.

I'm not sure about the inventory impact.

How much improvement could you get in the next few quarters or going into next year?

I will turn it over to Ian Kilgour.

We expect to be able to bring our unit costs down in the second half of this year as we increase production and, we expect to be running around $65 onsite costs by the end of the year.

That's expected to continue in 2012.

Okay.

Thank you very much.

Thank you.

The next question is from Jorge Beristain of Deutsche Bank.

Please go ahead.

Good morning gentlemen.

Hello Ron, Don, and Greg.

Just following up on that, maybe looking into the second half for coal.

You were intoning that guidance could come in at the slight low end of your sort of 23.5 million to 24.5 million range.

And seems to be more fourth quarter weighted in terms of coal sales volume.

Could you talk to why you are still seeing a sort of slightly weak third quarter?

And, if there is, on the cost decreases you're expecting, is that really something more seeing at exiting the fourth quarter run rate at CAD65 per ton or is that sort of immediate one we get rid of the CAD7 per ton that you saw for the labor settlement?

Maybe I will make an additional comment and I'll turn it over to Ian Kilgour again.

We don't feel the third quarter is slightly weak.

It's ramping up.

The first quarter was a miserable quarter because of all the weather-related issues and strike and so on.

We have seen a significant improvement in the second quarter.

The third quarter will continue that improvement and of course, we are getting more trucks, and continuing to get closer to when the plant upgrades are finished and we have increased capacity there.

I view it as ramping up quarter by quarter which was always the case.

It's hard to sort of do a straight line ramp up.

Things come in incrementally.

We are generally on the plan that we said we would be.

For more detail, Ian over to you.

Thanks, Don.

I think is essentially the ramp-up as the key difference between the quarters in the sense of that we are gradually bringing on extra equipment, and we continue to do that in the second half.

And the other aspect, actually is that, we concentrate our plant shut down in the third quarter, to take advantage of the good weather.

So we just completed 4 of our planned 5 plant shutdowns for the scheduled annual plant shut down for the year.

So, sorry if I heard that correctly, you just had 4 or 5 plant shut downs in the third quarter?

That's right.

Okay.

That's simply scheduled on an annual basis to take advantage of the best weather to be out to carry out the scheduled maintenance.

And from a cost point of view, could you talk to, if any of your fuel is hedged at any price in the second half or, for example, the Canadian dollar which has obviously been a source of appreciating costs?

Ron Millos, did you want to speak to the Canadian dollar?

We generally hedge a portion of our US dollar sales to fix, effectively to match it up the Canadian dollar cost.

We do that on a quarterly basis about $300 million.

We don't do any fuel hedging.

Okay.

Thank you.

Thank you.

Next question is from Garrett Nelson, of BB&T Capital Markets.

Please go ahead.

Good morning, everyone.

As you highlighted, you have about CAD3.4 billion of cash are now.

Hardly any debt maturity is due until mid-decade.

Based on anyone's projection, you should be generating pretty significant free cash flow going forward.

So, I guess I was little surprised to see you lower your 2011 coal and copper CapEx guidance slightly, most of which was on the expansion CapEx side.

I was hoping you could talk about how you are weighing some very attractive organic growth opportunities versus potential acquisitions right now?

And if you see anything that might be of interest on the acquisition front?

Okay.

There are two or three parts on the question.

I guess, first, we do have large cash balance.

We took advantage of what we thought was a good opportunity in the debt markets in general levels of interest rates, at the 4% over the last 20 years.

Knowing that at some stage, we would need that cash, either to, call or redeem or buy back some of the other bonds that are outstanding with higher coupons.

Or to fund the large CapEx program that we have, admittedly it doesn't start until next year sometime.

It doesn't ramp-up to significant numbers until the end of 2013 or 2040, but we don't know how the world will unfold so we wanted to be sure that we had all the cash on hand.

We do look at acquisition opportunities as you would expect us to.

We haven't seen anything that is of interest at this point.

We do a lot of analysis.

The industry went through a period of fairly significant consolidation from the 2006 to 2008 period.

Also during that phase we were acquiring the projects in good geo-political jurisdictions that we wanted to develop.

And right now, when we look at our, what I call the stay the course strategy, where we continue to do internal or organic growth as people call, developing each of Quebrada Blanca & Relincho, we have Fort Hills coming along with quite material growth in the coal business.

We know that at the end of five years, we'll have substantially more copper production per share, substantially more coal production per share, substantially more oil production that was pretty good based strategy, and acquisitions need to be measured against that.

And so far, the acquisitions haven't been appealing enough for us to make a move.

Doesn't mean we aren't looking, but the stay the course strategy looks pretty good.

Okay.

And then on the copper sales guidance.

It looks like you're at about a 150,000 tons through six months, and maybe you've built a little bit of inventory in the first half.

What mines are the key volume drivers in the second half in order to get to your 330,000 to 340,000 guidance range?

Okay, I'll turn that over to Roger Higgins.

Thanks, Don.

The 2 mines we expect to see some improvement and will see some improvement on during the course of the year.

Highland Valley as we complete the buttress work that we've been talking about now for the best part of a couple of years.

The buttress is due for completion August.

That will provide us better overall value going forward.

It will take the third or fourth quarter to achieve the full benefits of that.

The other is Andacollo, as we ramp up to some of the measures that DOn spoke about earlier on to get more throughput though the Andacollo plant.

Great.

Thanks very much gentlemen.

Thank you.

The next question is from Harry Mateer of Barclay's Capital.

Please go ahead.

Hello.

Good morning.

Ron, question for you.

Just following up on the last question about the new debt.

During the last couple of years you consistently paid down debt, and you're generating free cash flows.

So, does the new debt offering, in addition to taking advantage of the low rates, does it reflect a view that you may have overshot on debt reduction a bit and this is more optimal capital structure or is taking advantage of the low rates and paying down some high coupon debt, still a very real possibility, particularly before your CapEx picks up next year?

You know, we will monitor the debt on an opportunistic basis, but I think, going up to the marketplace, the rates were low, and the opportunity was there.

We have a major capital spend coming at us.

We will look at the economics of taking out high-yield debts with cash on hand if the opportunity presents itself.

So, we are relatively happy with the capital structure, and with the cash we have on hand, and the potential cash coming in at current commodity prices.

We have a lot of flexibility on how we want to move forward.

Okay.

Can you just refresh us on your leverage targets?

Are there terms of total debt you wanted the balance sheet or debt to EBITDA, or debt to cap metrics?

We want the metrics to be consistent or allow us to maintain our mid investment grade credit rating.

Our internal target is 25% to 30% debt to debt equity ratio.

We're comfortable with the mid-triple B rating.

It gives us a bit of a cushion in a general industry downgrade where we don't want to get drawn to below the investment grade.

Basically, the key metric is that the debt equity ratio, the 25% to 30% and leverage of 2.5 times debt to EBITDA.

Great.

Thanks very much.

Thank you.

Our next question is from Oscar Cabrera of Bank of America, Merrill Lynch.

Please go ahead.

Good morning, gentlemen.

Couple of questions.

Net coal first, and then copper.

Net coal -- just curious about your estimates for the third quarter, in the range of CAD280 to CAD290 a ton.

You said, the third quarter had settled at CAD315.

The less comes call you said there would be carryovers all most every quarter and the carryover is at CAD330.

Can you provide color on the mix of coal sales that you expect to get that lower net coal price realized for the third quarter?

Hand over to probably a combination of Ian and Greg.

Whoever wants to go first.

Well, our premium hard coking coal is bout to be priced at prayer CAD315 a ton.

And that's a high proportion of that production, but of course we also have weak coking coal and PCI coal, which are priced at levels below that.

So, essentially, we have that mix, and we also have the carryover from the second quarter.

We expect to complete all the sales that we had, that did carryover from Q2 in Q3.

And basically, that mix gives us the proportions that we are estimating at this point.

And Ian, if I could at one point here, all three, you may recall in Q1 we indicated that there would be some carryover tonnage from Q1.

The bulk of which would be sold in Q2 and was, but there would still be some of that coal.

Of course, that was priced back on a base of a benchmark price of CAD225 a ton.

Some of that would be carried into Q3 as well.

Thank you.

And then, on your copper projects.

This is more a question on your priorities and how you state your projects.

And the returns that you are looking for.

Based on the release from the pre-feasibility in Galore Creek, long-term copper prices are about $2.65 a pound.

The project economics internal rate of return is about 7%.

Just wondering -- so two part question.

One, how are you thinking about in terms of staging your development CapEx for your copper and Oil Sands?

And secondly, what sort of hurdle rates are you looking for to get -- to maximize free cash flow.

Okay.

This is an excellent question, and I just want to take some time on it.

Because, it's probably the key question that the whole industry is facing right now.

My first comment would be that every analysis that you do is based on a number of significant assumptions.

The first one of course is commodity pricing.

While the model you are referring to in Galore Creek, Noble Gold shows CAD2.65 copper.

We've been using lower copper prices than that as our base case.

But we do note that various other bank analysts have come out with higher long term copper pricing, more recently some at CAD3.

It is a very tough call.

We don't know what the long-term price is going to be, so we do sensitivity analysis and run several models of different copper prices.

And it's interesting that, in this day and age, where there is significant pressure on capital costs, as you raise the capital costs for some of these projects, and we have seen a number of companies come out in the last week, increasing capital cost or major products by CAD1 billion or more, as you raise that capital cost, it really makes a big difference to your IRR result or your NPV and then the commodity price itself does.

Right now, as you analyze these large, CAD4 billion and CAD5 billion projects, the result you get in your NPV and your RR is all over the map.

So in the end you have to make a judgment as to whether the world is going to need that particular project.

So in those cases, you look and say, well, what is the quality of the resource?

What is the grade?

What is the mine like?

Is it going to be around for several cycles?

Will you have 5 or 6 cycles longer than the pay back periods of the project itself?

Is it in a geopolitically safe jurisdiction where you know that if you invest your capital, you can get your capital out and get your return?

Can you keep your workers safe?

Can you meet the local sustainability requirements, and will the communities benefit?

All these kind of qualitative decisions become very, very important and is a judgment call.

I think the doability of building a project, actually construction challenges that a project has, what elevation is it at?

What is the terrain like?

What other sort of engineering challenges there might be.

Those become very critical when making the final decision.

Our Board spends an awful lot of time on these issues.

And, I think probably the mining industry generally is doing that.

And particularly, the larger companies that have a portfolio projects -- we're very lucky that we have several choices of projects to develop in copper.

A lot of companies don't, and so they run into the same issue which is one project, and then they have to make assumptions that are sometimes aggressive just to show a decent return.

I think it is reflective of the whole copper industry.

That the tightness of the market is pushing us to look at projects that have more and more challenges associated with them, and when the calculation is done it shows numbers that are 7%,as you point out or sometimes not even that high.

But in the end, the world is short copper and a lot of these projects should be built because world is going to need it.

Those are some thoughts on how we do the analysis, but, it's never a pure science at the end.

It'll come down to a judgment call.

Great.

Thank you Don.

Thank you.

The next question is from Greg Barnes of TD Securities.

Please go ahead.

I would just like follow up on that too, in respect to the CapEx inflation that we have seen, and just deep into the studies on Relincho and QB2.

On investor day last year, we talked about capital intensities of CAD25, 000 to CAD30,000 per ton of daily mill throughput.

This seems to be going up.

I'm just wondering where that number fits now relative to where it was nine months ago?

We don't have an answer that question yet.

It is an excellent question.

But I think it's safe to assume that it is going to be higher and probably significant.

So, we are seeing significant pressures on capital costs.

And as I mentioned earlier, number of announcements from other companies confirmed that.

We are seeing the same thing but we haven't finished the numbers, and when we do, we will announce them.

But Greg, while I have got you, I just wanted, to complement you on the last quarterly call when you made the suggestion on hedging silver when it was over CAD50.

I have to say that was a very good call.

I think two days later, the collapse occurred, so I hope you did some yourself.

No, better lucky than smart, I guess.

I do have a second question.

On the transition on of QB to the dump leach.

QB has historically produced about 85,000 tons of copper a year.

I'm wondering how that profile changes as we move into this transition and how costs are going to evolve as well?

Roger Higgins, over to you.

Yes, thanks, Don.

QB is approaching the final years of its leaching operations.

During this period, head grades will be declining.

All the sensors for overburden are increasing and we are putting an increasing proportion of material to the end of line dump, as opposed to the heap.

These factors put pressure on unit cost of production.

We don't see a great fall off in total production terms, although, we are also, of course adjusting to maintain the leaching plant in place as long as possible given the encroaching pit for the future hypogene project.

The plant was originally designed for 75,000 tons per year, we should remember that, as we record that we did have a few good years.

Where we were able to put more than that through.

The declining solution grades from QB will mean it will be pushed back further towards that original design capacity.

And that the cost will be subject to the lower grades and longer, particularly longer distances.

If I have calculated the numbers right, cash costs in Q2 was around CAD2, CAD2.07.

Is that something we should be looking at pushing forward on?

That would be about the right number for this last quarter, but it was an usual quarter because of the disruptions we had due to weather.

And are still reacting to the (inaudible).

That's a fairly high number.

Okay fair enough.

Thank you.

Thank you.

Next question is from David Beard of Iberia Capital Partners.

Please go ahead.

Hello.

Good morning.

Good morning.

I just want to touch base on the coke and coal side relative to your ASP guidance.

I seem to recall as order you guided to CAD2.80 to CAD2.90.

We came in lower, and Japanese shipments were pushed out.

You are still guiding CAD2.80, $2.90.

I thought that new tons being sold or the Japanese shipments coming in this quarter, that would be a higher number or, last quarter's guidance was too aggressive.

Maybe just help me understand why, seemingly with either Japanese shipment or higher price coal being sold, the guidance is flat sequentially.

CAD2.80 to CAD 2.90 again.

Ian and Greg again.

Essentially it is a combination of factors we talked about previously, that there is increased carry over of higher priced coal from the second quarter, a positive factor on the one hand.

But the headline price is down CAD15 from CAD330 to CAD315.

That's basically counteract each other and the result is a similar forecast.

Ian, if I could just add a clarification.

David, I think is important to note that we talk about our benchmark price of CAD315 a ton, we and our competitors are talking about the price that our premium product sells at.

Of course, not everything we sell, that is hard coking coal is that premium product.

It is a percentage of our product.

We then have other products, other blends, that sell at some reductions of that.

There are still considered hard coking coal, but they don't sell at quite as high a price.

And 90% of our business is hard coking coal.

Conversely, that means, of course, 10% of our business is not hard coking coal.

It is semi-soft, it is PCI, it is thermal, it sells, of course, at much lower prices.

When you factor those in, that of course brings down the overall average realized price by some percentage change is going to vary from quarter to quarter depending on, as Ian refer to as well, these carryover amount.

And we do have some carryover still from Q1, which was that CAD225 quarter.

And the other point to make, is that the spread the price of the highest quality coal and then that of weaker coal is getting wider.

And that is something that we think could incur for quite some time.

One of the reasons why we like our coal, and don't participate in the number of these other transactions where it is much weaker coal involved, because the long-term outlook for those coals is not as positive as it is for the high-quality, hard coking coal, which is quite scarce.

So I think you have to factor those items in as well.

Right.

Now that's helpful.

Just maybe to address the stripping ratios because it has come up in the first quarter and again in the second quarter.

I usually don't worry until three quarters is a trend.

Can you give me some more detail why we may see strip ratios return to more normal environment?

Ian, over to you.

Yes, the reason that we will see a decrease from our highs of the last couple of quarters is that we are moving to a higher level of production.

And, when you're moving to a higher level of coal production, you're also moving to a higher level of waste production.

Normally, the production of waste proceeds the increase in coal production so that you get a little bit of a jump in the strip ratio before you return to the steady state again.

That's basically what we are seeing.

We are in the middle of the bump at the moment, and then, as our coal exposure and production increases over the next two quarters, we will see a return to a slightly lower strip ratio.

Okay.

That's helpful.

Last question relative to share repurchases.

What were your level of share repurchases in the quarter, and what will we see going forward relative to your operation?

Sorry, could you repeat the question?

Just, did you repurchase any shares of the quarter, and, can you give us any sense of what share repurchases may look like going forward?

Okay.

We did not repurchase any shares in the quarter and going forward, we monitor it, daily basically, looking at the opportunities.

We don't know what we will be able to achieve in the coming quarters, but we at least have the regulatory filing in place so we can do so we think it's a right time.

Okay.

Thank you for your time.

Thank you.

(Operator Instructions) The next question is from Alec Kodatsky of CIBC.

Please go ahead.

Thanks, good morning everyone.

I just had a couple of questions around slide 10.

And probably just break them up into three parts so you can hand them off.

Just in observing the strip ratio going forward, it is much less volatile than it has been in the past.

Just curious, is that reflective of a shift in operations or a shift in planning?

With respect to the coal operations or, where is your level of comfort, if that's going to stabilize relative to history?

And, secondly, you have expressed in the past, sort of a need or a feeling that you needed to catch up on stripping.

Just curious on your thoughts as to where you sit now as far as your level of comfort with catching up with past stripping.

And then thirdly, just in looking at the material move column, it's obviously ramping up here through the end of 2011, but as you get into 2012, the total material mind number stays pretty static.

I'm just curious, with equipment coming on in 2012, and over the course of trucks arriving through the course of 2012, is that new equipment largely replacing the contractors that you have on site, and therefore we should start to see in some cost improvements?

Or just trying to reconcile how do new equipment doesn't translate into more tons moved.

Thanks.

I'll make a quick comment present turn it over to Ian for the second half or second two thirds of that question.

On the volatility in the strip ratio, I showed on slide 10, you see a big bump in Q1 and Q2 of 2009.

Basically, what occurred there, that was during the severe downturn.

We had some large European customers who reneged on contracts, and so, they weren't sending ships.

And so we didn't mine the coal but used the capacity to mine more waste to free up coal for later.

And, that was just deliberate decision at the time, during those two quarters.

So in the normal course, you would not have seen that degree of volatility.

So when you're looking is slide 10, yes, from Q1 2008, to Q4 of 2010, it was pretty volatile.

It was an unusual situation and normally that would have been a little flatter.

With that, over to you, Ian.

Thanks, Don.

The trend in strip ratio normally is reasonably steady, because it's a blend of the product of our six mines.

Trends go up and down in the different mines, but overall, when we add them altogether, they are normally fairly steady in the changes of flow.

As Don mentioned, that was an unusual period in 2008, 2009.

We are returning, I guess you would say to a more normal sort of profile.

In terms of where we are in stripping, we have, as you mentioned, used contractors at a number of our mines to help us get in a strong position with regard to coal recovery.

That does, in fact decrease over the next year, and that is one of the factors in us increasing our own truck capacity.

So that we will be moving more material to increase our coal production in 2012, and essentially doing that principally with our own equipment.

Okay.

Great.

Thank you very much.

Thank you.

The next question is from Brian MacArthur of UBS Securities.

Please go ahead.

I just wanted to follow-up on that slide a little bit more, too.

That was very helpful.

When you get up to Q4 2012, does that assume you have now got to maximum production at the Elk Valley mines?

I.e., that 26.5 million, 27 million tons, whatever you think.

Or to get that, will the strip ratio have to go up even higher as you ramp up?

Ian?

No, the strip ratio doesn't go significantly higher in the next few years.

We will be, at that point, at the capacity in place to wrap up to our overall goal.

And just a second follow-up, when you get to that full Elk Valley production, as Don mentioned, the spreads are getting wider between high quality hard coking coal and the secondary coal.

You talk now, 90% hard coking coal and 10% other.

What's the ratio when we get out of that max value when everything is at full capacity -- loose coke, coal, and everything else.

Is it 85-5 to 15 or is it still stay at 90-10?

No, the ratio stays pretty much as it is now because we are focusing our expansion on our premium coal producing mines.

That is, Fording River, Elk View and Green Belts.

Okay great.

Thank you very much.

Thank you.

The next question is from David Lipner of CLSA.

Please go ahead.

Hi.

You said that you sell some hard coking coal of the benchmark, and some hard coking coal that sold slightly below the benchmark.

Is there any deterioration in that spread?

Well, we don't see significant trends in that spread occurring at the moment.

We see the demand for our products is still strong and, so that the outlook is still positive.

So we don't see any major changes in the structure of the processing.

Okay.

Thanks.

Thank you.

We have no further questions registered at this time.

I'm not like to turn the meeting back over to Mr.

Lindsay.

Please go ahead.

Okay.

Well, thank you very much.

I might just add one the bit of color to the last question.

That, Ian is absolutely right, there's been no change in the structure.

But when prices are higher, prices are CAD300 and over, the difference between one high quality hard coking coal and the other is at low prices, there was CAD1 or CAD2 difference, then you might get CAD3 or CAD4 difference, but percentage-wise, it is pretty much the same.

I think that's important because we get a lot of questions on this average price we realize for the quarter versus the benchmark.

So, the more understanding people can have on how that works, the better.

So it's a good question.

In any event, since there are no more questions, we thank you all for attending today, and look forward to reporting in October on the third quarter which, we believe will continue to be stronger as we ramp up our production in coal and copper.

Thanks very much all.

Thank you.

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