Teck Resources Ltd (TECK) 2016 Q2 法說會逐字稿

Welcome to Teck Resources Q2 Earnings 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 Thursday July 28, 2016.

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

Thanks very much, Valerie and good morning, everyone and thanks for joining us for our second quarter results conference call. Before we begin, I'd like to draw your attention to the forward-looking information on slide 2. This presentation contains forward-looking statements regarding our business. However, there are various risks and uncertainties which may cause actual results to vary. Teck does not assume the obligation to update any forward-looking statement.

And with that, I'd like to turn the call over to Don Lindsay, our President and CEO.

Thanks very much, Greg and good morning everyone. I will begin with a brief overview of our second quarter results and then Ron Millos, our CFO, will provide additional color from a financial perspective. We will then conclude with a Q&A session when Ron, myself and additional members of our senior management would be happy to answer any questions.

So while we have seen positive developments in zinc and steel making coal, prices overall remain at relatively low levels. Our focus remains on cost management and operating execution. We have continued to deliver results on these fronts including significant reductions in cash unit costs at our operations and as a result we have lowered our coal and copper cost guidance for the full year. We've also increased our production guidance in coal and tightened our guidance for copper and mine zinc production which represents a slight increase in the midpoint of those guidance ranges.

We also executed a series of transactions in the second quarter to strengthen our financial position and this has extended our near-term maturities and credit lines essentially clearing the runway through 2020 well after Fort Hills is expected to be fully operating and Ron will speak to these transactions in greater detail a little later.

We now expect to exceed our original target for year-end cash balance ending the year with more than CAD700 million and finally we were honored to be named once again to the Best 50 Corporate Citizens in Canada for the fourth consecutive year by Corporate Knights and the ranking was based on 12 sustainability measures. Looking at an overview of our Q2 results on slide 4, compared with the same quarter last year, revenues declined 13% to CAD1.7 billion primarily due to lower prices for all of our principal products. Overall gross profit before depreciation and amortization was CAD536 million and bottom line profit attributable to shareholders was CAD15 million. After removing unusual items, adjusted profit attributable to shareholders was CAD3 million or CAD0.01 per share.

Touching on some operational highlights from the second quarter on slide 5, our operations continued to perform well particularly on cost reductions. Unit costs are down in both our coal and copper business units. On a US dollar basis total cash unit costs, including capitalized stripping, were $66 per tonne for coal, down $15 per tonne from Q2 last year. Copper cash unit costs, again including capitalized stripping, are currently $1.48 per pound or $0.21 per pound lower in the same period.

Turning to slide 6, we have heard that some investors think we have been under stripping in our coal business due to our reduced capitalized stripping costs. I want to emphasize that this is not the case. As the chart shows, we continue to move waste material in line with our long term mining plans and in line with their coal release. Our total material moved has continued to increase and we now are moving in excess of 70 million bank cubic meters per quarter as we have grown coal production to 6.5 million tonnes per quarter.

We did have a dip in Q3 last year as we took three weeks of downtime at each of our mines to manage coal inventories in what was a very different coal market. The fact that our capitalized stripping costs are down is due to our reduced operating costs overall. Capitalized stripping is just a portion of our operating cost that we have to capitalize and those costs have benefited from the same productivity improvements, the same cost reductions that the rest of the operation has.

You will note that we disclosed our strip ratios in our quarterly reports and these have remained very consistent as demonstrated by this chart. So I trust that this puts that unwarranted concern to rest.

Running through some additional highlights by business unit and starting with steel making coal on slide 7, coal sales were lower than we originally expected by the equivalent of approximately one cape size vessel. Late vessel arrivals resulted in some sales shifting into Q3. Some customers were also bidding at opportunistically low prices which we did not accept.

And as we flagged last quarter our realized price reflected a smaller discount to the quarterly contract price than our usual range at around 99% due to the high spot prices in the quarter. On a Canadian dollar basis though our average realized price was down CAD9 per tonne CAD107 compared to last year's Q2.

Production was up slightly extending the streak of excellent production results from the mines, Elkview, Green Hills and Line Creek each set new production records for Q2 and for the first half of the year. We continue to expect production to be weighted more heavily to the second half of the year with the majority of our annual plant maintenance shutdowns now complete. Our cost reduction efforts continue to produce significant results in coal helped by lower diesel prices. In Canadian dollar terms cost of sales is down CAD6 per tonne compared with Q2 last year.

Now looking forward to Q3, we expect our highest sales quarter for the year with at least 6.8 million tonnes in sales. Coal prices have been agreed with the majority of our customers based on the $92.50 per tonne for the highest quality products.

Turning to our base metals business starting with copper on slide 8, sales were lower and the realized price was down by $0.61. Production was also down slightly overall when compared with Q2 last year but it was higher than last quarter. As anticipated by the mine plan, Antamina had significantly higher production due to higher grade and recovery and a significant increase in copper-only ore processed. This was more than offset by lower production at other sites including Andacollo and Quebrada Blanca. At Highland Valley production was down slightly as we continued to transition from the Valley pit to the Lornex Pit. Our cost reduction efforts have also produced significant results in copper. On a US dollar basis C1 one unit costs net of byproduct credits were down $0.15 per pound to $1.34. Our controllable costs, which are total cash costs before byproduct margins were down $0.27 per pound. Looking forward, production is still anticipated to decline over the next two quarters as previously announced with the final quarter being the weakest due to significantly lower grades at Highland Valley. Just part of the mine plan nothing we can do about it.

Our zinc business unit results are summarized on slide 9, please note that Antamina zinc related financial results are reported in our copper business unit as the mine forms part of our copper business unit. Antamina zinc production and sales are included production and sales in the zinc business unit. Revenues were up in the quarter with higher sales volumes from Red Dog due to timing of shipments. Our realized price was down by $0.13 per pound in the quarter. However the ***** LME cash price broke through $1 in mid-July.

Zinc in concentrate production at Red Dog was similar to a year ago and our Trail Operations refined zinc production was down and refined lead production set a new quarterly record. Overall gross profit before depreciation and amortization was down due to the lower average zinc price in the quarter. Looking forward Red Dog shipping season has begun with the first vessel sailing on July 6 and we expect sales of 150,000 tonnes of contained zinc in Q3 and 190,000 tonnes in Q4 which reflects the normal seasonal pattern of Red Dog sales.

Now an update on Fort Hills on slide 10, engineering is essentially complete and construction has now surpassed the 60% mark overall. This photo shows the progress on the ore processing plant as of last week. Wildfires threatening the region in May did not cause any damage to the project or any of its associated regional infrastructure. Construction on site was interrupted for approximately one month. The project is currently back at planned work force levels. Suncor is currently assessing the impact of the interruption and schedule mitigation options and they expect to provide a project update at the end of the year including cost and schedule targets. And despite the interruption first oil is still expected near the end of 2017.

On slide 11, turning to some highlights from our markets, starting with the steelmaking coal business. We are seeing some positive developments in the steelmaking coal market. In the hard coking coal component of the steelmaking coal market where we primarily supply and compete, we estimate that the market is very close to being balanced. Pricing is starting to reflect that. Coking coal demand from a number of market areas, including China, appear to be improving.

In China steel production hit a two-year high in June and we are seeing tightness in the domestic coal market as mines cut their operating days from 330 days per year to 276 days as a part of the government supply side reform. Coking coal imports between March and June were on an annualized basis at the 60 million tonne level which compared with 38 million tonnes in 2015.

Outside of China we are continuing to see curtailments, US exports are continuing to decline. There have been some recent production disruptions in Australia due to rain. And looking forward the Q3 benchmark price of $92.50 represents the second consecutive quarterly increase and most of you will probably know the spot price is currently well above that.

Looking at the zinc market on slide 12, as always the focus is on what's happening in China and quite apparently the supply of zinc concentrate from both domestic production and imports is declining. As you can see from the chart in the upper left total domestic production plus imports has fallen from around 500,000 tonnes per month in 2013 to a run rate of about 435,000 tonnes per month currently and availability of imported concentrates has declined significantly due to the well-publicized recent mine closures. And we see this at the smelters with the working inventories of concentrates declining by half in the past six months.

To maintain the supply of overall zinc units China has had to turn to metal imports and this shift has started to be reflected in import numbers in the chart on the lower left which shows that Chinese zinc metal imports are up around 80% from the first half of 2015. We know there is other data circulating that indicates that China zinc mine production is increasing and we don't think that data is correct. It is estimates only and it's based on metal production.

In the end, the degree of market tightness for concentrates is evidenced by spot treatment charges falling by around 40% in the past year.

And with that I'll turn it over to Ron Millos for some comments on our financial results.

Okay. Thanks, Don. I've summarized our changes in our cash balance for the quarter on slide 13, and as you can see cash flow from operations and working capital was CAD339 million. The liquidity management transaction that we completed [during the] quarter reflected in the cash flow statement this quarter, we received CAD$1.6 billion from the two debt issues and which we used to purchase the outstanding notes due in 2017, 2018 to 2019 under our cash tender offer.

In addition we spent CAD325 million on capital projects including Fort Hills, our capitalized stripping costs were CAD122 million and we also received CAD89 million proceeds from sale of investments in other assets. We paid CAD74 million in interest and principal on our debt and CAD29 million on dividends.

After these expenditure items, expenditures on financial investments and other assets the impact of exchange rate changes on our cash and cash equivalents and distributions to non-controlling interests, we ended the quarter with cash and short term investments of just under CAD1.3 billion.

In addition we've previously talked about our target for the core business of coal, copper and zinc excluding our investment in Fort Hills to be cash flow neutral or positive. And in the second quarter our core business generated CAD132 million in positive free cash flow.

Moving on to the next slide, our second quarter pricing adjustments are summarized. Overall we had CAD1 million of negative pricing adjustments this quarter compared with CAD32 million of negative adjustments in Q2 of last year. And these adjustments are included in our income statement under other operating income and expense. This was an unusual quarter for pricing adjustments due to the silver price increase. Zinc was up $0.14 per pound from the end of Q1 to the end of Q2. So we had a positive settlement adjustment there. Copper price was unchanged but outstanding volumes changed and we had a small positive result as a result.

Silver however increased by roughly $3 per ounce. Just as that would contribute to a positive settlement adjustment on the sale of concentrates it also contributes to a negative adjustment on the purchase of concentrates at Trail and since Red Dog sales volumes are typically lower in Q2 the ongoing purchase of concentrates at Trail had a greater impact this quarter and that resulted in a negative pricing adjustment.

The chart on the left represents a simplified relationship between the change in copper and zinc prices and the reported settlement adjustment and usually provides a good estimate of our pricing adjustments each quarter. The overall settlement adjustment this quarter was at the bottom end of the range suggested by our model and that was primarily due to the impact of silver. And as a reminder refining and treatment charges in the Canadian-US dollar exchange rate should be considered in your analysis of the impact on price changes in the adjustment and you should also consider taxes and royalties when analyzing the impact on our profit.

Turning to our financial position our slide 15, as Don mentioned we executed a series of transactions in the second quarter to further strengthen our financial position by extending the maturities of our debt. In May we extended the maturity of $1 billion of our $1.2 billion revolving credit facility by two years to June 2019 and that required us to provide guarantees on this facility and our $3 billion facility from certain of our wholly owned subsidiaries.

Extending the maturity of the credit facility was key to us issuing $650 million of five-year and $600 million of eight-year senior secured notes which have the same guarantees provided to our revolving facilities. The new notes which were priced at 8% and 8.5% respectively have call features in two and three years' time respectively which provides us with potential deleveraging opportunities.

The chart on this page shows the changes to our debt maturity profile with the red circle highlighting the $1.25 billion of our shortest term notes that were repurchased under the tender offer and the green bars show the issuance of the new $650 million and $600 million five and eight-year unsecured notes. So overall we have significantly reduced the amount of debt and bank credit maturing over the next few years that enhances our near term liquidity and clears the runway by leaving us with no significant maturities until after the completion and ramp up of the Fort Hills project.

Looking at a slide 16, we currently have liquidity of about CAD5.4 billion and that's made up of our cash balance plus the Canadian dollar equivalent of our $3 billion credit facility. As you're probably well aware we have two primarily revolving credit facilities, the $3 billion facility matures in July of 2020 and that remains undrawn at this time, and as previously mentioned we have the $1.2 billion facility which was just amended as I mentioned, and $1 billion of that now expires in June 2019. It currently has $806 million in letters of credit issued against it and we expect to keep the balance available for letter of credit requirements if necessary.

We also continue to maintain CAD1.65 billion in uncommitted bilateral credit facilities for the issuance of letters of credit primarily for future reclamation obligations and off that CAD150 million is still available for use. There are no financial covenants in our public debt indenture and just one financial covenant in our bank credit agreement which requires us to maintain a debt to debt plus equity ratio below 50%. And as of June 30 we were at 35% and our net debt to net debt plus equity ratio was 32%.

Going forward we intend to maintain a strong financial position. As Don mentioned earlier, we now expect to exceed our original target for the year-end cash balance and end the year with at least CAD700 million. This of course assumes our current commodity prices and exchange rates and that we meet our revised 2016 guidance for production cost and capital spending and it also assumes that we maintain our existing US dollar debt levels and have no unusual transactions.

Moving on to the next slide, we have revised some of our previous guidance for 2016. In steelmaking coal we increased our production guidance by 1 million tonnes to 26 million tonnes to 27 million tonnes and we have also lowered our site cost guidance range to CAD42 to CAD46 per tonne and our transportation costs ranged to CAD33 to CAD35 per ton.

In copper we have tightened our production guidance range to 310,000 to 320,000 tonnes and we have lowered our C1 unit cost net of byproducts range by $0.10 per pound to between $1.40 and $1.50 per pound. In zinc we have tightened our production guidance range for mine zinc to 645,000 tonnes to 665,000 tonnes and that includes production for Red Dog and Pend Oreille and our share of production from Antamina.

And with that I will turn the call back to Don.

So in summary on slide 18, looking across the mining industry from our vantage point we think we're pretty well positioned relative to others as we come out of the cycle. Unlike many of our peers we are not in a position where we need to issue equity or to sell off our core producing assets. What differentiates us is that we are going through this down cycle doing things to give us the best upside when the up cycle returns. We will have production growth from Fort Hills when most others are not building, no operating assets will have been sold well many others are selling mines and there will be no equity dilution while many have issued more shares. Therefore we will have more production per share coming out of this down cycle while others will have less production per share.

At the same time we are maintaining strong liquidity looking for opportunities to manage our debt maturity profile and to reduce debt. We have always believed that if we can successfully achieve these things our shares will be better positioned coming out of this cycle than our competitors.

And with that we would be happy to answer your questions and please note that some of our management team members are on the line in different locations. So there may be a brief pause after you ask your question while we figure out who to allocate it to. So, operator back to you.

(Operator Instructions) Evan Kurtz, Morgan Stanley.

Good morning, everyone. So my question is on asset sales. I know earlier in the year when the commodity environment was a little more bleak, you talked about perhaps monetizing Wintering Hills or some of the port assets. Wondering if the thought there has changed with the rally in met coal and zinc?

I don't think it's really changed. I would say that there's no feeling of urgency at all, but these are things that actually take quite a long time and when we talk about infrastructure we're talking about -- that we need power dam the Neptune Port, Wintering Hills, windmills and so on. We're still looking at them carefully. We recognize that infrastructure assets such as these tend to trade at much higher multiples of EBITDA than a diversified mining metals company will ever trade at. So there is logic to it. But you do want to get it right and that's something that certainly takes time which is what we've found when we sold a third of (inaudible) **00:22:49 last time in 2009. So we're working through it to see if it can come to pass and make sense but we aren't feeling any pressure to do it.

And my follow up is just on your -- maybe dig a little deeper into the supply side on met coal. We have seen the supply side reforms impacting coal far more than steel so far this year in China and there's been a little bit of flooding, so it feels like the met coal prices are on better footing right now. How do you think that's going to impact, I guess, one, industry supply response? Do you see a potential for mine restarts out of Australia or maybe a decline in the rate of curtailments in the US? And specifically for Teck, I mean how are you thinking about that? Do you still think that 2017 production will be relatively in line with 2016? Any updated thoughts on Quintette?

I will answer the last question and turn it over to Real Foley for the first part. We are not making any plans to increase production further from where we're at now. We have earlier announced that Coal Mountain will be closing down in 2017 and that we will consolidate our production around the four key mines in Elk Valley. There are no plans to restart any activity at Quintette.

So with that over to you Real on the first part.

Thanks, Don. So typically for capacity to return to the market mining companies want to see prices improve not only over a short period of time but forecasted to last in order to step forward and make the decision to inject significant capital to restart operations, we hire employees and bring back equipment. So at the current quarterly benchmark price of $92.50 Wood Mackenzie is still estimating that about 25% of the seaborne hard coking coal is operating at negative margin and around 75% of the US hard coking coal exports are cash negative.

So with respect to when to -- where the restarts could come from, we need to go back and look at the time when those production cuts were made, what pricing levels were and what are the remaining coal reserves for that capacity that was shut. At the time the production curtailments were done pricing was below breakeven most likely for those operations, so that supports the fact that pricing would need to improve further for some of those idled operation to restart.

And just to add on your question with respect to Teck, our increase of 1 million tonnes in our 2016 production guidance reflects our view that this is supported by demand and the fact that we've also achieved strong cost and production performance at our operations.

Chris Terry, Deutsche Bank.

Also related to the coal division, just wanted to explore that a little bit further, put it another way, so in 2016 if the met coal price hadn't rebounded would you still have been producing what you are today, i.e. how responsive can you be to price increases over time?

Interesting question. I'll just make an overview comment and then turn it over to Robin Sheremeta. So there's no exact answer to your question, part of the increase in production as Real just mentioned is related to productivity improvements. I just had a recent swing through four of our sites and I can tell you that everybody is really actively engaged in finding whatever way possible to be more efficient and a result of that is increased production and reduced costs. It's just sort of a natural consequence of people improving truck productivities and so on.

If the increase in demand had not occurred then we would be looking very closely at sales, customer demand, managing inventories as we did last summer when the market was in a very weak state and we chose to have rotating shutdowns for three weeks at each of the mine sites to manage inventory and not dump incremental tonne of coal on the spot market.

So it was sort of back to last year's situation that's probably what we would have done or you could see a scenario like that, but I guess what we're saying is it's nowhere close to last situation, so we're not.

Robin, would you like to add any comment on our productivity activities?

Yes, maybe just to add to that which pretty much covered scope pretty well but maybe to add to it, the productivity gains that we've seen are quite sustainable and we've had extremely good engagement with the operations. So our costs are in an area that makes us very competitive and there's no reason to believe that won't continue. So we've got very good response at the operating level to sustain this kind of performance, so that gives us quite a bit of flexibility in terms of response to a market change.

Thanks for the color. And taking into account the Coal Mountain coming to an end in a couple of years, can you just remind us what the latent capacity still in the system might be? So if we did get a big pickup in prices and you did one to look at additional volumes what might be possible?

Robin, back to you.

At this stage we will be able to absorb the production loss at Coal Mountain in the other four operations. So the current plan is to maintain that production level. We haven't built into any plan, an increase in production beyond what we currently have available at the sites.

And I would just add to that, it depends on how significant that price move is and I guess consistent with Real Foley told you about typically mines you want to see a sustained increase in price before they consider restarting a closed operation. Quintette is actually one of the easier ones to get back on. It would be about a year of construction activity in capital and we clearly are not looking at bringing it back at these price levels. So while we do have an additional 4 million tonnes of capacity that we could bring on if we thought things were going to be sustainable at much higher levels, we aren't even looking at it at this point.

Orest Wowkodaw, Scotia Bank.

Couple of questions for me also about the coal division. Firstly in terms of your cost reductions, the reduction in transport costs does that reflect efficiencies or are you actually getting some kind of pricing or cost discounts from the rails and the ports here?

The cost reduction in the transportation side is also a reflection of the diesel fuel prices that we're seeing so that has an impact on the cost structure for the transportation and also just the ongoing efficiencies that along with the operations side the transportation side is also working with the terminals in terms of maximizing efficiency of the supply chain movement to the customer, so a combination of fuel cost and streamline and working on the efficiencies on the port facilities and performance of the rail service providers.

Okay. So you haven't received any discounts from the rail or the port?

No, we're under contract -- we have contracts in place for our service providers -- from our service providers and they're being maintained.

Okay. And then just in terms of coal volume again coming back to your capacity, I believe Coal Mountain is supposed to close at the end of 2017, there was some talk at the time that you'd be able to make up 2.25 million tonne of production from the other mines. Could we assume that you could maintain something in the 26 million tonne to 27 million tonne range excluding Quintette when Coal Mountain closes?

Back to you Robin.

Yes, you bet. We have got solid plans in place to build to sustain production with minimal inputs at the other operations, there is enough capacity to absorb Coal Mountain's production.

Okay, so 26 million tonne to 27 million tonne is a realistic number?

Yes, it is.

Greg Barnes, TD Securities.

Don or whoever else can answer this question. What can you do to increase your zinc mine production in light of what's going on in the zinc market?

I'll make an overview comment and then turn it to Dale. The short term answer is not much, long term there are a number of different options but it would take significant capital and time to be able to do so. We're working on a number of projects at Red Dog and (inaudible) 00:33:42** and Antamina and so you think you get some good years in zinc as well and there's some of that is coming but Dale over to you.

Thanks, Don. Greg, just to add a bit of color Red Dog is performing very well. We're looking out further production optimization projects over the next couple of years but that really will help to offset any grade fluctuations and future grade declines with the current mine plan.

So I think the ability of Red Dog to ramp up production in any significant way is limited. I think really in the short term looking forward over the next couple of years, the opportunity is really at Antamina and again that's associated with the mine plan.

At the end of last year we did provide guidance looking forward for the 2017 to 2019 timeframe and we've put out guidance of an increase at Antamina to approximately 80,000 tonne contain metal range for our share and that compares to our recent update on guidance for this year 40,000 tonne to 45000 tonne. So really I think that's the majority of the near-term potential.

Okay. That's great. So what do you think the industry's supply response can be and what price, maybe this is a question for Andrew Stonkus, what kind of price do we need to have zinc mine supply lift higher from here?

Andrew?

Thanks, Greg. I think what we're seeing today is that at these current prices were not -- the project pipeline is still very thin and we're not seeing any significant supply response. I think the question always is is what will China do. And if you look at the Chinese mine production as Don mentioned the statistics coming out of there are always a little bit suspect. I think the production guidance or production forecast out of China have tended to be overstated.

One thing out of China, so we have to remember that the ore grades that they're working with there are quite low in the range of 4% to 5% combined zinc and lead. So the cost structure for the Chinese domestic mine production is challenged and that's why we're not seeing the supply response as people expect out of China. And also the environmental issues surrounding some of the domestic mine production in China. So we're not seeing a supply response at current prices. So it's -- the trend is not significant in terms of new mine production coming on the current prices. So we need something higher, it's a matter of what the trigger price will be but it's not at the current price level that's for sure.

Just quickly do your forecast assume that Glencore turns their production back on next year?

I wouldn't want to speculate on what Glencore's price point would be for restarts. They were very clear in last October that they want to keep the resource in the ground at those prices and that was done at a price of CAD1,800. So we're slightly above that but they have made a decision to restart as far as I'm aware.

Yes, I might add Greg that one thing that's clear is that Glencore believes that you make more money on price than volume and they believe in balanced markets and not bringing on that additional tonne which may be a lower cost but puts the market into surplus. We believe in that too. We already have a fairly large zinc business. As you may know for a long time like over the last 10-year period, I had a policy of read my lips, no new zinc because the market was in serious oversupply and we really kind of believe in that.

So, I think the key comes down to what Andrew was just talking about in China and this grade issue is a big one. They have one of mine that's 11% zinc and then all the rest start with a 4% and that's versus current average rate of 6% to 7%. So that any new mines that they can bring on are going to be -- have that much more capital per tonne of capacity and that much higher operating cost just because of lower grades. So it's actually a bigger step down percentage wise than what we're seeing worldwide in copper.

So we'll see how it unfolds but for our purposes we know you make more money on price than volume and we've waited a long time for these conditions and zinc to occur, so we'd like to enjoy it for a bit.

Karl Blunden, Goldman Sachs.

Just had one on the balance sheet and one on the operating side. When you bought the bond deal back a couple of months ago you had mentioned that on the uncommitted credit facilities you're looking at reducing some of the bank exposure there through some surety bonds. Can you comment on how that's progressing or how just generally how we should think about the risk in those facilities right now?

Turn that one over to Scott Wilson, please.

Yes, we're continuing to work with a couple of insurers on bringing on some surety bond capacity and expect to have something in the range of CAD150 million to CAD200 million in that regard completed in Q3 here.

That's helpful. Thanks very much. And then just on Fort Hills, it's been some time since you've provided an update there in terms of what the operating costs might be. Is there any way for us to think about it first of all end of 2017? We've seen quite significant cost come out of oil production at Suncor's existing operations. Is there any way we can frame the opportunity in terms of how much cost have come down since I think your last update was a couple quarters ago now.

I'll make a couple of comments and turn it over to Tim Watson. We've been looking at this issue quite closely and note that industry wide since the oil price had this steep downturn, industry wide cost seem to have gone down on average 24% and then we also looked closely at Suncor's base operations and see where they're producing. These are public numbers and our belief and I think Suncor's belief as well is that Fort Hills will be lower cost than their current operations. So with that as context, over to Tim.

With respect to an update on the operating cost estimate, as Suncor is moving through the second half of the year, they are doing a total project forecast update as well as a schedule update for the remaining portion of the project and included in that work is an update to the operating cost estimate. So we expect to see that at the tail end of the fourth quarter of this year.

Great. That's very helpful. And then just one more quick one here just here on met coal, you did mention here and I think the point is well taken that your stripping levels has remained consistent in terms of cost their relative to the coal being mined. Is there a flexibility and if you do think about a downside case, is there a significant flexibility to reduce stripping cost temporarily to reduce cash or is that not really a choice that you have?

A brief comment and then over to Robin. I think we've been through perhaps the most severe time period in met coal pricing relative to industry cost that we've seen in our lifetimes and we didn't do that. So that's just what the history shows. In terms of what options we have over to you Robin.

I mean that's an operating philosophy to maintain a long term view of coal and we resist obviously very strongly any move that would jeopardize that and to take advantage of a short period of time I think would be shortsighted and so we've been able to keep that focus in coal and be able to come out of this downturn stronger now than we were going into the downturn. So for us it's a philosophical choice more than anything.

You always pay an extraordinary price later and it's just not worth it.

Thanks very much and congrats on the good operating results today. Thank you.

(Operator Instructions) Lucas Pipes, FBR & Company.

Congrats on another very good quarter. I wanted to ask a little bit more about your strategy given the improvement in the commodity markets. You've done the refinancing earlier this year. Kind of just big picture, how are you thinking about growth? There were a couple of questions this morning about organic growth opportunities. How would you rank kind of the opportunities in today's marketplace? Thank you.

So the next year or so we're focused on Fort Hills and seeing that finished and brought on stream either very end of 2017 or early 2018 and that will add the fourth leg, fourth core business in a long life operation in a good geo political jurisdiction and add some good balance to the portfolio. So we're looking forward to that. We have all the cash on the balance sheet now that we need to complete that and we haven't touched the $3 billion credit facility that we have and we don't intend to touch it this year and I think we have a reasonable shot at finishing the project without ever touching it.

So that does give us some capacity to look at other opportunities, it's our job to look at other opportunities anyway. So everything that you see are rumored to be on the block or whatever we do review. Sometimes we go and visit them, occasionally we put in a bid. But in terms of acquisitions we've seen at least in copper which we have a long-term interest in that assets have traded at prices that discount a reasonable copper price that usually over CAD3, so it's not as if there are any fire sales going on from what we see.

We do have our own key projects in Quebrada Blanca 2, QB2 (inaudible) both of which we think the world is going to need and both of which are solid projects. The QB2 timeline looks like the earliest that we could sanction that project would be first quarter of 2018, that's if everything went perfectly on the permitting timeline and as you're probably well aware that usually there have been delays and sometimes long delays so we'll see, but that is our highest priority after finishing Fort Hills and we've been doing a lot of work on reducing the capital cost and we will announce the results of that towards the end of the year.

So that's something that we'd really like to get on with but we just aren't certain of the timeline. We compare anything else out there against QB2 in that because we control QB2 with 76.5%, we could always defer that if there was something that is better that came along. But so far we haven't seen that, QB2 is in again a good geopolitical jurisdiction, it's an area where we already have a mine operating shovels and trucks are there, the people are there, the access is there so there's a lot of advantages and it's a tremendous reserve that will run for 50 years probably and be expanded and so on.

So it's one of those core assets that we would really like to have as part of the portfolio. I think when it starts it would be the 12th largest copper mine in the world but likely move up to league tables as others decline in production with declining head grade and as QB2 ultimately gets expanded. That's kind of key to our growth strategy but it does take a while before we get going with it, meanwhile we'll be watching others. (inaudible) is progressing well, we're having a really good working relationship with Goldcorp and that one is probably a couple years behind the QB2 timeline. Does that answer your question?

That was very helpful. Don, I appreciate those details. Thank you.

David Wang, Morningstar.

I had one on coal, so the cash costs that you guys have achieved have been pretty great and the reduction in guidance seems to indicate that you've been cutting even more. Is there further potential for cost cutting as you look out into next year or so or even beyond that and do you think that you're cutting costs in line with other competitors in the market or how do you see your cost cutting versus the other industry players?

Robin, over to you.

Yes, I guess if you think about the cost cutting it's sort of happened in three stages. So the first stage was really around increasing equipment productivity and we think we're -- well we know we're in the top quartile in terms of that metric. The next area of focus for us has been maintenance and procurement and we're working through that this year and we continue to see good progress on that. So through the rest of this year we anticipate our ability to certainly hit the cost guidance that we have put out.

As time goes on -- coal is probably three to four years into a cost cutting optimization kind of stage and so we're seeing certainly the increase is now becoming more difficult to find big numbers, but we still make progress we're still making good progress and the cost cutting that we have achieved is all sustainable. We will carry that forward. So we're pretty confident at the level we're, very competitive.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you Mr. Lindsay.

Okay. Well thank you all for attending today. We're very pleased with the quarter but I have to say we're looking forward to Q3 as coal production, coal sales ramp up in a market that appears to have a decent tailwind in both steelmaking coal and in zinc. So we look forward to speaking to you in October. Thank you.

Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.