Teck Resources Ltd (TECK) 2018 Q2 法說會逐字稿

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Q2 2018 Earnings Call.

(Operator Instructions) This conference is being recorded on Thursday, July 26, 2018.

I'd like to turn the conference over to Mr. Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis.

Please go ahead, sir.

Thanks very much, John.

Good morning, everyone, and thank you for joining us for Teck's Second Quarter 2018 Results Conference Call.

Before we begin, I'll -- we will draw your attention to the forward-looking information on Slide 2. This presentation contains forward-looking statements regarding our business.

However, various risks and uncertainties may cause actual results to vary.

Teck does not assume the obligation to update any forward-looking statement.

With that, I'll turn the call over to Don Lindsay, our President and CEO.

Thank you, Fraser, and good morning, everyone.

I will begin on Slide 3 with some highlights from the second quarter, followed by Ron Millos, our CFO, who will provide additional color on our financial results.

We will conclude with a Q&A session, where Ron and I and several additional members of our senior management team would be happy to answer any questions.

I'm delighted to report a record first half for Teck.

And in fact, we've now had 7 quarters in a row of EBITDA, $1 billion or more than that, and the actual average during that time is $1.5 billion per quarter.

And this has really put the company in great shape as we look forward to an exciting growth program.

But before discussing the quarter, I would like to comment on the announcement we made yesterday with the changes to our Board of Directors.

Teck is very pleased to announce that Dominic Barton has agreed to join Teck's Board of Directors, effective September 1, 2018.

And many of you will know Dominic from his time at McKinsey & Company, where he has been a Global Managing Partner for the past 9 years.

And among Dominic's many accomplishments, he served as Chair of the Canadian Minister of Finance's Advisory Council on Economic Growth.

He is a recognized thought leader on creating long-term social and economic value, and he brings tremendous global perspective to our business, including extensive experience in Asia.

And we're very excited about the role that he will play at Teck in the future.

We've also announced yesterday, that our longtime Chairman, Dr. Norman Keevil, will retire from the Board of Directors at year-end.

And as part of our succession planning, Dominic Barton will assume the role of Chair on October 1. Also at that time, Norman Keevil III, who has been on our board since 1997, will become Vice Chair of the company.

We will, of course, have much more to say about Norman's retirement as it approaches, but I wanted to say just a few short words today.

Norman is an officer of the Order of Canada.

He's a member of the Canadian Mining Hall of Fame and of the Canadian Business Hall of Fame.

He has worn many hats over an extraordinary career, including scientist, explorer, entrepreneur, industry leader and, more recently, author.

And to paraphrase one of his favorite sayings, over more than half a century with Teck, Dr. Keevil never once rested on his oars.

And we're looking forward to further honoring and celebrating Dr. Keevil's achievements and his legacy in the months ahead.

Also, as you will have seen in our press release, we will shortly hold a process to seek an additional partner for QB2.

Our objective is to hold our interest at the 60% to 70% level, and a transaction would most likely be announced in the fourth quarter.

A decision to proceed with the development will be contingent upon regulatory approvals and market conditions, among other things, and we are exploring various potential financing alternatives for the project.

Turning now to Q2.

The highlight of the quarter was Fort Hills achieving commercial production.

We have now added another operating business unit to our portfolio with a high-quality asset that will generate cash for the next 45 years or more.

The Fort Hills plant startup has exceeded expectations with respect to both production volumes and, most importantly, product quality.

Suncor has done a great job building that plant.

Fort Hills is ramping up to its nameplate capacity of 194,000 barrels per day and is completing the transition from capital spending on construction to now generating cash flow from operations, which means a very significant swing in our cash generation profile.

Overall, our operations continue to perform well, resulting in another strong quarter of operating results.

We set a new record for quarterly zinc production at Antamina, and strong mining performance from our steelmaking coal operations contribute towards record material movement in the first half of the year, which gives us a lot of operational flexibility going forward.

And as a result of our solid operating performance, we've improved our guidance in our copper, zinc and energy business units for 2018.

And we expect to close the $1.2 billion sale of our 2/3 interest in the Waneta Dam today, in fact.

This will strengthen our liquidity to close to $7 billion and put us in a good position ahead of a potential sanctioning decision on a QB project later in the year.

In fact, our liquidity will already be significantly in excess of the capital cost of a 60% to 70% interest in QB2, and that is, of course, even before any entry fee that a new partner might pay.

In addition, we announced on July 25 that we will pay our regular base quarterly dividend of $0.05 per share on September 28 to shareholders of record at close of business on September 14.

And finally, we were pleased to be named to the Best 50 Corporate Citizens in Canada list by Corporate Knights for the 12th consecutive year.

Turning to our financial results for the second quarter on Slide 4. Revenues were $3 billion; gross profit before depreciation and amortization was $1.6 billion; and after adjusting for unusual items, adjusted EBITDA was $1.4 billion.

Bottom line adjusted profit attributable to shareholders was $653 million or $1.14 per share.

That's $1.12 per share on a diluted basis.

And that is a significant increase from the $580 million or $0.99 per share in the same quarter last year.

Details of the quarter's earning adjustments are on Slide 5. And as you can see, there are very few adjustments in Q2 of 2018.

I'll now run through the highlights by business units, starting with steelmaking coal on Slide 6. Sales volumes were slightly lower than expected in Q2.

Preparations for 2 separate CP Rail strikes resulted in around 300,000 tonnes in lost rail capacity.

But importantly, demand remained strong.

We had orders from customers in place that would comfortably exceed our original sales guidance of around 6.7 million tonnes.

As I mentioned earlier, we achieved record material movement in the first half of the year, and that will allow operational flexibility going forward.

Looking forward, third quarter sales are expected to be around 6.8 million tonnes, subject, of course, to our logistics chain performance.

For the full year, our annual steelmaking coal production guidance remains 26 million to 27 million tonnes, though currently, we now expect it to be near the lower end of the range.

Our operating cost guidance is unchanged.

With increased rail fuel surcharges due to higher diesel prices, we now expect our transportation costs to be at the high end of our guidance range of $35 to $37 per tonne.

And finally, some good news.

We plan to invest approximately $12 million to complete and evaluate the MacKenzie Redcap detailed design study at Cardinal River.

The MacKenzie Redcap development is expected to supply approximately 1.4 million tonnes of steelmaking coal production per year and has the potential to extend the Cardinal River operation for approximately 9 years from the planned closure in 2020.

And beyond 2020, this additional tonnage would be over and above our current planned production capacity of around 27 million tonnes in the Elk Valley.

Our copper business unit results are summarized on Slide 7. In Q2, gross profit before depreciation and amortization was up $137 million from the same quarter last year, reflecting higher prices and volumes and lower costs.

Net cash costs after byproduct credits were down USD 0.05 per pound from the Q2 of last year, helped by strong cash credits for byproducts.

At Highland Valley, copper ore grades and recoveries were higher than originally planned due to a timing issue related to areas being mined.

Grades are expected to decline in the second half of the year as we mine lower-grade areas, consistent with the mine plan.

We have basically brought forward some higher-grade ore from 2019 and expect to finish 2018 above plan.

On the technology side, an autonomous haulage pilot is on track to have 6 trucks operational by year-end.

Following a successful trial of shovel-based ore sorting technology over the past 6 months, we now plan to fully operationalize the technology, which is now being extended to the rest of the main shovel fleet.

And on QB2, we continue to advance execution and operational readiness, with detailed engineering and design now approximately 70% complete.

On the permitting front, the indigenous consultation process, I'm proud to say, is now complete, and the environmental evaluation is finished.

We expect to receive the final permit approval documents after the environmental evaluation commission votes on the project, and that is anticipated in the first half of August.

Looking forward, we now expect full year copper production to be in the range of 280,000 to 290,000 tonnes, which is an increase from before, and we have lowered our copper unit cost range to USD 1.30 to USD 1.40 per pound after byproducts.

Finally, you will have seen in a separate press release today that Newmont has acquired NOVAGOLD's 50% interest in Galore Creek.

We have entered into an amended partnership agreement with Newmont, and we look forward to working with them.

Our objective for Galore Creek is to complete an updated prefeasibility study over the next 3 to 4 years to improve our overall project understanding and economics, and our share of the investment to complete this work will be approximately CAD 12 million to CAD 20 million on an annual basis.

As you know, the Galore Creek project is part of Project Satellite, an initiative focused on surfacing value from Teck's substantial base metal assets located in low-risk, stable jurisdictions.

On Slide 8, we turn to our zinc business units.

And as a reminder, Antamina's zinc-related financial results are reported in our copper business unit.

In Q2, gross profit before depreciation and amortization was up 19% or $38 million from Q1 of 2017, and that reflects higher prices and higher volumes.

At Red Dog, contained zinc sales were slightly ahead of our guidance, reflecting ongoing tightness in the zinc concentrate market, and zinc production was 20% higher than a year ago due to higher-grade ore and improved recoveries.

And as expected, Red Dog's unit cash costs after byproduct credits were above our annual guidance range, and that, just to remind you, is consistent with our normal seasonal pattern.

Refined zinc production at Trail operations was similar to Q2 of last year, and looking forward, Red Dog's shipping season commenced on July 6, and we expect Red Dog contained zinc sales to be around 160,000 tonnes in Q3, again reflecting the usual seasonal pattern.

But based on strong performance at Red Dog, we have now increased our overall zinc and concentrate production guidance to the range of 655,000 and 667,000 (sic) [670,000] for the full year.

And just as a reminder as well, we will have extended maintenance at Trail operations starting in Q3 for the KIVCET furnace, which will result in lower lead production in the second half of the year compared to 2017, and this is maintenance that is required once every 4 years.

Our energy business unit results are summarized on Slide 9. And as I mentioned earlier, commercial production was achieved in the quarter, and the plant startup has exceeded expectations with respect to both production volumes and product quality.

And please note that we have reported our energy results from June 1 to June 30 as the first month of official commercial production.

Our share of Fort Hills' production was around 750,000 barrels or almost 25,000 barrels per day in that period, and this reflects some unusually wet weather that impacted production in June and then also in July, but it is not expected to have a material impact on operations for the full year.

We have also reported an operating netback of CAD 13.85 per barrel of bitumen.

That calculation is summarized on the slide.

There's also a reconciliation table included in our quarterly press release.

So looking forward, full production at Fort Hills is now expected to begin at the beginning of the fourth quarter, and that is 3 months earlier than previously anticipated.

And production guidance has now been increased for the full year with our 21.3% share now expected to be 8.5 million to 10 million barrels of bitumen.

So that's an increase over previous guidance, and it'll start 3 months earlier.

Guidance for cash operating costs has also now been lowered to CAD 28.50 to CAD 32.50 per barrel.

And of course, it will -- in order to achieve that range, it will end up significantly lower than that by the end of the year.

Finally, at the Frontier Project, the regulatory application review is continuing with a public hearing before a federal and provincial panel that's scheduled to start on September 25.

The federal decision statement on that can be expected sometime in mid-2019.

And with that, I will pass it over to Ron for some comments on the financial side.

Thanks, Don.

I'll start with our liquidity on Slide 10.

And our -- as Don mentioned, our liquidity is currently over $5.6 billion, and that includes $1.7 billion in cash and USD 3 billion of the undrawn committed credit facilities.

As Don mentioned earlier, we expect to receive $1.2 billion in cash with the closing of the Waneta Dam transaction later today, and that would strengthen our cash balance to about $2.9 billion and our liquidity to close to $7 billion.

This will put us in a good position ahead of a potential sanctioning decision on the Q2 project later this year.

In the meantime, we're continuing to build cash on our balance sheet and progress the engineering, and that's reducing both the funding and the execution risk for that project.

We also only have $220 million of debt maturities prior to 2022, and our strong credit metrics compare favorably to our diversified and North American peers on a pro forma basis with the expected closing of Waneta Dam sale.

On Slide 11, I've summarized changes in our cash during the second quarter.

We generated $1.1 billion in cash flow from operations.

We spent $345 million on capital projects, including Fort Hills.

And our capitalized stripping costs were $175 million in the quarter.

We paid $119 million on financial investments and other assets, including the USD 52.5 million paid on closing of the transaction for the acquisition of the additional 13.5% indirect interest in the QB2 project through our purchase of IMSA, our minority partner.

And that transaction simplifies the ownership and capital structure of QB2 and gives us flexibility on financing options for the project.

So we now have a 90% equity interest and a 100% funding interest in QB2.

We paid $70 million in interest and finance charges and $28 million for our regular quarterly base dividend of $0.05 per share.

And after these and other minor items, we ended the quarter with cash and short-term investments of around $1.6 billion.

And with that, I'll turn it back over to Don for his closing comments.

Okay.

Thanks, Ron.

I'd like to wrap up by looking forward to the next key catalysts or some call them valuation milestones.

For the second half of 2018, we anticipate receiving the final approval documents for QB2, and that should happen next month, in fact.

We expect the partnering process for QB2 to be completed and to be in a position to announce the transaction in Q4.

And then, of course, we hope to sanction the project also probably in Q4.

Full production at Fort Hills is expected at the beginning of the fourth quarter as well.

We aim to complete the Highland Valley 2040 prefeasibility study also in Q4.

And then we also aim to complete the feasibility study at Zafranal in Peru and to submit the SEIA document in the same quarter.

And in 2019, we aim to complete the feasibility study on NuevaUnión that -- probably by Q3.

And we also expect to complete the prefeasibility study and submit the SEIA for San Nicolás, that's in Mexico, in the second half of the year.

So there is a lot to look forward to in the next 6 to 12 months.

Before I close, I would be remiss if I did not comment on the risks that have risen in the global economy and the volatility that have caused -- that have risen in the commodity markets in particular.

But I do want to say that demand for our products and the underlying fundamentals of our commodity markets remain strong.

However, government policy changes, including tariffs, and the potential for trade wars have created uncertainty in global markets, and that threatens to slow global economic growth.

And that, in turn, has resulted in a significant correction in commodity prices over the past few weeks.

But that being said, as you can see, we have taken significant steps to insulate our company from commodity price volatility.

We have improved operations and reduced unit costs.

We've strengthened our balance sheet by reducing debt.

And we have significant liquidity and strong cash flows.

And as a result, we are well positioned to navigate this period of uncertainty facing the global market.

Just a summary statement before we turn to questions.

It really was an extraordinary quarter.

While earnings itself of $653 million was terrific and it's a record earnings for the first half of the year at $1.4 million (sic) [$1.4 billion], we also increased our guidance in each of zinc and copper and energy.

And the QB2 partner process is really significant.

If you think about it, that will make a very significant difference in terms of the financial requirements for us in the coming years if we -- for example, just to use an arithmetic example, if we were to sell a 30% interest, that would reduce our capital needs by $1.5 billion and then add to that the entry fee of some sort.

So we believe that's a transaction that will reduce financial requirements by over USD 2 billion.

The permitting progress (sic) [process] for QB2 is almost finished.

Fort Hills, the final startup of Train 3, went incredibly smoothly and would be operating at full capacity by the fourth quarter.

The Waneta transaction will close literally later today.

That's $1.2 billion more cash, which takes us close to $7 billion of liquidity, which significantly exceeds the capital that we'd be required to come up with for QB2.

We've got a great new partner in Newmont at Galore Creek.

And we had a very managed -- very well managed, very smooth succession program for the Chairman.

So very proud to say that Teck is in terrific condition, and we're now open for questions.

(Operator Instructions)

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Thanks.

It's a good question.

And I can assure you we had very, very strong sales in Q2, and we wish we would have been able to deliver more.

But for more details, I'll turn it over to Réal Foley.

All right.

Thanks, Don.

So [Boris], we do have sales in place for Q3.

Demand is continuing to be very strong.

And of course, our estimated sales, our sales guidance, reflects all considerations that you have mentioned.

So it is really ensuring that we have appropriate coal to meet demand at the ports, and the port inventories continue to be tight.

So we have sufficient coal to meet demand, but we -- no doubt we are tight, and that is what we're observing in the world.

So there has been a correction in the coal price, but the coal price levels at over $172 on average this morning still reflect very strong demand fundamentals.

But could you, in theory, deliver more than that?

Or are you capped right now by rail or loading constraints?

We could deliver more than 6.8 million tonnes, but we also have to be reasonable in the guidance that we provide.

Okay.

And just as a follow-on, I didn't see any mention in the release about the board approval for the Neptune coal terminal expansion.

Is that -- has that been improved or is that deferred?

No, that has been approved.

It's under way and going very well.

The next question is from Chris Terry from Deutsche Bank.

Don and team, my question is really around QB2.

I was just looking for a bit more color.

So the project is 70% complete from a detailed engineering perspective.

Do -- how far do you think you have to get that through when you look at doing a transaction?

Do you think the key step is to get the permitting in place?

Do you need to progress that further before you could look at the actual transaction with the buyer?

The short answer to that would be I don't think we need to progress it further.

It will progress further just in a normal course.

We had a target of wanting to have engineering design up to the 80% completion level before sanctioning.

So clearly, we're on track to do that.

We have had, I should say, an awful lot of interest in people being our potential partner from around the world.

And many of them would have already known that this was a possibility and done their numbers.

So we will wait to -- before formally starting the process to get the permit in hand just because that's clearly an important valuation milestone that's very close.

But after that, we'll be fully into it.

And I think the potential partners are quite ready for them.

Okay.

And the follow-up to that, just 2 parts.

What would you look to do with the cash if that comes in, is the first part.

And secondly, when you have -- when you go to evaluate who the potential partner is, how are you going to assess the -- is it just the highest bidder?

Or is it the bidder that also brings some sort of operating expertise or build expertise or whatever it might be?

How do you assess who the best partner would be?

Yes.

No, very good question, and I'll start -- I'll take the second question first.

We look at it -- there's probably 3 categories of potential partners.

There are the very large mining companies that have strong operating expertise and construction expertise that really help to validate the project's long-term value and would be a great partner to have for the long term.

Remember, we have about 100 years of resource at QB2.

Right now, we currently only published a mine plan for 25 years but uses only about 25% of the resource.

There are also different partners out there that clearly are more marketing oriented that are very, very keen to get their share of the copper concentrate, which is going to be a higher-grade, very clean concentrate, which is clearly going to be in big demand as the world evolves.

And then there's different financial players that have stepped up and have proposed interesting structures where they provide financing and really reduce the risk to us but while also still leaving us the potential 5, 7, 8 years down the road that we could buy it back from them at a prescribed return.

So there's a range of choices.

It won't be just the highest bidder.

But of course, the valuation to put out will be a significant factor.

So we're looking forward to it.

And because there are very few projects like this out there, people sort of thought that the world really only had [Queveco] and QB2 as opportunities for those who want to grow in copper with a large project.

Queveco , of course, has already been done, and this looks like it's the last one for some time.

So I think we'll have some scarcity value involved in that, and it should be a very interesting process.

And just the potential use of cash depending on what that would be from the sell-down.

Yes.

No, we're in a very, very good position.

It's an interesting question.

As we've said, we'll have close to $7 billion of liquidity before the end of today, and then there'll be some entry fee coming to QB2.

So there are a number of choices.

First and foremost, there's always return of capital to shareholders, and we will be making that decision at the November board meeting, as our policy describes.

And that will be a combination of cash dividends and buyback.

And so clearly, we're in a very strong position from that point of view.

We could also reduce debt further in a market that's quite volatile.

And for a bit of geopolitical uncertainty out there, that might be appropriate.

And then, of course, we do want to steward our capital for these potential growth opportunities, although by doing the partnering process of QB2, we would require less than the market would have thought previously, and our financial resources will significantly exceed what would be required for QB2.

So that'll give us other opportunities.

As you know, we have 2 large projects, QB2 and NuevaUnión, that will be sort of core to portfolio for decades to come.

And then within Project Satellite, we have 5 copper projects, 2 of which could be in production by 2022, 2023.

And while we don't know whether we're going to build those or sell those, both of them are being advanced on the valuation milestone change with full feasibilities and prefeasibilities, so we do want to maintain some capital for things such as that.

But we have a lot to work with, some very interesting choices, so should be quite interesting.

The next question is from Greg Barnes from TD Securities.

I just want to switch topics a little bit, Don.

Zinc was the worst-performing metal yesterday, I think.

Is that justified?

We don't think so.

I'm going to turn it over to Andrew Stonkus in a minute.

But again, the -- sometimes I call it this.

Well, sometimes, the market sentiment or the sheer weight of money can overwhelm fundamentals, and we think zinc is the most extreme example of that.

When we look at customer demand and treatment charges in particular as a signal of how tight the market is and different actions being taken by Chinese smelters and so on, we believe the zinc market is still very tight.

But Andrew, over to you.

Yes, thanks, Don.

Yes, Greg, I think Don summarized it pretty well.

It's -- demand is still -- for metal is still very firm.

I -- when you look at North American steel mill galvanized production, steel mills are running at high utilization rates and looking at adding on additional galvanized capacity.

So the regional market in North America is strong.

But so is the global market.

When you look at global galvanized production, it's -- continues to increase.

So demand for metal is there.

On the raw material side, concentrate side, we're still at very -- historically low treatment charges of approximately $40 to $50 in the spot market.

So that's considerably below the annual benchmark term.

So -- and the concentrate market continues to be extremely tight.

There is additional mine production coming onstream later on this year, but a lot of this new mine production is also not sulfide production, it's reclaimed tailings.

So that's another aspect of the marketplace.

It is looking for materials that are not traditional supply lines.

So that's going to be a challenge, I think, for the industry to continue to bring on new mine production and concentrate feat for the marketplace.

The Chinese mine, domestic mine production continues to be basically flat with the environmental restrictions, both on the mining side and on the smelting side.

So when you look at the metal drawdowns from the Shanghai inventories, certainly they continue to fall down or decline.

Smelters are not running at full rates in China.

So demand in China is firm, and the inventories in China have continued to fall.

So overall, it's -- the fundamentals are there.

Technical trading for the situation is causing short-term volatility.

But longer term, the fundamentals still remain very strong.

Right, right.

Don, I just want to go back to another question then.

I repeatedly get asked whether oil is still a core business for Teck.

Or is it a core business for Teck?

Is it?

And would you potentially monetize your oil sands business now that you've got Fort Hills up and running?

Yes, I think 2 comments on that.

First of all, we look at it as a mining business.

And when we went into it some 10 years ago, we think of it as a large open-pit mine, shovel truck operation, we have a lot of skill and operating experience, expertise in that.

And it's also a great geopolitical jurisdiction.

Even under an NDP government, it's a lot better than many other jurisdictions that if you were sitting in my seat, you get to choose whether to go into it or not.

And it's very tax effective for us to -- the capital we've invested there provides shelter against operating cash flow from the coal mines or Highland Valley, Trail and so on.

The technology is proven, and we're delighted that the product we're producing is -- from a carbon footprint point of view, it actually ranks in the middle of the pack of all the oil that's refined and consumed in North America.

So that's a very different situation than normally people think of with oil sands.

So there's a lot of reasons to hold it as a great, high-quality, core asset.

And we think once it's through this transition year, 2018, as it starts up, that depending on what your assumptions are for oil price and differentials, that this will be literally one of our best mines, right up there with Antamina or Fording River and -- in terms of like ongoing EBITDA for the next 45 years.

So in an ideal world, we'd love to have it as a core asset for the long term.

It provides that much stability.

And on nature, this whole business is -- the risk is in getting it built.

Once it's built and if you have a high-quality result like we've had where this startup is just so, so exciting, then it's just a source of sheer cash flow for several decades.

And you see that in some quarters' results.

You've seen our results.

You've seen our results that once these assets are built, they are extremely valuable.

However, if we go out a couple years, it says 2020 or 2021, and the full debottlenecking is finished and it's running with cash costs at CAD 20 a barrel or lower and running significantly above nameplate capacity, if we don't get proper value recognition in our share price, then we would look at some other form of transaction or something to ensure that the shareholders' benefit from the value that's been created.

And whether that was a -- some sort of a spinout or sale or a partnering or -- I don't know what -- we'll look at it, but we wouldn't look at it for at least a couple years.

We need to finish the job right now.

It's gone really well.

As you've seen, we've increased our guidance for the year, and we've moved ahead the timetable for how long we think it'll be running at nameplate capacity.

But we need to finish that job first and do the debottlenecking next year to take it up even higher.

But if mid- to end of 2020 we're not getting recognition for it, yes, we would do something.

That's our job.

The next question is from Brad Rosenberg from Overbrook.

Oh, just one quick moment.

Yes, he's been on.

I'm sorry for the delay, sir.

(technical difficulty)

Sorry, John, where are we at?

I'm really sorry.

There's a slight issue with that.

(inaudible) It'll just be a few seconds.

Great.

Sorry about that.

I don't know what happened.

I just wanted to follow up on the question before about zinc fundamentals.

Obviously, you've had an increase in the aluminum inventories over the past 4 months now, and there's a good amount of supply that's projected to come on.

I'm just curious what your thoughts about those projects.

I know you've said you'd comment on them.

Just a quick overview statement.

We have a team that's just following the zinc industry in extreme detail full time.

And not just in Toronto, where our commodity consultants -- internal commodity consultants are based, but people in Shanghai who spend the bulk of their time analyzing what's going on in that country and what zinc production is coming on, to come on or is not coming on.

And we believe that one of the major commodity consultants out there has significantly overestimated the supply that's coming on, and that's one of the big differences, in our view, of the zinc market.

And it would appear that many in the financial markets have relied on that estimate, but I guess we'll find out in the next 6 months whether it's right or not.

But certainly, what we're seeing is it's not close to right.

But with that as an overview comment, Andrew, do you have any more thoughts on zinc?

Yes.

I think, Brad, again, when you look at the terminal exchanges, stock exchanges, LME has gone up.

But again, some of that is hidden stocks that are reappearing onto the LME.

But the market today is still a backwardated market.

So again, the backwardated market means that the market physically is still firm.

If it was a long market and, then the backwardation would probably be eliminated.

And even with the increases in the LME on occasion, it's still a backwardated market.

But when we look at the Shanghai exchanges on the other side, it's down over 20%.

So material has been basically displaced from other traditional markets and gone into the China market as the demand is -- continues to be strong there.

Smelters are operating at low utilization rates, as I mentioned.

So the demand in China is firm.

There's just not enough metal supply because -- due to the tightness in the concentrate market.

So the metal inventories are declining in China.

There is some blips in the LME terminal stocks, but that is still some of the hidden stocks coming out of the woodwork.

And -- but overall, it's a firm market.

We're at 9 days of global consumption.

So again, well below the historical long-term average of over 20 days.

So we're still running at very low metal inventories, and the concentrate market, as I mentioned, is at historically low levels on treatment charges.

And to your question on what are the quality of these materials coming to the marketplace on new production, some of them are the reclaimed tailings, and this will be something new to the marketplace, which has not experienced processing reclaimed tailings to the extent that this appears to come to the marketplace.

So the market for concentrates is still going to be tight in the near term.

So there's new additional material coming on that's required.

It's still not sufficient to meet the demand growth rates.

And just one other factor.

I mean, there has been no letup in China's commitment to environmental standards, much higher environmental standards.

And if anything, they're getting stricter on that.

So that has had a big, big impact on potential mined zinc production in China.

We just don't think it's going to materialize like some of the others do.

But I guess that's what makes the market, a difference of views.

The next question is from Oscar Cabrera from CIBC.

If we could get back to just QB2.

The objective to ultimately hold 60% to 70% interest, was that trying to diversify risk from the project or -- and then participate in other projects in the copper space later on?

Or is it more the current market that we are seeing now and the possibility of slower demand if the trade wars escalate?

So I want to be very clear on this, Oscar, because we saw your report, and we know that you didn't get a chance to call us first before writing it.

But the current market conditions have nothing to do with us making the decision to seek a partner in QB2.

I repeat, absolutely nothing to no effect whatsoever.

This is a long-term project.

As I said, a 100-year resource and short-term market volatility or even short- to medium-term kind of volatility in price does not affect these long-term investment decisions.

We are making decisions that are more than 50 years.

So it has no impact whatsoever.

We just believe that given the experience the industry has had over the last 10 to 15 years, putting all your eggs in one $5 billion basket isn't really the prudent thing to do.

Bringing in a partner will only strengthen the project, whichever kind of partner we bring on, whether it be a financial partner, a market and a concentrated-related partner or an operating and construction-related partner.

And that's a good thing for QB2 long term and a good thing for Teck long term.

It does free up quite a bit of financial resources, certainly USD 2 billion or more for us to do other things.

And as I said, that could start with capital returns to shareholders or reducing debt more or any of the other projects that we have, and we do have a long list.

But again, I want to emphasize that, that decision has nothing to do and shouldn't have anything to do with current market volatility.

Okay.

No, that's really clear.

Then in terms of -- you're about 70% complete on engineering.

Have you seen anything that would lead you to believe that the -- I believe it was USD 4.8 billion -- could be reduced?

I'll turn that over to, I guess, Alex Christopher or Dale Andres, whoever wants to take it.

We're in the final strokes here.

I will highlight (inaudible) is the exchange rate of the Chilean peso that you choose, and that's been variable, shall we say, in the last 6 to 12 months, just as the Canadian dollar has.

So the nameplate number that we end up publishing will be affected by that.

But Alex, you want to start?

Yes, certainly.

Thanks for the question, Oscar.

I guess a couple of things here to point out.

As we advance engineering, one of the key things we're doing here is reducing the exposure risk with respect to all of our estimates around pricing of contracts and labor productivity.

As we go through our procurement cycle, we're getting firm numbers in from the companies that we're letting the equipment out to.

So we've certainly reduced the risk of that capital number moving from -- on an upward basis.

And really, that's the benefit of getting the advancement in the engineering and -- out into the market with respect to procurement.

With respect to reducing the cost, we continue to focus on a variety of things, including our estimates of labor productivity in the field, and are working hard with the major contractors that we're going out to RFP to bid on, on the major contracts in terms of improving our productivity estimates to maintain the capital number or bring it down.

And we see that is the place where we're going to see the best chance at reducing the overall capital price.

Okay, that's helpful.

And then lastly, on -- switching over to steelmaking coal.

On the MacKenzie Redcap, 1.4 million tonnes over 9 years.

Could you give us an idea of the scope of the project in terms of capital expenditures?

And can you remind me what the -- what your capacity is on your processing facilities?

Okay.

I'll just turn that over to Robin Sheremeta.

But just to remind you that, that 1.4 million tonnes would be over and above the current capacity that we're aiming for from the Elk Valley mines of 27 million tonnes.

So Robin?

Okay.

As far as capacity, the Cardinal River plant has capacity for about 1.8 million per year.

So that's the nameplate on the plant.

And then as far as capital, I think to be fair, it's still at a feasibility stage.

We're still trying to establish what the total capital costs are.

But it's actually quite a capital-efficient project for us.

If you looked at any of our expansion opportunities , it's one of our top ones.

So I think that's probably where we'd like to leave the capital estimate right now.

Would it be comparable to what we were talking about with Quintette?

It would be quite a bit less because it is a brownfield expansion.

It's really the mining part.

There's not a whole lot to do beyond that.

We just need to construct an access out to that area of the operation.

There's not a whole lot of extra equipment to bring that online.

So it's quite a bit more capital efficient than Quintette would be.

Yes, and that would be order of magnitude less.

Yes.

I just want to clarify that QB2's engineering is 70% complete, not 30%, as I think was said.

The following question is from Lucas Pipes from B. Riley FBR.

I also appreciate the clarity on seeking a partner for QB2, and I really want to follow up on just the previous question.

Don, at various times, it appeared as if you would be happy to go ahead alone, if I think back, for example, to the Analyst Day.

And what changed?

Is it -- I would really appreciate your perspective on that.

I think it makes a ton of sense, but I would appreciate kind of what changed your thinking.

I wouldn't say anything actually changed.

What I would say is that the board has had a thorough discussion of the balance of risks and made a decision to be as prudent as possible on this project.

And look, if you've been in the business a long time, you know how hard it is to get a hold of a nice, clean, doable project in a decent geopolitical jurisdiction that has a really long life -- mine life to payback ratios of in excess of 10 or something.

So to get ahold of that is really, really tough.

Just ask any of the other competitive -- competing companies that are in the industry.

It's tough to find one, and we've got one.

So you are tempted to keep it all and do it all.

But we also have several other alternatives, and we do want to ensure that shareholders get good returns on a capital return basis and that we have debt at nice, low levels for the long term in an increasingly volatile world.

So when you're balancing all those factors, eventually the board makes a decision.

And this will free up in the order of USD 2 billion or more in terms of capital required going forward.

So completely changes the picture going forward and gives us flexibility to do something else.

We could still end up with the same total copper production increase over a 3- or 4-year period.

But just having it in 2 different sources, perhaps 2 different countries, 2 different operational and construction risk, and that just makes a stronger company overall.

So that's the board's decision.

We haven't done it yet, of course, but we certainly see an awful lot of interest.

So as we've said, we think we can go through the process from now till the end of the year and announce a transaction.

I appreciate that.

And then on Neptune, I wanted to follow up on the expansion project there.

And I wanted to ask kind of what is the potential minimum amount of volumes that could or -- would have to ship through Westshore once that Neptune expansion is completed?

I think that will depend at the time on what the alternative options are.

But suffice it to say that we're going to have a lot of capacity there.

And if competing options are not appropriate economics, then we can put an awful lot through Neptune.

I think -- I mean, we've announced different sort of nameplates and things, but it's going to give us a lot of flexibility.

And remember, the key reason for doing this is it gives us long-term, low-cost and flexible capacity so we can count on our coal being delivered into the market, particularly when prices are high.

And so this is just going to make that whole business a lot stronger.

Got it.

And the competing options that you mentioned, would that be -- could you elaborate on that?

All right.

Now we ship essentially through Westshore, Neptune and Ridley.

And the mix of how many tonnes go where will change once the Neptune project is (inaudible).

Got it.

And then maybe one last one for Réal, just following on the drop in met coal prices.

Réal, what would you attribute that to?

Is it some of the macro concerns or maybe more specifically related to weaker demand in China or supply growth?

I would really appreciate your perspective.

And also, if you could comment on what you think is the -- kind of the best estimates for an equilibrium price in your steelmaking coal.

I would appreciate your thoughts.

All right.

Thanks, Lucas.

Well, maybe the first thing to say is demand in the market remains really, really strong.

So even if you look at global crude steel production June year-to-date, it's up nearly 5%.

And that's in all areas of the world.

That's a global increase.

But China is up 6%, India is up over 5% and the rest of the world is up 3%.

So as you can see, the global demand remains strong.

In terms of what we're seeing on our side, customers are continuing to request additional tonnes, and that reflects really that stronger demand that we see on the coal side and on the steel side.

With respect to pricing, yes, pricing has corrected.

It is a function of, we believe, the uncertainty around tariffs and also potential for trade war.

But the price of coal is still pretty close to the long-term average of around $180.

This morning, the average of the 3 assessments are above $172, and the average for the quarter to-date, lag by a month, is sitting over $192.

So it is still, by all means, very decent pricing for steelmaking coal.

Particularly in Canadian dollars where it's close to $230.

The next question is from Piyush Sood from Morgan Stanley.

Couple questions from me.

On -- first, on Galore Creek, I just want to understand that -- let's say the project gets approved.

Would you be 50-50 partners?

And will you also get an offtake of the precious metals side?

Or is it possible to imagine a scenario where based on some economics, you keep the copper and Newmont keeps gold and silver, something like that?

Yes, I guess -- I mean, it's an interesting question.

I would say it's a little premature, in that we're going to be working with Newmont for the next 3 years.

We have an agreed plan to redo the prefeasibility, as we discussed.

And at that time then, we will make decisions on how to go forward, but we're delighted to have Newmont as a partner.

Gary Goldberg and I work very closely together on different industry issues, and I think it's just a great partnership, really good culture fit.

And could long term, we end up streaming gold one way and copper the other?

That's, of course a possibility.

But it's something that I think we think about literally probably not for about 4 years at the earliest.

We need to get through the work that we've agreed to do.

But it's still an exciting development.

It just makes Galore Creek like a very real option for the long term, and that's exciting for us because it's right here in B.C. as well.

So we're very, very pleased with that announcement today.

No, that's fair.

And also, the press release mentioned a letter from the U.S. commissioners of International Joint Commission on water quality.

Could you talk a little bit more about it?

Yes.

I think probably the best person to answer that would be Marcia Smith, our Senior Vice President of Sustainability and External Affairs.

Please.

Sure.

Happy to take the question.

As we've said over the last few weeks, it is disappointing that members of the U.S. Joint International Commission claim that they lack information on water quality in Elk Valley.

In fact, I think as people on this call know, there have been massive amounts of data, numerous studies made available of the potential impacts of selenium on water quality.

And I think the issue is very well understood by both regulators and stakeholders on both sides of the border.

This is a complex legacy issue caused by many decades of mining, and that is why we are working to address those issues.

We're working closely with regulators here in British Colombia, with Canada and in the U.S. And we are in the process of investing significant funds to treat water quality.

And ultimately, our view is that the plan we've put in place is one of the most comprehensive of its kind ever developed.

So we're making good progress, and I think we're on track to get our water treatment facilities up and running this fall.

So that's really where the issue stands at this point.

So at this point, you're probably doing more R&D on the saturated rockfill, the site technology.

So do you think eventually maybe costs actually go down versus what we previously heard from you?

Yes, we're pretty excited about this.

I'm going to ask Robin Sheremeta to talk about saturated rockfill.

You bet.

I love talking about saturated rockfills.

We've got what is at this stage a very successful pilot in process.

In fact, we've -- we're managing to treat now -- we're approaching 10,000 cubic meters a day.

We're seeing 95% to 100% removal of selenium out of the water from the saturated rockfill at Elkview.

And I'll just put that in perspective.

That's almost double the capacity of what we will have operating in West Line Creek when we -- when our plant comes back online here shortly.

So it's -- so far, it is an extraordinarily positive pilot, and we do anticipate this will be a part of our long-term strategy in our water treatment.

And possible effects on capital required?

Yes, just -- I mean, briefly, if you take a 20,000 cubic meter a day plant, just for reference, it would cost in around $300 million to construct.

A saturated rockfill would cost roughly $50 million to construct at that same level of capacity.

And then on an operating basis, a 20,000 cubic meter a day plant would run at roughly $22 million a year operating cost, and a saturated rockfill would be about half that.

So around $10 million a year.

So big difference in (inaudible).

So clearly, we're very excited about the potential, but we will have to finish our confirmation of the results there and make sure the regulators and so on fully understand it before it becomes part of the long-term plan.

But clearly, very, very positive development.

The next question is from Jeremy Sussman from Clarksons.

I think, Don, last quarter, you were sort of pretty clear in terms of noting your priority for QB2 over Quintette.

I'm curious if the decision to sell down a stake in QB2 changes anything for the potential for Quintette to move ahead.

That's a very good question.

The -- my initial sort of response is not really, but I think it's a fair question in that it certainly frees up a lot of capital for us to be able to do other things, one of which could be Quintette.

But the principles that I probably talked about last time remain the same, that we are working longer term to rebalance the portfolio.

We obviously are a little bit overweight steelmaking coal.

Not that we don't like the business.

It's proving to be one of the very best mining businesses in the world.

And so we like that.

And we are seeing strong demand, as Réal talked about, and we had a lot of requests from customers in India and so on to reopen Quintette.

So I do think, at some point, that it will make sense to do so.

But right now, we've committed to our shareholders that growth in copper is getting the priority.

And the strategy of the company is quite simple: We're taking strong cash flows from coal and strong cash flows from zinc and devoting it to doubling our copper business.

To the extent that we're not going to put all of our eggs in one $5 billion basket on QB2 because we just think it's more prudent to diversify a bit, and that frees up as much as USD 2 billion to do something else, I still think that copper would take priority for some time.

But you never know.

So -- and that's a decision that -- we wouldn't be looking at deploying any extra capital, I would think, for at least a year.

You'd want to see QB2 up and running smooth and -- I mean, in terms of its construction, up and running smoothly before you decided to commit capital to other growth projects, one of which could be Quintette.

But during that year, we're going to see several milestones, including the full feasibility on Zafranal, prefeasibility on San Nicolás and so on.

So it's going to be a very interesting year.

Fair question.

I'm not sure I gave you that clear an answer, but at least you get a feel for how we think about it.

No, that was actually a super helpful answer.

And maybe just as my follow-up, obviously QB2 and [Queveco] are both world-class projects.

And one of the 2 just sold [Danna] for the 22% stake for $600 million.

I'm curious if you have a thought on valuation there.

Yes.

I think depending on future payments, you get a number even higher than that.

We see a lot of comparability between the 2 projects.

We literally do, we call it, apples-to-apples but a direct comparison, line by line on the different aspects of the 2 projects.

And they have a little bit higher production in the early years because of higher grade, but QB2 has more consistent over-the-life.

And a whole bunch of -- like we have much lowered strip ratios; all-in sustaining costs are really good.

We're going to be going out to the market, Canada, U.S. and Europe, once the project is sanctioned with very detailed presentations on all elements of QB2 and comparing to what else is out there.

So we can't predict what the valuation is going to be.

And the world will evolve between now and when it will happen in Q4 that will have an effect, but we do see a lot of comparability between the 2 projects.

John, I think we've got to -- we've gone over a little bit over here.

We've got time for one more question.

So the last question for today will be from Mark Levin from Seaport Global Securities.

Just 2 very quick questions.

One has to do with the capital structure.

And maybe if you have some updated thoughts about what you think will look like or looks like the best capital structure for the business going forward, particularly given QB2 and the decision you made to find a partner.

Okay, I'll ask Ron Millos first to start just on our basic ratios and then I maybe have some additional comments.

Yes, so our basic ratios, debt equity ratio would -- we'd like to see that somewhere in the 20% to 30% range.

And the debt-to-EBITDA, the leverage test, we'd like to be in that sort of 2.0 to 2.5x.

If -- on occasion we'll exceed that depending on the opportunities in front of us and where commodity prices are.

But if we sort of get to those levels, we think that will be certainly helpful to get back to an investment-grade credit rating.

Yes, that makes sense.

Yes.

And so what -- and what I wanted to add to that is that the structure of your outstanding debt is really important, too, in terms of your maturity ladder and balanced against how much liquidity you keep on.

So we said that we're going to have close to $7 billion of liquidity, and this is before any entry fee into QB2.

And that compares to no debt due for the rest of 2018, no debt due in 2019, no debt due in 2020 and only $220 million debt due in 2021.

So $7 billion of liquidity with only $200 million of debt coming due in 3 years' time.

So during the time that we would be building, we would have a really, really strong position.

So the total debt outstanding is one thing, and we can still reduce that.

But the maturity ladder or the timetable of our maturities is really, really important to us, and that's why we've structured it the way it is.

No, that makes sense.

And one last one question.

We -- I think I know the answer before I ask, but I'll try anyway.

With the realizations, the nickel price realizations this quarter kind of returned back to more normal levels, I'm assuming, because the spreads weren't as wide during the quarter.

But I -- obviously, the quarter before that, it had kind of blown out.

Any preliminary ideas right now if this -- where you were this quarter with the met coal price realization relative to the benchmark is more likely in Q3 or something that looks more like it did in Q1?

Yes.

So on this one, we have made a decision not to focus on the percent realized price versus benchmark because it became clear that it was highly misleading to the market, the people who were focusing on that number.

The reality is that it depend -- that if we ever put a number out there, it is only good for a moment in time.

And we found that people were sort of putting that in their models and leaving it there when really you need to pay attention to the daily -- the trade journals who publish a coal price index every day and look at the difference between high-quality, hard coking coal and then the lower-quality products that are out there and see what the spreads were.

It is true that the percent realization number, if you did the calculation, which we're not going to do anymore, was wider last time because in the market there was a significant difference in demand for high-quality versus low quality, and those spreads widened quite significantly.

In this quarter, they've gone back more to normal.

Nothing has changed in terms of the coal that's in the ground.

It is what it is.

And in the long term, if you just took normalized pricing spreads, about 92% is where we end up.

We were, I think, at 93% this time, but I'm trying to forget what those numbers are because it's more important to just look at the day-to-day numbers.

I understand.

That makes sense.

And then finally, last question for Réal has to do with Chinese buying patterns in the met coal market.

The yuan has obviously had a pretty significant move.

Even like the rupee in India, the currency has moved a lot.

Have you seen in the market less of an interest from either Chinese or Indian buyers potentially as a function of currency more than anything?

So an interesting question, Mark.

The Chinese imports of steelmaking coal from seaborne market are down this year compared to last year, but India is running very, very strong, and that is where we see the most growth going forward.

There's -- so the government plan for crude steel production is still to increase 300 million tonnes of capacity by 2030, 2031.

That's compared to around 120 million to 125 million tonnes currently.

So there is still very strong demand in that market.

In Eastern Europe with the depletion of mines, they're relying more on seaborne market.

We're also seeing growth in Southeast Asian markets.

So we need to look at the market as a whole as opposed to market by market.

Okay, well, let me just make a closing comment.

And to repeat, we think it was an extraordinary quarter.

Solid earnings of $650 million and a record first half for the company of $1.4 billion in earnings.

We've increased guidance on each of the zinc, copper and coal businesses.

We've got the QB2 partner process getting started, which should free up as much as USD 2 billion from future capital requirements.

We've got the permitting almost done in QB2, and as there's real scarcity value in QB2 in terms of projects out there, the Fort Hills start-up could not have been better.

Really got a fantastic plant there.

Suncor, doing a great job.

The Waneta transaction closes today.

$1.2 billion more cash.

Newmont coming in as a partner in Galore Creek.

That is fantastic.

And we've got all sorts of catalysts coming in the next 6 to 12 months, so we're feeling great here.

Look forward to talking to you after Q3.

Thanks very much.

Thank you.

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