Teck Resources Limited (TECK) on Q4 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Teck's Fourth Quarter 2021 Earnings Release Conference Call. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. This conference call is being recorded on Thursday, February 24, 2022. I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead.
Fraser Phillips: Thanks very much, Patrick, and good morning, everyone, and thank you for joining us for Teck's fourth quarter 2021 results conference call. Please note, today's call contains forward-looking statements. Various risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward-looking statements. Please refer to slides two and three for the assumptions underlying our forward-looking statements. In addition, we will reference various non-GAAP measures throughout this call. Explanations and reconciliations regarding these measures can be found in our MD&A in the latest press release on our website. Don Lindsay, our President and CEO, will begin today's call with full year and fourth quarter highlights. He'll be followed by Jonathan Price, our CFO, who will provide additional color on our financial results. We will conclude today's session with Q&A period to address any remaining questions. With that, I'll turn the call over to Don.
Don Lindsay: Thank you, Fraser, and good morning, everyone. Well, 2021 was a great year for Teck. We are pleased to close out the year by setting a number of financial records despite what was a very challenging backdrop. Solid operational performance and strong commodity prices drove $6.6 billion in adjusted EBITDA in 2021 and the highest ever quarterly adjusted EBITDA of $2.5 billion in Q4, which was more than triple last year's level. I am incredibly proud of the tremendous resiliency demonstrated by our team all across the company, who continued to operate our assets safely and sustainably through heat waves; a heat dome, I've never heard that turn before; wildfires; incredibly heavy rains, deep freeze, freezing temperatures, record cold temperatures and the continued impacts, of course, of the global pandemic. Unprecedented floods brought on by three atmospheric rivers, a term I also hadn't heard, three of them in four days in the fourth quarter, tested the resiliency of our steelmaking coal supply chain in British Columbia. And despite major rail and infrastructure damage caused by what is now referred to as one of the worst natural disasters in Canadian history, there was no material impact on our production. We reached multi-year collective agreements at Antamina, QB, Fording River and Elkview in 2021 and also at Highland Valley subsequent to year-end. So we now have long-term stable agreements at our three largest mines. We continue to advance our priority projects in the fourth quarter and overall progress at our flagship QB2 copper project has reached 77%. We are focused on delivering on the projects' key milestones, including the commissioning of systems as they are completed. And we continue to expect first production in the second half of this year. Teck is already one of the world's lowest carbon-intensity producers, rich of copper or zinc and steelmaking coal, but we are taking further action to support global efforts to combat climate change. We continue to reduce the carbon footprint of our operations as we progress towards our target of net zero by 2050. And in November, we announced an agreement with Oldendorff Carriers to employ energy-efficient bulk carriers, which is expected to reduce our Scope 3 emissions on a portion of our assuming coal shipments by up to 40%. The estimated savings can be up to 45,000 tonnes of CO2 annually, which is the equivalent to removing nearly 10,000 passenger vehicles from the road. In January, we announced our partnership with Caterpillar to deploy 30 zero-emission large haul trucks at our mining operations. And this is exciting progress because the decarbonization of our fleet, represents the single largest opportunity to reduce our Scope 1 emissions. And overall, we're very pleased to see our continued efforts in ESG are being recognized by the industry. So for the third year in a row, we are ranked number one in the metals and mining industry on S&P's Corporate Sustainability Assessment. We are also ranked number one among North America's metals and mining companies by Moody's ESG, and number 2 in diversified metals by Sustainalytics and rated AA by MSCI for our ESG performance. Turning to Slide 5. Annual adjusted EBITDA of $6.6 billion in 2021 was a record, reflecting strong contributions from each of our copper, zinc and steelmaking coal business units. And importantly, our record profitability enabled us to deliver meaningful cash returns to shareholders. Yesterday, the Board approved an amended dividend policy and declared a dividend and authorized a repurchase of up to $100 million of Class B subordinate loan shares in 2022. Under the new dividend policy, the annual base dividend has been increased from $0.20 a share to $0.50 a share. And in accordance with the new dividend policy, our capital allocation framework, the Board declared a dividend of $0.625 per share, consisting of $0.125 of a quarterly base dividend and a supplemental dividend of $0.50 per share. In addition, the Board authorized annual share buybacks up to $100 million and additional buybacks on top of that will be considered regularly. Taking into account the new annual base dividend in 2022 and the supplemental dividend and assuming the $100 million in share repurchases, these initiatives represent a total of approximately $635 million in aggregate of dividends and share repurchases. Our ability to deliver a supplemental dividend in 2021 and the increased annual base dividend and the new annual share buyback demonstrate both our confidence in the outlook for our business and our commitment to balance growth and returns to shareholders. So turning to our operations on Slide 7. Fourth quarter EBITDA for our copper business unit increased by 64% compared to last year supported by copper prices, which reached an all-time quarterly record. Production was in line with plan, although copper sales were impacted by heavy rains and extreme winter conditions, which affected rail service and shipment schedules. Net cash unit costs after cash margins for byproducts were USD 1.52 per pound. That's $0.25 higher than last year. We continue to experience inflationary cost pressures. And we also are seeing increases in our profitability, based payments at Antamina, and that's included in that 25% increase. As I've already noted, we are pleased to have reached multiyear collective agreements in Antamina, Quebrada Blanca and subsequent to quarter end at Highland Valley. So looking ahead, we expect strong performance from all of our copper operations in 2022. Moving on to zinc on slide 8. Our zinc business generated $290 million in EBITDA in the fourth quarter, and that's an 80% increase compared to last year. The increase was driven by higher zinc prices and partly offset by higher royalty costs related to profitability at Red Dog. Lower Red Dog zinc and concentrate production was primarily due to lower mill throughput and recoveries as a result of unplanned maintenance, which is now behind us. Refined zinc production at our Trail operations was 11,800 tonnes lower than a year ago due to issues we encountered in the commissioning of new equipment as well as unplanned maintenance. Looking ahead, Trails 2022 production will be impacted by major maintenance activities from September to November, when the KIVCET furnace hearth and the dome of one of the zinc roasters will be replaced after 25 years of operation. And our Red Dog royalty will increase to 40% in October from 35% currently based on our operating agreement with Mana, which outlines a 5% increase every fifth year to a maximum of 50%. In 2022, we expect a significant increase in zinc production at Red Dog and a decline in total cash unit cost before byproduct credits despite ongoing cost inflation pressures. Turning to slide 9. Our steelmaking coal business unit had a record fourth quarter, generating $1.7 billion of EBITDA in the quarter, and that compares with $118 million last year. Realized prices averaged US$351 a tonne, which was $244 higher compared to a year ago. And to capitalize on this premium pricing, we maximized available processing capacity to meet additional sales opportunities to China in the fourth quarter. Thanks to our Neptune facility, which had ramped up and was exceeding design capacity during the quarter, we ended the first half of November with historically low levels of clean coal inventory at the mine sites. This allowed us to continue operations with minimal production impacts despite the logistics disruptions that occurred in the latter half of the fourth quarter. Sales in the quarter were 5.1 million tonnes, which was slightly below our revised guidance. We sold 1.8 million tonnes of steelmaking coal to customers in China in the quarter. That was pretty similar to the three previous quarters. And annual sales to customers in China totaled 7.6 million tonnes or approximately 30% of our annual sales volumes. Sales to our customers in China are, of course, at CFR China prices, which reached a record high of more than US$610 during October. And although, the steelmaking coal price in China decreased quite a bit during the fourth quarter, the average CFR China price for the quarter exceeded FOB Australia price assessments. The remainder of our sales are still based on the FOB Australia price, which also averaged at a record level through the fourth quarter. And fourth quarter adjusted site cash cost of sales of $72 per tonne were higher due to inflationary pressures, including higher diesel prices, profit-based compensation and our investment in RACE21. Our annual adjusted site cash cost of $65 per tonne was within our previously disclosed guidance range of $64 to $66. Fourth quarter transportation costs of $49 per tonne reflect the extraordinary vessel demerged in the quarter as a result of port service disruptions and higher rail fuel surcharges and the higher costs were partially offset by lower port costs as higher volume of sales run through Neptune. And as a result of prolonged supply chain disruptions, we entered 2022 with very high mine site steelmaking coal inventories with CN and CP Rail making progress towards fully restoring rail service to our cold terminals, we expect to be able to largely recover delayed fourth quarter sales within the first half of 2022. And assuming full recovery of the rail network, we expect sales to be between 6.1 million and 6.5 million tons for Q1. We expect 2022 steelmaking coal production between 24.5 million and 25.5 million tons. Our 2022 production estimate is reflective of prudential production curtailments in the first quarter due to higher inventory levels, but we see that starting to decline now and have made some good progress recently. Further, while the recent surge in Omicron cases has not had a major impact on productivity to-date, continued absenteeism has the potential to have a negative impact on our operations. So, despite unprecedented logistics challenges and continued inflationary pressures, our steelmaking coal business unit delivered record financial results in 2021 and is well to deliver very strong financial performance again in 2022. And I note that Australia FOB prices are up again today, and they are currently over $450 per ton back, closer to $459 per ton, up about $18 in the last 3 days. Turning to our Energy business unit on slide 10. Our results improved from the fourth quarter 2020 largely due to the 88% increase in the Western Canadian Select oil price, which resulted in a positive operating netback. In the fourth quarter, the focus was on ramp-up to full rates. We were pleased to see Fort Hills safely and successfully resumed to a two-train operation in December. The facility is expected to operate at an average utilization rate of 90% throughout 2022. The midpoint of our guidance represents an increase of approximately 85% compared to 2021 for our share of the annual production. And with higher production and productivity, adjusted operating costs are expected to come down by approximately 40% to between $26 and $30 per barrel in 2022. Underpinned by strong global energy prices, we expect to see a meaningful improvement in Fort Hills EBITDA in the first half of 2022. And I note that WTI is $97.33 as we speak and with differentials fairly stable, that means that we have a Western Canadian Select price in the mid-$80s or well over CAD100. Moving on to slide 11. As I mentioned earlier, we continue to advance construction at QB2 with overall progress now having reached 77%. We are very proud of Q4, by the way, that we achieved 11% completion in that quarter and 35% for the whole year. We are proud of this achievement especially in light of the challenges that we have faced around COVID-19. The number of cases in Chile rose very rapidly in January and early February. So, we weren't able to continue the rate of progress that we were making in Q4 during that time. We are continuing to aggressively mitigate the impact of the pandemic on QB2 and we believe that we're past the peak there, and this has improved quite significantly from the worst of it. Construction continues to progress, and we remain focused on delivering key systems as we position for first copper later this year. We have completed more than 90% of the water supply pipeline welding, and the tailings starter dam is more than 85% constructed. We've also energized the port area substations, and we are continuing with our preoperational testing of the desalination plant. Our operations and commissioning teams are working in close collaboration with the construction teams and are busy commissioning systems as they are completed and handed over. And this includes commissioning the port substations, the mine electrical loop and the first two electric shovels. We've also completed commissioning and testing of the autonomous haul truck system, and these trucks are now doing productive work in the mine area. And I was able to visit and see them in action in December. A number of us will be going again next month. Turning to Slide 12, which shows the testing and commissioning of the electrical systems associated with the mine electrical loop. Energization of the mine loop was an important step in completing commissioning of our mining fleet. With the mine loop energized, you can see the two new electric shovels that we've commissioned on Slide 13, and these shovels will be used for pre-stripping mining activities. Slide 14 is a view of the 15-storey-high ore stack restructure, which transfers ore from the crusher to the ore stockpile. And you can also see the commencement of the erection of the ore stockpile dome in the center of the photo. Slide 15 is showing the grinding building where we have all the mills in place. We're working on the mechanical and electrical systems and we've commenced the installation of the siding. The next slide, Slide 16, shows one of the 85-meter-diameter tailing thickenings, where we are completing the installation of the internal mechanical components now. And from here, Slide 17, we go to the starter dam at the tailings management facility, where we continue to make excellent progress and are now over 85% constructed. The Teck mining fleet has done a great job in providing materials for construction. On the right, probably you can see the pond liner, which is in place in preparation for receiving water. Work on the main jetty is progressing well. It will support both the ship loader and the seawater intake system. And the subsea work including the 440-meter-long brine outfall pipe and the first to two water in tank pipe systems are now in place in preparation for seawater extraction. As we head back onshore, you can see we've energized the four substations there on Slide 19. And this energization is an important step towards commissioning of the infrastructure at the port area. And finally, Slide 20 shows the roof structure in place for the 75,000-tonne capacity concentrated storage building at support. So in summary, we continue to be very pleased with the progress that we are making. And we are excited about building on our construction successes to date with a focus on delivering to the project's key milestones. And I'd encourage you to visit the Investors section of our website to watch a video of the project and view our latest quarterly photo gallery. So with that, I will now pass it over to Jonathan to discuss our financial results.
Jonathan Price: Thanks, Don. Profitability in the fourth quarter improved significantly from a year ago as a result of higher prices for all of our principal products as shown on Slide 22. Copper prices reached an all-time quarterly record of US$4.40 per pound in the fourth quarter, up 35% from last year, while zinc prices increased by 29%. Western Canadian Select, the heavy oil benchmark price was 88% higher compared to the fourth quarter last year and has continued to increase through the first quarter of 2022, as Don outlined. Similarly, we benefited from record-high steelmaking coal prices. Realized prices in the fourth quarter were US$351 per tonne, more than a threefold increase from $107 a tonne a year ago. As Don noted, high realized prices reflected our strategy to increase our sales to customers in China in 2021, which was priced at a premium to FOB Australia price assessments. A large increase in steel making coal prices from Q3 to Q4 resulted in pricing adjustments of approximately $69 million in the fourth quarter or $44 million on an after-tax basis. Now we've outlined the key drivers of our record profitability on slide 23. We generated $2.5 billion of adjusted EBITDA in the quarter, an increase of more than $1.6 billion compared to the same period last year. This was largely driven by higher prices across all of our principal commodities, partially offset by lower sales volumes, higher operating costs and the strengthening of the Canadian dollar. It was also impacted by asset impairment and impairment reversal related to Fort Hills and respectively, in the quarter. We continue to experience inflationary cost pressures, notably in diesel prices, mill steel and replacement parts, driven largely by price increases for underlying commodities such as steel, crude oil and natural gas. The inflationary pressures reflected in fourth quarter operating results across our business are expected to continue in 2022. Cash flow from operations in the fourth quarter was $2.1 billion compared with $594 million a year ago. Our capital investments in the quarter totaled $1.1 billion, including $715 million on QB2 and $300 million in sustaining capital. Capitalized stripping was $186 million, primarily related to the advancements of pits for future production at our steelmaking coal operations. This was higher than a year ago, primarily due to decreased stripping activities in Q4 2020 as a result of COVID-19 restrictions. Debt proceeds were primarily driven by $303 million from our US$2.5 billion project financing facility in the quarter. Net-net, we also repaid $268 million on our revolving credit facility, bringing our balance on this facility to nil. Including these and other minor items, we ended the quarter with cash and cash equivalents of $1.4 billion, an increase of approximately $1 billion as compared to the end of the last quarter and the same period last year. Now turning to slide 25. We're pleased to have enhanced our already strong financial position. Our solid operating performance, combined with strong commodity prices, resulted in a 49% adjusted EBITDA margin and $6.6 billion in adjusted EBITDA for the year. Our net debt-to-adjusted EBITDA ratio was one-time. During the quarter, we converted our US$4 billion committed credit facility into a sustainability link facility with zero amounts drawn at this time. Subsequent to the end of the quarter, on January 18, 2022, we redeemed US$150 million of our maturing 4.75% term notes. As of February 23rd, we had $7 billion of total liquidity. Importantly, our strong financial performance enabled us to return meaningful cash to shareholders. Applying our capital allocation framework on slide 26 to our cash flow from operations of at $4.1 billion in 2021, we deducted sustaining and committed growth capital of roughly $3 billion, net of QB2 project financing and partner contributions, $106 million of base dividends and $335 million of debt repayments to improve our capital structure. This left us with over $730 million of available cash flow. As you know, the first 30% of any available cash flow is automatically returned to shareholders, and this totaled approximately $220 million. According to our framework, the balance of 70% can also be returned to shareholders or otherwise used for investment in growth or debt reduction or a combination of these. As Don noted at the start of the call, the Board made the decision to pay a supplemental dividend of $0.50 per share, or $267 million, representing 37% of available cash flow above the minimum stipulated in our capital allocation framework. And going forward, the Board approved a 150% increase in the annual base dividend to $0.50 per share per year from $0.20 per share and authorized an annual share buyback that allows us to repurchase up to $100 million. Additional buybacks will be considered regularly. The increased base dividend is indicated by our confidence in the outlook for Teck, reflecting both the near-term strong cash flow generation of our business units and our anticipation of the transition of QB2 from construction to operations. The annual share buyback provides management with a discretion to repurchase our Class B shares, such that we can offset the impact of dilution created by issuance of shares resulting from the exercise of employee stock options, as well as ensuring the flexibility to time repurchases in the context of market conditions. As shown, we have amended our capital allocation framework to reflect this additional regular return mechanism, with the cash used for share repurchases during the year to be deducted from our calculation of available cash flow. Slide 28 outlines our guidance for capital investments for 2022 and our outlook for a dramatic decrease in spending in 2023. We are approaching a major cash flow inflection point in 2023, driven by the completion of QB2. Sustaining capital spending is expected to increase in 2022, relative to 2021 levels, due to one-time projects, including the Harmer project to relocate maintenance and office facilities at the Elkview steelmaking coal mine to allow access to the next phase of mining, a major smelter turnaround with Trail, a haulage truck rebuild program and the inclusion of sustaining capital for QB2 for the first time. In total, we expect these factors to increase 2022 sustaining capital by approximately $500 million over 2021 levels. We expect to spend in Canadian dollar terms C$2.2 billion to C$2.5 billion of QB2 development capital on a consolidated basis in 2022. With the completion of QB2 and a normalization of other categories of spend, such as capitalized stripping, we expect our total capital expenditures to decline by roughly $2 billion into 2023. And with that, I will pass it back to Don for closing remarks.
Don Lindsay: Thank you, Jonathan. So as you can see, this is an exciting year for Teck. This is the year of transformation where we rebalance our portfolio and really start ramping up our copper production. We are months away from the startup of QB2 in the second half. We're particularly excited by this position, because we find ourselves as QB2 ramps up to full capacity, we expect to shift from a period of significant capital investment to what will be a period of significant cash generation. And at between US$350 a pound and US$450 a pound copper prices and with QB2 at full production, we believe that we can generate somewhere between $6 to $7 per share of what we call available cash flow for shareholders, which we can use to grow our copper business, while returning significant cash to shareholders at the same time and also maintaining a strong investment-grade balance sheet. And as a result of Teck's long-term and consistent commitment to seek out high-quality long-life base metals resources, we have a portfolio of high-quality growth options that is the envy of our peers. And after carefully assessing multiple configurations for the further expansion of QB beyond QB2, we have determined that the next phase of development will be the QB mill expansion or as it will be known, QBME. The mill expansion is expected to increase concentrate throughput by 50%, with the addition of one identical, semi-autogenous grinding line, that's one SAG mill and two ball mills. And we believe this configuration optimizes the time line to obtain approval, the permitting process and to progress the development of this world-class ore body well, leveraging the existing infrastructure that we're building right now for maximum capital efficiency. The QBME feasibility study has already started, including all of the environmental baseline activities. And with completion targeted for the fourth quarter of this year, QBME will be a significant contributor to our medium-term copper growth portfolio. At the same time, we are also continuing to progress the project satellite assets. At Zafranal, a feasibility study has been completed, and we have now received confirmation of our SEIA admissibility in Q1 2022. So that's a very, very important milestone. At San Nicolás, we've commenced work on a pre-feasibility study and -- that was in Q1 and with completion targeted for Q3 of 2023, and we are deeply in partnering negotiations right now. At Galore Creek, Fluor has been appointed to undertake a pre-feasibility study starting in Q1 with completion targeted in the first half of 2023. So that's another notable step with our partner, Newmont. Finally, strategic technical and commercial assessments for the advancement of NuevaUnión, Mesaba and Schaft Creek are ongoing. So in closing, we're pleased with how Teck is positioned to drive long-term shareholder value. There are meaningful opportunities ahead as global growth and the transition to a lower-carbon economy drive new copper and metal demand. And as a result of Teck's long-term and consistent commitment to seek out high-quality long-life base metal resources through mineral exploration, discovery, acquisition, partnership and development, we have a portfolio of high-quality growth options that is the envy of our peers. And as we move forward, will rebalance our portfolio to copper, while reducing the proportion of carbon in our overall business. The strong performance in the commodity prices over the last few months has accelerated our ability to return capital to shareholders. And looking ahead, we have the ability to generate even greater cash flow and returns. And as we've always done, we will continue to strengthen how we operate, both through cutting-edge innovation to improve productivity and through our leading ESG performance. And with that, I'll turn the call over to our operator to open up for questions. And I should say that we're all doing this call remotely. And so we have people in different time zones on lines all over the place. So after your questions, we ask it may take a moment or two to till we sort of who's going to answer it. Operator, over to you. Operator, over to you.
Operator: The first question is from Greg Barnes from TD Securities. Please go ahead.
Greg Barnes : Thank you. Good morning. Can you give any comments about the coal sales into China in 2023 as you had last year?
Don Lindsay: Okay. And congratulations, Greg. So I'll turn that question over to Réal. We've done a lot of thinking but as you know, the CFR price and the FOB price do not necessarily move in sync, sometimes one side or sometimes the other side. But Réal, over to you.
Réal Foley: All right. Thanks, Greg. So overall, looking at 2022, we're expecting our sales distribution to be similar to 2021. As we've discussed previously, we're continuing to maintain our supply to our ex-China customers because those are long-term relationships. And we're confident as well in China as the steel production recovers. Actually, we've seen steel production already come back very strongly right after the Olympics. So, we see that as continuing to support CFR China pricing as China continues to be short hard coking coal. So – and the last point is, we keep a portion of our book for spot sales. And of course, these spot sales will be placed in markets where we achieve the highest returns for Teck.
Greg Barnes: Great. Thanks Real. A follow-up question again for you, Don, on coal. Your thinking around the near-term future of coal in your portfolio seems to be evolving. Can you talk about how you're positioning the business, in your mind, from this point forward?
Don Lindsay: And when you say the business, you mean the overall portfolio?
Greg Barnes: Yes. Coal in the overall portfolio and how you see that...
Don Lindsay: Nothing has changed from what we've said before that we're on the journey to rebalance our portfolio so that carbon -- both coal and oil sands will be a lower percentage of the portfolio, whether you measure it in terms of revenue or EBITDA. And this is a big year of transformation for that because we double the consolidated copper production in QB2. But as we're going to start featuring throughout the year, the other projects in our portfolio are probably coming a little sooner than people might have expected. And then we hope to announce the partner on say -- in due course. It's taken a little longer than we thought, but we're certainly deep into it. And we're giving more information today in the next few weeks on QBME and moving at a pace. So the coal part of it will reduce in proportion naturally as copper grows. But we still had the same position on oil sands on the Fort Hills project that I've talked about before, so nothing has changed in that. But we're in the midst of our first quarter operating with 2 trains running. And so while -- that was a long time in coming, but it's up and running now. It was tough in the first couple of weeks of January, when temperatures were so cold and so on. But it seems to be going smoothly now. So that will give us some financial results and allow us to move forward on whatever strategic action we take on that. So we believe that the carbon part of portfolio will be reduced in that step. And then we'll take a look and say, well, can we get down to a level that shareholders find acceptable by keeping the whole coal business or do we need to reduce our exposure there somewhat. We love the business. As you can see, it's a tremendous cash generation business. And I just want to give a shout-out to our whole team that works in the coal division because there's a lot of ESG pressures and so on. But -- they are so dedicated, so determined and innovative in addressing issues. We've now got tremendous water treatment capacity up and running in the highest minimum concentrate area. It's really going well. Fish population has been increasing and so on. So I am just so proud of everything we do there. So I call it one of the best mining businesses in the world. And I say that frequently to our people. I should say it publicly, too. That said, we know that with all the ESG pressures and movements, there's a lot of people that shy away from anything called coal even though it's the good coal, steelmaking coal that the world absolutely needs for a low-carbon future. And so we have to take that in consideration. But the Board has been studying this intensely for a couple of years and even more intensely recently. But whether any specific action is taken in the next few months. I don't know. Nothing is imminent, that's for sure, but we sure look at it a lot. I do want to say that our coal, our steelmaking coal is amongst the highest quality in the world. And if you produce a tonne of steel with our coal, there's between 5% and 30% lower carbon emissions than the coals from the US, Australia, Mongolia and so on. So it's a very valuable business, and it's certainly doing extremely well, especially with coal prices having jumped $18 a tonne in the last three days. So sorry, that's a lot, Greg, but that's how I'm thinking about it.
Greg Barnes: That’s great. Thanks, Don. Just wanted to clear that up. And I’ll pass it on.
Operator: Thank you. The next question is from Orest Wowkodaw from Scotiabank. Please go ahead.
Orest Wowkodaw: Good morning. Couple of questions for me, if I could, Don. First one, I've noticed that the languaging around the share buyback seems to suggest that the Board may consider buybacks a lot more often than just annually. Is that the right way to interpret it, that we could actually see something reviewed quarterly?
Don Lindsay: We didn't say quarterly, but we said regularly. But the direction of your question is correct that -- where we're at now, we're 77% complete of QB2. But there's still a lot of capital this year. And so we're taking a prudent measured approach. We wanted to increase the base dividend. We wanted to implement the capital allocation framework. And we put in a pretty decent supplemental dividend on top of that, which in total gives you $1 for the year and then start the buyback. We wanted to have the approvals in place so that if events in the world happen as they seem to be happening in the last 24 hours, and there's moments of weakness or -- we can be ready and we can start any time. But we didn't want to go too far right now until we get further on QB2. But if you roll the clock forward a quarter or two, and we're over -- 90% or something and there's no particular disruption, we're generating the -- that these commodity prices can generate, then why would we wait all the way until next February or something? So we wanted to signal that the Board is very attuned to this issue. And it will be a subject of discussion frequently as cash is generated. But month-by-month, these prices makes a huge difference to this company. Like every month, there's a lot of cash that comes in. So we would look at how best to deploy it. And I think when you see QBME and how that would be financed it St. Nick and how that would be financed, you'll see the ability to still grow copper while generating a lot of cash that's available for return to shareholders will start to unfold more. And then the Board can make those decisions in that context. Sorry, I missed the first question but--
Orest Wowkodaw: Thanks Don. Just as a follow-up on QB2, you gave us a fair amount of status updates on the key pieces, but what about the concentrator? Where is that at with respect to completion? And is that now the critical path to start up?
Don Lindsay: Very good question, and I look at pictures of it every day. So, I'm going to ask Red Conger to take that question and he may work with Alex Christopher as well. But Red, over to you.
Red Conger: Good morning Orest appreciate the question. Yes, it's been a busy time for us on the project and we're pleased with progress as Don had mentioned. Just specifically on the concentrator, when we talk about critical path through grinding line 1, that still remains the critical path. So, that work is key to getting the first copper production. We did a lot of work with our contractors late last year to, as you have seen, reassess what the COVID capital cost impacts are going to be. We renegotiated the contract with them, taking all of the current circumstances into account, hiring additional people, et cetera, getting everybody aligned on the construction plans as they are today and the completion date. So -- and I'll tell you, we've -- Alex has been down there. I've been down there December, January, and February, working closely with the team on these issues. And when I walk that concentrate in that grinding line and compare it to other things that we've done elsewhere in the world, the debt to go on and the cost to go on. This is all very practical, very doable, and we're excited the milestones coming up, the first one being the first water to commission the desalinization plan. And at the time all of that's going on, we're completing the first grinding line at the concentrator. So that's ready to run when the water is there. And then all of those employees just naturally go to grinding line 2 and another aspects of the project to complete it. So, we're excited about where we're at. The grinding line number 1 remains the critical path first for this.
Orest Wowkodaw: And just to be clear, can you give us a percentage of completion on that?
Red Conger: Yes, we're at 77% now. And all of that effort is around the sequence that it takes to complete all of those things. So they're complete at a time when you can actually make something. And it's not about bulk construction completion at this point. The thing that's most critical for us right now are the key milestones that we need to achieve and the order that we need to achieve them in. For instance, it doesn't do us any good to complete grinding line 1 before we have water to put in it. So, all of the work plans, work effort, intensity is around that proper sequence to get us to first copper as safely and rapidly as we can.
Orest Wowkodaw: Okay. Thank you, Red.
Operator: The next question is from Matthew Murphy from Barclays. Please go ahead.
Matthew Murphy: Hi. It's probably too early, but I can't resist asking about capital on the QB expansion. Any kind of like ballpark bracketing of possibility you could give us?
Don Lindsay: Well, it's like half of QB2, but without a lot of the infrastructure, the pipeline transmission lines, ports, stuff, so less than that. But then you got to roll the clock forward a number of years for whatever cost inflation happens over that time. I think it would be too early to give you an actual number. But to your question, ballpark order bank to, that's how I think about it.
Matthew Murphy: So if I said something like $2 billion, that's like not ridiculous?
Don Lindsay: Well, it's in that range, but you've got to think that when this gets started, we've had – like the $5.26 billion of QB2, that was in 2019, I think and so you got to roll the clock forward six, six years and whatever cost increases have happened in steel and all different things. So I'd take that in serious consideration.
Matthew Murphy: Yeah. No, fair enough. That's helpful. And then I had another question just on tax pools. There was a note in the earnings of an expectation to be accruing for current Canadian corporate income taxes starting this quarter. So could you just remind us where the tax pools are and how much further you have to go on those?
Don Lindsay: Jonathan, over to you.
Jonathan Price: Yeah. So those tax pools are held in Canada, of course. We – as for the guidance we've given, expect to fully consume those pools early in this year. And therefore, we start to recruit Canadian income taxes. And that will convert, of course, into cash taxes in due course.
Matthew Murphy: Okay. So that's like the pool amount?
Jonathan Price: Yeah. And we do – we've held these pools for a long time, of course. But we have significant profits being generated right now in the business, in particular, of course, from the coal business here in British Columbia. And that will see the end of those tax pools essentially and us paying corporate income tax on those profits.
Matthew Murphy: Yeah. Okay. Thank you.
Jonathan Price: You’re welcome.
Operator: The next question is from Carlos De Alba from Morgan Stanley. Please go ahead.
Carlos De Alba: Yeah. Thank you. Good morning, everyone. So coming back to QB2, so given where we are and sort of the run rate that you mentioned down of 11% progression in the fourth quarter was really good, but some slowdown in the first quarter, is it fair to say then that your first production will really come most likely during the fourth quarter perhaps until the end of the year? And then the second question on QB2 was on CapEx. Could you give us a reminder of that 5% of additional contingency on the original CapEx of $5.62 billion? What is the FX that is embedded in that 5% additional contingency expanding? Is it still trading at 7.75 peso per dollar, or has it moved closer to spot?
Don Lindsay: Okay. I'll take the first one and then turn it over to either Red or Jonathan or Alex for the second. But the present completion in Q4 was our best quarter. And I can tell you, January and February with Omicron is nowhere near that. It was pretty rough going at one stage. We had over 800 people isolated, the absenteeism has been really high. And so you can't sort of project that. And so we keep saying just second half because, we don't know if we'll get back to that Q4 rate, which would be great. And obviously, two quarters like that, you'd be in good shape, or it could carry on where it's been in the last six or seven weeks. And we've been through a few phases like this just as there have been phases of the coronavirus, the Alpha, Delta, Omicron and on. So we're trying to stay away from predicting too specifically. And we're just going to say, look, we're going to get this thing done in the second half, first crop is going to be produced. And then we're going to drive forward with a tremendous new asset that's going to be around for generation. So we're looking forward to it. Now on the exchange rate, Red or Jonathan?
Red Conger: Yeah, Don. Red here, Carlos. The capital to go, the spend to go on this, we've used more current rates than we were seeing at the time, 8.25 to 8.50 exchange rate on capital to go, spend to go. It's mostly labor based in Chilean peso expense to go.
Jonathan Price: Just to add to that, Red, if you look through our previous expenditure for QB2 and the guidance we've given, both for the underlying estimate, the contingency and now the COVID spend of $900 million to $1.1 billion, and you look at all of that in US dollar terms, it will give you a -- you can pretty accurately figure out what we're going to spend this year based on the guidance we've given and what would be carried over into 2023. So as Red says, you spot FX rates for what we're spending right now given that's predominantly labor costs that we're incurring.
Carlos De Alba: All right. Thank you very much, everyone.
Operator: Thank you. The next question is from Lawson Winder from Bank of America Securities. Please go ahead.
Lawson Winder: Yeah. Thank you operator. Good morning, everyone, and thank you for the update. I'd like to ask about the Chilean Constitutional Convention and how that might factor into your decision to proceed with QBME. And do you expect to have the ability to obtain a stability agreement, or might it be even potentially grandfathered in with QB2?
Don Lindsay: I'll make some preliminary comments. And then I'll turn it over to Amparo Cornejo, I believe she's on the call from Chile. So in terms of making a final sanction decision for QBME, we've got a fair bit of work to go there. We've got to finish the pre-feasibility this year. And there is some work on the final feasibility going on in parallel with that. But the time you get to sanction, we should have much better clarity on what's going on in Chile with the constitution, with the different tax and royalty proposals and that sort of thing. And then the Board can make a decision whether they're comfortable with the risk. We believe that the proposal we're making falls under the current taxability agreement, and within current permitting for some the infrastructure that's already there. So that's one of the reasons. There are two of the reasons why going with a 50% expansion like the one line, one SAG and two ball mills, just expansion of the current mill, the QBME, QB mill expansion makes sense because it's sort of the least regulatory challenging and or tax or whatever. Just a lot less risk or uncertainty and a lot faster. Like when I say faster, it's faster by somewhere between two and four years compared to doing a larger expansion. And if for some reason, Chile decides to impose taxes that are just too high and make us come to a conclusion that we don't want to commit what is clearly going to be $2 billion or north of as our previous question was showing, then we wouldn't do it, right? So it's in Chile's hands to put together a good investment environment. And it has done that for decades, frankly, Chile has been one of the best countries in the world to the mining copper. And I'm a big believer that, it will continue to be so. But we'll be able to wait and see what the final rules are, before we make any sanction decision. Amparo, if you're there, please feel free to comment on the latest developments and constitutional discussions.
Amparo Cornejo: Okay. Thank you, Don. Good morning, everybody. Yes, I'm here. Sorry, I have had some issues with the connection. So hopefully, I can continue. And what Don explained is correct. There is no indication that the mining royalty deal that is currently under discussion will have any impact on our stability agreement that has been expected by all the parties. So international agreements and commitments will be respected. In relation to the constitutional convention process, which is, of course, very important for the future of Chile in order to establish a new social pack and ensure future stability, we believe that the process has not finished. It's too early to really comment. Up to this moment, they have only been approved by the convention. Two blocks of – parts of the constitution, all the discussion about environmental issues or others that could have an impact on the mining activity has not yet been voted. We expect that both of the convention will take place around mid-March. And it's important to remind everybody that those standards require two-thirds of approval. So at this moment, we don't really have enough information. There is not a draft of the constitution, where we can say that the outcomes are going to generate additional risk. Of course, we are following the process very closely. And there is a lot of national debate and a lot of information around the constitution. But it's important to mention that those standards related to the industry have not yet been voted.
Lawson Winder: Thank you, both. That's extremely helpful perspective. And a follow-up, if I might, on HVC 2040. What's your latest view on the time line to approval? And just thinking to the evolution of the overall portfolio towards more copper, I mean, is it possible that HVC 2040 could become an expansion and throughput? Thanks.
Don Lindsay: I'll turn that one over to Shehzad Bharmal.
Shehzad Bharmal: Thank you. So HVC 2040, our plan is to submit our permitting documentation, the full after consultation with indigenous groups and other communities in the first quarter of next year and then with the 12-month permitting time line. And remember, that it is mostly an extension with a little bit of expansion as well. So there is more grinding capacity being installed. And our throughput should be higher by about 10% or so, 10% to 15%. So it's an extension, as well as a minor expansion.
Lawson Winder: That’s all very helpful. Thank you so much.
Fraser Phillips: Patrick. Operator, it's Frazer. I think we have time for one more question, please.
Operator: Certainly. The last question will be from Lucas Pipes from B. Riley Securities. Please go ahead.
Lucas Pipes: Thank you very much and good morning, everyone. I wanted to follow up on the portfolio management, obviously, Fort Hills here in this energy price environment is a nice hedge. And I wondered if you can update us on where you see that asset fitting in longer term. Thank you very much.
Don Lindsay: Yes. So we've been very public about our position on that. It's been a long road to get to full production. But we said once we got to full production and it was really down in operating well, then the Board would look to see whether we felt we were getting paid for Fort Hills in Teck Resources share price. As you know, with all the ESG focus, there are many institutions that are interested in buying a company involved in oil sands. And the asset itself looks like it can generate tremendous EBITDA and cash flow, particularly at these prices. So if it's not valued within Teck Resources, then we may conclude that it should be held differently and allows shareholders to continue to participate if they so choose. And that could be any one of three general directions. And one would be sale to another partner. We are in partnership with Suncor and Total. One would be contributing into a mid-size company and taking back shares and distributing those shares to shareholders as part of the consolidation play. Or it could be just spun out directly as a yieldco and it would be a pretty healthy yield at a -- in these circumstances. So -- but we do need to get at least a quarter's financial results while it's running at full production. And so we're in that quarter now, although, it was pretty tough for the first couple of weeks. So the Board will be considering this in the not-too-distant future, but that's how we think about it. You're quite right. It is a good hedge on oil prices. That was one of the reasons why we went into it years ago. There are a bunch of other good reasons as well. First of all, we are in the mining part of the business, large open pit, shovel truck operations. And we have thousands of people within an hour's drive of the Alberta border who do just that and do it very, very well. Second, the province of Alberta is pretty good geopolitical jurisdiction to invest in. If you sit in my chair and you look at the choices you have around the world, and Alberta looks pretty good. Third, it was very tax efficient. The capital that we invested provided a shelter against the cash flows from Highland Valley and the coal operations in Trail and so on. The technology risk was minimal. We do have the advantage of some new technology. The paraffinic froth treatment process has improved. It means it's a much lower carbon footprint. And the original oil sands has been one-third of original operations. So that was good. Oil itself is something you could hedge a long way out. You could hedge as far out as 15 years, if you wanted to, whereas copper and zinc are certainly not core you can’t do that. So there are a whole bunch of -- and there's not particularly a lot of geological risk. The resource has been drilled over there. So there's a whole bunch of really good reasons to have it in the portfolio back then, but the world has changed. And so to the extent that our investability is affected by having that within Teck Resources, then the Board is going to look at how to deal with that. But first, let's get through this quarter and get some financial results.
Lucas Pipes: That's very helpful. Thank you for that. And then a quick second question on Slide 28. You're looking at a reduction of CapEx of $2 billion in 2023. So it looks like an increase of $200 million to $500 million. Any particular driver on that? Is that sustaining capital of QB2 that gets rolled in inflationary pressures? Any perspective you can share on that? Thank you very much.
Don Lindsay: Jonathan, over to you.
Jonathan Price: Yes. Thanks for the question. As I mentioned previously, there will be some carryover of QB2 capital into 2023. And as I mentioned, you can sort of figure that out by looking at our guidance in aggregate for a total spend there versus what we've spent on our guidance for 2022. So you'll see there’s sort of a stud year 2023. Things like sustaining capital will start to come down. Capitalized stripping will come down to be more consistent with prior years. And therefore, when we wrap up QB2, all else being equal, then we would see a further reduction again into 2024. But they're some of the key drivers in that capital number.
Lucas Pipes: Terrific. Very helpful. Thank you very much and best of luck.
Don Lindsay: Thank you.
Operator: I would like to turn the meeting back over to Mr. Lindsay.
Don Lindsay: Okay. Well, thank you very much, everybody, for attending today. In closing, I want to say how excited we are about 2022 in this transformational year in QB2 and starting down that copper growth trail and rebalancing the portfolio. I just want to bring people's attention to Page 33 in our quarterly release because there you’ll find a chart on the sensitivities to the various commodities and, in particular, to the exchange rate. I know we've got some tough dues happening in the Ukraine. And we hope that things can be resolved for benefit of all the people, peacefully in some. In the meantime, the world is quite concerned on risk off. And the Canadian dollar has moved to full penny today, and the sensitivity shows that for every $0.01 to Canadian dollar declines, that increases our EBITDA by $143 million. And then just a little further down the chart on steelmaking coal, as I noted, steelmaking coal is around $459, up $18. For every dollar it increases, that's another $28 million in EBITDA to Teck. So I think these are important. And even just below that, you see WTI and WCS sensitivities as well. So while it's a tough day in the markets, for sure, in terms of the things that drive our financial results, it's actually very, very positive. And with that, thank you very much. We look forward to speaking to you in April. Bye now.
Operator: Please disconnect your lines at this time, and thank you for your participation.
