Teck Reports Unaudited First Quarter Results for 2017
(firmenpresse) - VANCOUVER, BRITISH COLUMBIA -- (Marketwired) -- 04/25/17 -- All dollar amounts expressed in this news release are in Canadian dollars unless otherwise noted.
Teck Resources Limited (TSX: TECK.A and TECK.B, NYSE: TECK) ("Teck") reported profit attributable to shareholders of $572 million ($0.99 per share) compared with $94 million ($0.16 per share) a year ago. Adjusted profit attributable to shareholders was $671 million, or $1.16 per share, compared with $18 million, or $0.03 per share in 2016.
"Substantially higher commodity prices had a significant positive effect on our financial results compared with the first quarter of 2016," said Don Lindsay, President and CEO. "We set a monthly sales record in steelmaking coal in March, as we saw an increase in demand following a slow start to the quarter. We are now through the difficult winter weather and are seeing improvements in service levels from our logistics providers putting us in a strong position for the remainder of the year."
Highlights and Significant Items
This management''s discussion and analysis is dated as at April 25, 2017 and should be read in conjunction with the unaudited consolidated financial statements of Teck Resources Limited ("Teck") and the notes thereto for the three months ended March 31, 2017 and with the audited consolidated financial statements of Teck and the notes thereto for the year ended December 31, 2016. In this news release, unless the context otherwise dictates, a reference to "the company" or "us," "we" or "our" refers to Teck and its subsidiaries. Additional information, including our Annual Information Form and Management''s Discussion and Analysis for the year ended December 31, 2016, is available on SEDAR at .
This document contains forward-looking statements. Please refer to the cautionary language under the heading "CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION."
Overview
Our financial results in the first quarter improved substantially from a year ago primarily due to significantly higher steelmaking coal prices, which almost tripled from a year ago, while copper and zinc prices rose by 25% and 66%, respectively. These higher prices were partly offset by lower production and sales volumes in our steelmaking coal and copper business units. We experienced weak demand for our steelmaking coal in January and February before demand improved in March. In our copper business unit, sales volumes were approximately 20% lower than in the first quarter of 2016, primarily due to lower production from Highland Valley Copper as the mine is currently in a phase of lower grade ore, as anticipated in the mine plan.
Steelmaking coal spot pricing appeared to stabilize in the US$150 to US$160 per tonne range during the first quarter after exceeding US$300 per tonne in November 2016. Before the end of March, however, Cyclone Debbie resulted in supply disruptions in Australia, which have contributed to spot prices for highest grade products moving above US$300 per tonne for the fourth time since 2008. Reports indicate that the rail line that transports the majority of the highest grade products is expected to restart operations at the end of April and a long queue of vessels has formed at the ports, creating a backlog which will require time to normalize.
With the additional profits and cash flow generated from higher commodity prices, we took the opportunity to further strengthen our balance sheet by repurchasing US$1.0 billion principal amount of our outstanding notes in March. In the last eighteen months, we have reduced the principal amount of our outstanding notes by US$2.1 billion and US$5.1 billion of notes remain outstanding at March 31, 2017. Our debt to debt-plus-equity ratio over the same period has declined from 36% to 27%. We may purchase further debt from time to time as opportunities arise.
Construction progress on the Fort Hills oil sands project has surpassed 83%, with three of the six major project areas (mining, ore preparation plant and infrastructure) turned over to operations, with primary extraction turned over to operations on April 15th. All major plant equipment and materials are on-site, and all major vessels and process modules have been installed. Mobilization for operation has begun and the project remains on track to produce first oil in late 2017.
Profit and Adjusted Profit(1)
Profit attributable to shareholders was $572 million, or $0.99 per share, in the first quarter compared with $94 million, or $0.16 per share in the same period a year ago.
Adjusted profit attributable to shareholders, after adjusting for the items identified in the table below was $671 million, or $1.16 per share, in the first quarter compared with $18 million, or $0.03 per share, in the same period last year. The most significant of these items relates to a loss on the repurchase of our debt at a premium in the first quarter of 2017.
The significant increase in our adjusted profit in the first quarter of 2017 was largely driven by substantially higher realized steelmaking coal prices and, to a lesser extent, higher copper and zinc prices. The higher commodity prices were partly offset by lower sales volumes of steelmaking coal and copper, as well as by higher unit operating costs primarily driven by reduced production levels. In addition, our profit was negatively affected by the weaker U.S./Canadian dollar average exchange rate compared with a year ago.
Profit and Adjusted Profit
Our adjusted EBITDA(1) of $1.47 billion for the first quarter of 2017 ($443 million in 2016) includes these same adjustments applied on a pre-tax basis.
In addition to the items described above, our results include gains and losses due to changes in market prices and interest rates in respect of pricing adjustments, commodity derivatives, share based compensation and changes in the discounted value of decommissioning and restoration costs of closed mines. Taken together, these items resulted in $27 million of after-tax profits ($45 million before tax) in the first quarter, or $0.05 per share. We do not adjust our reported profit for these items as they occur on a regular basis.
BUSINESS UNIT RESULTS
Our revenues, gross profit before depreciation and amortization, and gross profit by business unit are summarized in the table below.
STEELMAKING COAL BUSINESS UNIT
Performance
Gross profit in the first quarter of 2017 from our steelmaking coal business unit was $980 million compared with $7 million a year ago. Gross profit before depreciation and amortization increased by $969 million from a year ago (see table below) as the benefits of significantly higher realized steelmaking coal prices more than offset lower sales volumes and the effect of higher unit production costs. The average realized steelmaking coal price of US$213 per tonne was US$138 per tonne higher than the first quarter of 2016, reflecting improved steelmaking coal market conditions.
First quarter production of 6.1 million tonnes was 8% lower than the same period a year ago. Low demand early in the first quarter combined with inadequate support from our logistics providers resulted in a lack of on-site storage capacity. This severely restricted coal production despite our efforts to increase it. Customer demand improved substantially in March, which was a record month for sales. Unit production costs in the first quarter rose by $13 per tonne to $56 per tonne compared with a year ago, partly due to the effect of the lower production and higher costs incurred in the quarter. With stronger demand and improved logistics chain performance, we continue to expect that our unit costs for the second quarter will fall within our previously announced guidance range of $47 to $51 per tonne.
The table below summarizes the year-over-year gross profit changes, before depreciation and amortization, in our steelmaking coal business unit for the quarter:
Property, plant and equipment expenditures totaled $51 million in the first quarter, of which $41 million was spent on sustaining capital. Capitalized stripping costs were $106 million in the first quarter compared with $95 million a year ago.
Markets
We experienced weak sales in January and February as customers had advanced purchases in the fourth quarter of 2016 in anticipation of supply constraints and were drawing down on those inventories during the first quarter of 2017. Sales volumes improved in March, with sales reaching 5.9 million tonnes in the quarter. Just before the end of the quarter, Cyclone Debbie made landfall in Queensland, the steelmaking coal producing region of Australia. The cyclone caused significant damage to critical rail infrastructure resulting in major suppliers in the region declaring force majeure. The disruption pushed spot pricing for the highest grade hard coking coal products above US$300 per tonne for the fourth time since 2008.
The quarterly benchmark price for steelmaking coal for the second quarter of 2017 has yet to be agreed due to the impact of Cyclone Debbie on Australian supply. Deliveries to our quarterly priced customers are continuing in accordance with contractual commitments. Additional sales priced on a spot basis will reflect market conditions as sales are concluded.
Operations
Logistics constraints resulted in reduced steelmaking coal production as mine site clean coal stockpiles reached maximum capacity early in the quarter. Plants were forced to idle as port and rail facilities struggled to provide adequate service. The mines continued to operate through this period although challenging winter weather conditions in southern British Columbia impacted our ability to move planned waste volumes. Higher usage and higher prices for key inputs, both of which were anticipated, resulted in increased total site costs. The higher total costs and lower production resulted in higher unit costs.
Recent performance improvements from our logistics providers and strong sales have resulted in mine site inventories beginning to decrease, restoring required operational flexibility back to the sites. Ultimately, achieving our planned production and sales will depend upon the performance of the rail transportation network and port dumping and loading facilities, which has improved substantially in recent weeks.
Cost of Sales
Operating costs in the first quarter of 2017 rose by $38 million compared with a year ago as we increased spending for contractors and repair parts in order to maximize production. Further, diesel prices, a key input cost, increased nearly 40%. All these factors were anticipated when we set our 2017 guidance. However, the shortfall in clean coal production due to logistics constraints affected our unit costs in the quarter. In combination, these factors resulted in a $13 per tonne increase in site unit cost of sales to $56 per tonne from $43 per tonne a year ago, which was also $6 per tonne above the top of our guidance range. Of the $13 per tonne increase, lower production accounted for $7 per tonne and the remainder related to cost increases in usage and/or price of inputs, which we accounted for in our 2017 guidance.
The tables below report the components of our unit costs in Canadian and equivalent U.S. dollars.
Our total cost of sales for the quarter also included a $13 per tonne charge for the amortization of capitalized stripping costs and $12 per tonne for other depreciation.
Outlook
We are expecting coal sales in the second quarter of 2017 to be at least 6.8 million tonnes. Vessel nominations for quarterly contract shipments are determined by customers and final sales and average prices for the quarter will depend on product mix, market direction for spot priced sales, timely arrival of vessels, as well as the performance of the rail transportation network and port-loading facilities.
COPPER BUSINESS UNIT
Performance
Gross profit from our copper business unit was $43 million compared with $59 million a year ago. Gross profit before depreciation and amortization increased by $15 million in the first quarter compared with a year ago (see table below). This was primarily due to higher realized prices, offset by lower sales volumes and associated higher unit costs. Depreciation and amortization charges rose by $31 million from a year ago primarily related to the effect of our decision to shorten the mine life at Quebrada Blanca.
Copper production declined by 22% from a year ago primarily due to reduced production at Highland Valley Copper as a result of lower ore grades as anticipated in the mine plan and weather impacts in the first quarter. Due to the lower production, our cash unit costs after by-products increased 20% to US$1.55 per pound compared to the same period a year ago. Production was expected to be lower in the first half of 2017, and is anticipated to gradually improve as the year progresses.
The table below summarizes the changes in gross profit, before depreciation and amortization, in our copper business unit for the quarter:
Property, plant and equipment expenditures totaled $44 million, including $19 million for sustaining capital and $22 million for new mine development related to the Quebrada Blanca Phase 2 project. Capitalized stripping costs were $37 million in the first quarter, $12 million lower than a year ago.
Markets
London Metal Exchange (LME) copper prices averaged US$2.65 per pound in the first quarter of 2017, up 10.5% from the fourth quarter of 2016 and up 25% compared with the first quarter of 2016. Copper prices had been on a downtrend since February 2011, one of the longest recorded downtrends in the copper price. Despite the recent uptick of copper prices, current price averages remain below the long-term inflation adjusted price for copper and below what several analysts believe to be the incentive price required to bring significant new mine production to the market.
Total reported exchange stocks rose 160,000 tonnes during the first quarter to 730,000 tonnes. Total reported global copper exchange stocks are now estimated to be 11.3 days of global consumption, just below the estimated 25 year average of 11.9 days of global consumption.
Copper consumption remains well supported across most regions, however, cathode demand has been negatively affected by an increase in copper scrap availability due to the increased copper price. Chinese demand growth is now projected by Wood Mackenzie to rise 2.2% in 2017. In the Chinese government''s next Five Year Plan, there is a spending focus on infrastructure and the environment and it is estimated by the International Copper Association to increase copper demand by almost 500,000 tonnes per year over the previous Five Year Plan. Wood Mackenzie is forecasting global growth in demand in 2017 at 1.8% compared to 2% in 2016.
Mine production disruptions were again a factor in the market in the first quarter with several large mines facing unplanned interruptions. Longer term, the lack of investments made over the past six years due to the downtrend in copper prices is expected to constrain new mine production growth to the end of this decade.
Operations
Highland Valley Copper
Copper production was significantly reduced in the first quarter at 16,400 tonnes, or 47% lower than a year ago. This was primarily due to lower grades and recoveries as a higher grade phase of the Valley pit was exhausted in 2016 and significantly more lower grade ore from the Lornex pit was processed than in the same period last year. Mill throughput was 9% higher, which partially offset the grade decline. As previously disclosed, ore grades and recoveries are expected to remain lower than in prior years, but are anticipated to gradually improve as the year progresses. Molybdenum production of 1.6 million pounds was 77% higher than a year ago due to higher grades.
Operating costs, before a $7 million inventory writedown, were $117 million in the first quarter, similar to a year ago. However, unit costs rose substantially as a result of the effect of lower production levels.
Our labour agreement at Highland Valley Copper expired at the end of the third quarter of 2016.
Antamina
Copper production in the first quarter of 89,700 tonnes decreased by 18% compared with a year ago, primarily as a result of lower grades as expected in the mine plan. The mix of mill feed in the quarter was 67% copper-only ore and 33% copper-zinc ore, with 19% more copper-zinc ore processed compared to a year ago. Zinc production of 72,600 tonnes in the first quarter was 30,800 tonnes, or 74% higher than in the same period a year ago, primarily due to significantly higher grades combined with higher recoveries.
Operating costs expensed in the first quarter were 21% higher than a year ago, primarily due to higher copper and zinc sales volumes.
The site was well prepared for the major floods and mud slides that affected Peru during the month of March, with no long term impacts to production expected in 2017.
Carmen de Andacollo
Copper production in the first quarter was 20,400 tonnes, 15% higher than a year ago, primarily as a result of improved grades and a 2.5% increase in mill throughput.
Operating costs declined by US$5 million in the first quarter compared with a year ago, reflecting our continued focus on cost reduction.
Quebrada Blanca
As previously announced in February 2017, the crushing, agglomeration and stacking circuits were halted and all supergene ore mined is now being sent directly to the dump leach circuit resulting in lower site costs, but also less recovery and a longer leaching cycle. Copper production in the first quarter decreased by 22% compared with a year ago to 6,900 tonnes. This is primarily as a result of the change to dump leach-only operation as well as declining grades, consistent with our mine plan.
Operating costs in the first quarter were US$2 million higher than a year ago, primarily as a result of one-time charges related to the significant workforce reduction in connection with the change to dump leach only operation and early settlement of two of three existing labour agreements. Excluding the one-time charges, operating costs declined by US$3 million.
Depreciation and amortization charges increased by $27 million in the first quarter compared with a year ago as a result of the shortened mine life resulting from the change in the mine plan.
Cost of Sales
Unit cash costs of product sold in the first quarter of 2017 as reported in U.S. dollars, before cash margins for by-products, were US$1.86 per pound compared to US$1.38 per pound in the same period a year ago. The higher unit costs were primarily the result of the significant decline in production at Highland Valley Copper as a result of mining lower grade material, and a decline in U.S. dollar exchange rates.
Cash margin for by-products increased significantly to US$0.31 per pound compared with US$0.09 per pound in the same period a year ago. This was primarily due to higher prices as well as significantly higher sales volumes of zinc from Antamina. The higher by-product credits partially offset the significantly lower copper production in the quarter resulting in unit cash costs for copper, after by-products, of US$1.55 per pound compared to US$1.29 in the same period a year ago.
Copper Development Projects
Quebrada Blanca Phase 2
Project activities during the quarter focused primarily on advancing the Social and Environmental Impact Assessment (SEIA) for part of the regulatory approval process, which is progressing well and as expected. An updated feasibility study, including capital and operating cost estimates and revised reserve and resource estimates for the project, was completed during the quarter as previously announced.
Quebrada Blanca Phase 2 is expected to have an annual production capacity of 300,000 tonnes of copper equivalent production per year for the first five years of mine life, equating to a capital intensity of approximately US$16,000 per annual tonne. A decision to proceed with development would be contingent upon regulatory approvals and market conditions, among other considerations. Given the timeline of the regulatory process, such a decision is not expected before mid-2018.
NuevaUnion
Activities continued to advance the pre-feasibility study in the quarter, including environmental baseline studies and ongoing community engagement with indigenous and non-indigenous communities. Camp refurbishment was completed in early April at the La Fortuna deposit to support our technical drilling campaign which has now commenced. We expect to complete the pre-feasibility study during the fourth quarter of 2017.
Other Copper Projects
In January 2017, we increased our ownership of Compania Minera Zafranal S.A.C. to 80% through an acquisition of all of the outstanding shares of AQM Copper Inc. not already owned by us. Additional drilling and a feasibility study are planned to start in the second quarter of 2017 along with additional community engagement activities, environmental and archaeological studies, and permitting work necessary to prepare and submit an Environmental Impact Assessment.
In March 2017, we launched our Project Satellite initiative, the focus of which is to surface value from five substantial base metals assets - Zafranal, San Nicolas, Galore Creek, Schaft Creek, and Mesaba, all of which are located in stable mining-friendly jurisdictions in the Americas. Our approach is to work with existing and potentially new partners on appropriate and prudently-funded work to advance engineering and design as well as social and environmental activities. Value capture could be achieved through various commercial or development options, including full divestment, further investment by Teck, partnering, vend-in or public offering.
Outlook
We continue to expect 2017 copper production to be in the range of 275,000 to 290,000 tonnes and full year copper unit costs to be in the range of US$1.75 to US$1.85 per pound before margins from by-products and US$1.40 to US$1.50 per pound after by-products.
Full year molybdenum production at Highland Valley Copper is now expected to be lower than previous guidance due to lower than expected ore grades, in the range of 6.0 to 6.5 million pounds contained in concentrate.
ZINC BUSINESS UNIT
Performance
Gross profit from our zinc business unit was $164 million in the first quarter compared with $90 million a year ago. Gross profit before depreciation and amortization increased by $80 million due primarily to higher zinc prices, partially offset by higher unit operating costs and royalty expense at Red Dog.
Refined zinc production from our Trail Operations in the first quarter was similar to the same period a year ago. At Red Dog, zinc production was 23% lower than a year ago primarily due to lower zinc grade, as well as reduced mill throughput and lower recovery.
The table below summarizes the gross profit change, before depreciation and amortization, in our zinc business unit for the quarter.
Property, plant and equipment expenditures include $23 million for sustaining capital, which included $16 million at Trail Operations and $3 million at Red Dog.
Markets
LME zinc prices averaged US$1.26 per pound in the first quarter of 2017, an increase of 10% from last quarter and up 66% from the first quarter a year ago. This is the highest quarterly average for zinc in ten years.
Total reported zinc exchange stocks fell 25,700 tonnes during the quarter to 555,000 tonnes, total exchange stocks are down 155,160 tonnes over the same period last year. Total global reported exchange stocks are estimated at 14.5 days of global consumption, below the 25 year average of 23.5 days. Excess zinc stocks also continue to be drawn down from non-LME warehouses.
Global demand for refined zinc improved in the first quarter of 2017, with galvanized steel production up 4.6% over the same quarter last year according to CRU. In China, CRU estimates that galvanized steel production rose 12% in the first quarter compared with the same period last year. In North America, steel service center inventories are currently below historical average levels and prices for galvanized sheet in North America remains strong at near three year highs. This is in part due to a reduction in the imports of galvanized sheet into the U.S., but also to a pickup in demand from the construction and automotive sectors.
Wood Mackenzie is forecasting an increase in global refined zinc demand in 2017 of 2.1% to 14.6 million tonnes, and that refined zinc production will be limited to a 3% increase, to 14.1 million tonnes, leaving the market in a deficit. With mine production not keeping pace with smelter capacity growth, refined zinc production will again be limited by lack of concentrates, and treatment charges have dropped to historically low levels. As a consequence of the limited availability last year, concentrate stocks were drawn down to critical levels in China and the tightness is now impacting refined production. We remain of the view that zinc prices will remain strong in the short and medium-term.
It has been reported that annual zinc concentrate treatment charges for 2017 have been agreed to at US$172 per tonne, without any price participation. This would be a reduction of approximately US$100 per tonne from current treatment charges and sets them at the lowest level ever relative to the current metal price.
Operations
Red Dog
Mill throughput in the first quarter was 6% lower than a year ago primarily due to poor weather conditions and downtime due to electrical equipment failures. The lower mill throughput combined with significantly lower grade and reduced mill recovery resulted in zinc production declining to 120,500 tonnes compared to 157,100 tonnes in the same period last year. Lead production declined 11% compared to last year as lower mill throughput and recoveries were partially offset by higher lead grade.
During the quarter, ore from the higher-grade Qanaiyaq pit was introduced to supplement declining grade ore from the Aqqaluk pit as planned, however, mill performance was adversely affected as these ores are metallurgically complex, particularly in the early stages of pit development where ores are highly oxidized. For the remainder of 2017, less Qanaiyaq ore will be added to the mill feed mix than originally planned in order to help improve recoveries and concentrate grades. Qanaiyaq ore is expected to become less oxidized as the pit is deepened, with higher percentages of this higher grade material being added in future years. Qanaiyaq ore has significantly higher grade than the Aqqaluk ore and is planned to be a supplemental feed source for the next 10 years, representing about 15% to 20% of the planned feed mix.
Zinc sales of 105,500 tonnes were slightly ahead of our guidance for the first quarter as smelters continued to accelerate the treatment of inventory due to the general tightness in the global concentrate market. This tightness is reflected in spot treatment charges, which continue to be significantly below annual contract terms. Offsite zinc inventory available for sale as of April 1, 2017 totals 112,000 tonnes of contained metal. Zinc sales volumes in the second quarter of 2017 are estimated to be approximately 80,000 tonnes of contained metal.
Operating costs in the first quarter were US$3 million higher than a year ago due primarily to less stripping costs being capitalized. Capitalized stripping costs were US$7 million in the first quarter compared with US$11 million a year ago due to reduced waste movement as a result of poor winter weather conditions.
Ongoing challenges in treating the higher grade but complex Qanaiyaq ores in the first quarter required a reduction in the amount of the Qanaiyaq ores treated. This adversely affected recoveries and, combined with unplanned downtime in the first quarter, resulted in our revised annual zinc production guidance. Red Dog''s production of contained metal in 2017 is now expected to be in the range of 475,000 to 500,000 tonnes of zinc. We continue to expect 110,000 to 115,000 tonnes of lead metal contained in concentrate for the full year.
A payment in lieu of taxes (PILT) agreement between Teck Alaska and the North West Arctic Borough (the Borough) expired December 31, 2015. Early in 2017, Teck Alaska and the Borough agreed on the terms of a new 10-year PILT agreement. Under the terms contemplated, PILT payments to the Borough, based on the assessed property value of the mine, would increase by approximately US$4 million to between US$14 million and US$18 million per year. In addition, Teck Alaska would make annual payments based on mine profitability to a separate fund aimed at social investment in villages in the region of between US$4 million and US$8 million per year, with US$11 million invested in the first year. This agreement is subject to approvals by the Borough, which are currently progressing, and will not be effective until a definitive PILT agreement and related documents are settled.
Trail Operations
Refined zinc production of 78,200 tonnes in the first quarter was comparable to the same period a year ago as higher feed rates were offset by increases in in-process inventories. Refined lead production was 10% lower than a year ago due to lower lead inputs in the feed mix.
Operating costs in the first quarter of $100 million were $8 million higher than a year ago, primarily as a result of increased energy prices and repair expenses.
Sustaining capital expenditures in the quarter included $9 million for advancing the Number 2 Acid Plant and $7 million for various other small projects.
Pend Oreille
Zinc production during the first quarter of 9,100 tonnes was 10% higher than a year ago due to higher grades and improved recovery.
The current mine plan sustains the operation through to early 2018, although there is still significant potential to extend the mine life. In 2016, we identified highly prospective areas in the currently producing East Mine area and we are continuing a major exploration and drilling program with good success so far.
Outlook
We now expect zinc in concentrate production in 2017, including co-product zinc production from our copper business unit, to be in the range of 590,000 to 615,000 tonnes as a result of lower production at Red Dog.
ENERGY BUSINESS UNIT
Fort Hills Project
Construction of the Fort Hills oil sands project has surpassed 83% completion, with three of the six major project areas (mining, ore preparation plant and infrastructure) turned over to operations. On April 15, 2017, primary extraction became the fourth major area turned over to operations. The remaining construction focus is on utilities and secondary extraction. Shovels, trucks and support mining equipment are mobilizing for operations. At the end of the first quarter, over 60% of operations personnel have been hired.
In the first quarter, our share of capital expenditures was $203 million. Our share of Fort Hills annual 2017 cash expenditures is estimated at $640 million.
Oil production from the first of three secondary extraction units is still expected by the end of 2017. The other two secondary extraction units are scheduled to be completed and commissioned in the first half of 2018, and production is expected to reach 90% of nameplate capacity by the end of 2018. Suncor, as the operator of the Fort Hills project, is also exploring the opportunity to reduce the ramp-up period.
The Fort Hills partners have executed long-term blend service and pipeline transportation agreements for the delivery of diluent from Edmonton to Fort Hills and blended bitumen to Hardisty from Fort Hills. Construction activities for the regional bitumen, diluent and blend pipelines and the East Tank Farm blending facility are nearing completion and will be in service prior to mine start-up.
Each Fort Hills partner will be responsible to meet its diluent blend requirements and to transport and sell its share of diluted bitumen to the market. The development of our comprehensive diluent acquisition and blended bitumen sales strategies is ongoing and we continue to review options to sell diluted bitumen into the North American and overseas markets.
Fort Hills blended bitumen is anticipated to have similar quality characteristics as production recently introduced into the marketplace from other large-scale oil sands mining projects. Our share of Fort Hills production will be marketed through a combination of long and short-term contracts. To this end, we are currently reviewing draft contract provisions with prospective customers. In support of our diverse market access strategy, we have contracted for 425,000 barrels of terminal storage at Hardisty. We will provide an update to our marketing plans mid-2017.
Frontier Energy Project
The regulatory application review of Frontier is continuing with a federal-provincial panel reviewing information filed to date. The regulatory review process is expected to continue through 2017, making 2018 the earliest a federal decision statement is expected for Frontier. Our expenditures on Frontier are limited to supporting this process. We are evaluating the future project schedule and development options as part of our ongoing capital review and prioritization process.
Wintering Hills Wind Power Facility
The previously announced sale of our 49% interest in the Wintering Hills Wind Power Facility to IKEA Canada for $58.6 million closed on March 1, 2017.
OTHER OPERATING INCOME AND EXPENSES
Other operating income, net of other expense, was $12 million in the first quarter compared with $10 million a year ago. The most significant of these items were positive pricing adjustments of $38 million and $46 million of commodity derivative gains. The commodity derivative gains result from our short-term zinc and lead positions and from derivatives embedded in our gold and silver streaming agreements. This compares with $27 million of positive pricing adjustments and $35 million of commodity derivative gains last year.
The table below outlines our outstanding receivable positions, provisionally valued at March 31, 2017 and December 31, 2016.
Our finance expense of $79 million in the first quarter decreased by $17 million from a year ago. Our finance expense includes the interest expense on our debt, finance fees and amortization, interest components of our pension obligations and accretion on our decommissioning and restoration provisions, less any interest that we capitalize against our development projects. Although we have reduced our debt balances from a year ago, our debt interest expense remained similar to a year ago as the debt we have issued over the past 18 months yields a higher effective interest rate than the debt we extinguished. The primary reason for the decrease in our finance expense was due to a higher amount of interest capitalized against our development projects, mainly Fort Hills and Quebrada Blanca Phase 2, reflecting our increased investment and carrying values of both of these projects compared with a year ago.
Non-operating expenses in the first quarter of 2017 totaled $145 million, which included a $178 million loss on the repurchase of our debt partly offset by foreign exchange gains of $12 million and a $21 million gain on the revaluation of our call options on certain long-term debt notes as our credit spread declined in the quarter. In the first quarter last year, we recorded non-operating income of $90 million primarily related to foreign exchange gains.
Income and resource taxes for the first quarter were $345 million, or 37% of pre-tax profits. This rate is higher than the Canadian statutory rate of 26% as a result of resource taxes, higher rates in foreign jurisdictions, and a lower tax recovery rate in respect of the loss on debt repurchases. Due to available tax pools, we are currently shielded from cash income taxes, but not resource taxes, in Canada. We remain subject to cash taxes in foreign jurisdictions.
FINANCIAL POSITION AND LIQUIDITY
Our financial position and liquidity remains strong. Our debt position, net debt, and credit ratios are summarized in the table below:
In the first quarter of 2017, we retired US$1.0 billion of our term notes pursuant to cash tender offers. As a result, the principal balance of our public notes is now US$5.1 billion. At March 31, 2017 our debt to debt-plus-equity ratio was 27%.
Our committed credit facilities are our US$3.0 billion revolving credit facility maturing July 2020 and our US$1.2 billion revolving credit facility maturing June 2019.
As at March 31, 2017, there were no amounts outstanding under the US$3.0 billion facility and US$910 million of letters of credit were outstanding under the US$1.2 billion facility. Of those letters of credit, an aggregate of US$672 million were issued in respect of long-term power purchase agreements for the Quebrada Blanca Phase 2 project and $167 million in respect of long-term transport service agreements for our share of the Fort Hills project. The remainder relates to reclamation obligations for our Red Dog mine.
We also have various other credit facilities and arrangements that secure our reclamation obligations in the amount of approximately $1.9 billion.
We may be required to post additional security in respect of reclamation at our sites in future periods as regulatory requirements change and closure plans are updated.
Operating Cash Flow
Cash flow from operations was $1.3 billion in the first quarter compared with $373 million a year ago with the increase primarily due to substantially higher steelmaking coal prices.
Investing Activities
Expenditures on property, plant and equipment were $356 million in the first quarter, including $203 million of new mine development for the Fort Hills oil sands project, $94 million on sustaining capital and $11 million on major enhancement projects. The largest components of sustaining expenditures were $41 million at our steelmaking coal operations, $16 million at our Trail Operations and $10 million each at Antamina and Fort Hills. Included in new mine development was our $17 million land acquisition of the Teena/Reward zinc property.
Capitalized production stripping costs were $152 million in the first quarter compared with $159 million a year ago. The majority of this item represents the advancement of pits for future production at our steelmaking coal mines.
The table below summarizes our year-to-date capital spending for 2017:
Financing Activities
In March we purchased US$1.0 billion aggregate principal of our outstanding notes for a total cost of CAD$1.45 billion, funded from cash on hand. We also repaid US$34 million of notes that matured in January. Our debt maturities are set out in Note 5 to our interim financial statements and show that debt maturing before 2021 has been reduced to US$122 million.
Debt interest and finance charges paid were $176 million in the first quarter compared with $209 million a year ago.
OUTLOOK
Prices for our key commodities have recently improved and are contributing additional revenue and cash flows. At the end of March, Cyclone Debbie damaged rail infrastructure in Queensland, the steelmaking coal region in Australia and one of the world''s main sources for this raw material. These supply disruptions have pushed spot prices for highest grade products above US$300 per tonne for the fourth time since 2008. Reports indicate that three of the rail lines which were closed by the cyclone restarted operations during the week of April 10, and the rail line which transports the majority of the highest grade products is expected to restart in late April. A long queue of vessels has formed at the ports, creating a backlog which will require time to normalize. We expect that steelmaking coal prices will correct once supply returns. In addition, contributing to the volatility in steelmaking coal prices were changes in the Chinese government''s working day policy for coal mines. Future changes in that policy, or other Chinese government action, may have a significant positive or negative effect on steelmaking coal prices. Commodity markets have historically been volatile and prices can change rapidly, which we have seen recently with the sharp rise and fall in steelmaking coal prices since the third quarter of 2016, and customers can alter shipment plans. This volatility can have a substantial effect on our business.
Foreign Exchange and Debt Revaluation
The sales of our products are denominated in U.S. dollars, while a significant portion of our expenses are incurred in local currencies, particularly the Canadian dollar and the Chilean peso. Foreign exchange fluctuations can have a significant effect on our operating margins, unless such fluctuations are offset by related changes to commodity prices.
Our U.S. dollar denominated debt is subject to revaluation based on changes in the Canadian/U.S. dollar exchange rate. As at March 31, 2017, $4.8 billion of our U.S. dollar denominated debt is designated as a hedge against our foreign operations that have a U.S. dollar functional currency. As a result, any foreign exchange gains or losses arising on that amount of our U.S. dollar debt are recorded in other comprehensive income, with the remainder being charged to profit.
FINANCIAL INSTRUMENTS AND DERIVATIVES
We hold a number of financial instruments and derivatives which are recorded on our balance sheet at fair value with gains and losses in each period included in other comprehensive income and profit for the period as appropriate. The most significant of these instruments are marketable securities, metal-related forward contracts including those embedded in our silver and gold streaming agreements, and settlements receivable and payable, and prepayment rights on certain long-term debt notes. Some of our gains and losses on metal-related financial instruments are affected by smelter price participation and are taken into account in determining royalties and other expenses. All are subject to varying rates of taxation depending on their nature and jurisdiction.
QUARTERLY PROFIT AND CASH FLOW
ADOPTION OF NEW ACCOUNTING STANDARDS AND ACCOUNTING DEVELOPMENTS
New IFRS pronouncements that have been issued but are not yet effective are listed below. We plan to apply the new standards or interpretations in the annual period for which they are first required.
Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (IFRS 15) as a result of a joint revenue project with the Financial Accounting Standards Board (FASB).
The new revenue standard introduces a single principles-based five-step model for the recognition of revenue when control of goods is transferred to, or a service is performed, for the customer. The five steps are to: identify the contract(s) with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price, and recognize revenue when the performance obligation is satisfied. IFRS 15 also requires enhanced disclosures about revenue to help investors better understand the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.
The standard initially had an effective date of January 1, 2017 but was subsequently deferred by one year to January 1, 2018. Early application of IFRS 15 is still permitted. We are currently assessing the effect of this standard on our financial statements. As at March 31, 2017, we have completed initial information gathering and scoping of the project. We have commenced our analysis of this information to determine what, if any, effect IFRS 15 will have on our financial statements.
Financial Instruments
IFRS 9, Financial Instruments (IFRS 9), addresses the classification, measurement and recognition of financial assets and financial liabilities. The July 2014 publication of IFRS 9 is the completed version of the standard, replacing earlier versions of IFRS 9 and superseding the guidance relating to the classification and measurement of financial instruments in IAS 39, Financial Instruments: Recognition and Measurement (IAS 39).
IFRS 9 requires financial assets to be classified into three measurement categories on initial recognition: those measured at fair value through profit and loss, those measured at fair value through other comprehensive income and those measured at amortized cost. Investments in equity instruments are required to be measured by default at fair value through profit or loss. However, there is an irrevocable option for each equity instrument to present fair value changes in other comprehensive income. Measurement and classification of financial assets is dependent on the entity''s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change relating to an entity''s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch.
IFRS 9 introduces a new three-stage expected credit loss model for calculating impairment for financial assets. IFRS 9 no longer requires a triggering event to have occurred before credit losses are recognized. An entity is required to recognize expected credit losses when financial instruments are initially recognized and to update the amount of expected credit losses recognized at each reporting date to reflect changes in the credit risk of the financial instruments. In addition, IFRS 9 requires additional disclosure requirements about expected credit losses and credit risk.
The new hedge accounting model in IFRS 9 aligns hedge accounting with risk management activities undertaken by an entity. Components of both financial and non-financial items will now be eligible for hedge accounting, as long as the risk component can be identified and measured. The hedge accounting model includes eligibility criteria that must be met, but these criteria are based on an economic assessment of the strength of the hedging relationship. New disclosure requirements relating to hedge accounting will be required and are meant to simplify existing disclosures. The IASB currently has a separate project on macro hedging activities and until the project is completed, the IASB has provided a policy choice for entities to either apply the hedge accounting model in IFRS 9 or IAS 39 in full. Additionally, there is a hybrid option to use IAS 39 to account for macro hedges only and to use IFRS 9 for all other hedges.
The completed version of IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. We are currently assessing the effect of this standard and its related amendments on our financial statements. As at March 31, 2017, we have completed initial scoping of the project and will commence information gathering and analysis in the second quarter to determine what, if any, effect IFRS 9 will have on our financial statements.
OUTSTANDING SHARE DATA
Subsequent to quarter end, approximately 1.6 million Class A common shares were tendered for conversion into the same number of Class B subordinate shares pursuant to the conversion right in the share conditions. As at April 24, 2017 there were 569.9 million Class B subordinate voting shares and 7.8 million Class A common shares outstanding. In addition, there were approximately 24 million stock options outstanding with exercise prices ranging between $4.15 and $58.80 per share. More information on these instruments and the terms of their conversion is set out in Note 21 of our 2016 audited financial statements.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. There have been no significant changes in our internal controls during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
SIGNIFICANT ACCOUNTING ESTIMATES
In preparing consolidated financial statements, management makes estimates that affect the reported amounts of assets, liabilities, revenue and expenses across all reportable segments. Management makes estimates that are believed to be reasonable under the circumstances. Our estimates are based on historical experience and other factors we consider to be reasonable, including expectations of future events. Critical accounting estimates are those that could affect the consolidated financial statements materially, are highly uncertain and where changes are reasonably likely to occur from period to period. Our critical accounting estimates that have a risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next year include the recoverable amounts of long-lived assets, fair value of embedded derivatives associated with streaming transactions, estimated recoverable reserves and resources and the valuation of other assets and liabilities such as decommissioning and restoration provisions and the accounting for income taxes. These critical accounting estimates are consistent with those outlined in more detail in our 2016 annual consolidated financial statements and Management''s Discussion and Analysis.
REVENUES AND GROSS PROFIT
Our revenue and gross profit by business unit are summarized in the tables below:
COST OF SALES SUMMARY
Our cost of sales information by business unit is summarized in the tables below:
CAPITALIZED STRIPPING COSTS
PRODUCTION AND SALES STATISTICS
Production statistics for each of our operations are presented in the tables below. Operating results are on a 100% basis.
USE OF NON-GAAP FINANCIAL MEASURES
Our financial results are prepared in accordance with International Financial Reporting Standards (IFRS). This document refers to adjusted profit, adjusted earnings per share, EBITDA, adjusted EBITDA, gross profit before depreciation and amortization, gross profit margins before depreciation, cash unit costs, adjusted cash costs of sales, cash margins for by-products, adjusted revenue, net debt, debt to debt-plus-equity ratio, and the net debt to net debt-plus-equity ratio, which are not measures recognized under IFRS in Canada and do not have a standardized meaning prescribed by IFRS or Generally Accepted Accounting Principles (GAAP) in the United States.
For adjusted profit, we adjust profit attributable to shareholders as reported to remove the effect (after taxes) of certain types of transactions that in our judgment are not indicative of our normal operating activities or do not necessarily occur on a regular basis. EBITDA is profit attributable to shareholders before net finance expense, income and resource taxes, and depreciation and amortization. Adjusted EBITDA is EBITDA before the pre-tax effect of the adjustments that we make to profit attributable to shareholders described above. These adjustments to profit attributable to shareholders and EBITDA highlight items and allow us and readers to analyze the rest of our results more clearly. We believe that disclosing these measures assist readers in understanding the ongoing cash generating potential of our business in order to provide liquidity to fund working capital needs, service outstanding debt, fund future capital expenditures and investment opportunities, and pay dividends.
Gross profit before depreciation and amortization is gross profit with the depreciation and amortization expense added back. Gross profit margins before depreciation are gross profit before depreciation and amortization, divided by revenue for each respective business unit.
Unit costs are calculated by dividing the cost of sales for the principal product by sales volumes. We include this information as it is frequently requested by investors and investment analysts who use it to assess our cost structure and margins and compare it to similar information provided by many companies in our industry.
We sell both copper concentrates and refined copper cathodes. The price for concentrates sold to smelters is based on average London Metal Exchange prices over a defined quotational period, from which processing and refining deductions are made. In addition, we are paid for an agreed percentage of the copper contained in concentrates, which constitutes payable pounds. Adjusted revenue excludes the revenue from co-products and by-products, but adds back the processing and refining allowances to arrive at the value of the underlying payable pounds of copper. Readers may compare this on a per unit basis with the price of copper on the LME.
Adjusted cash cost of sales for our steelmaking coal operations is defined as the cost of the product as it leaves the mine excluding depreciation and amortization charges. Adjusted cash cost of sales for our copper operations is defined as the cost of the product delivered to the port of shipment, excluding depreciation and amortization charges. It is common practice in the industry to exclude depreciation and amortization as these costs are ''non-cash'' and discounted cash flow valuation models used in the industry substitute expectations of future capital spending for these amounts. In order to arrive at adjusted cash costs of sales for copper we also deduct the costs of by-products and co-products. Total cash unit costs include the smelter and refining allowances added back in determining adjusted revenue. This presentation allows a comparison of unit costs, including smelter allowances, to the underlying price of copper in order to assess the margin. Unit costs, after deducting co-product and by-product margins, are also a common industry measure. By deducting the co- and by-product margin per unit of the principal product, the margin for the mine on a per unit basis may be presented in a single metric for comparison to other operations. Readers should be aware that this metric, by excluding certain items and reclassifying cost and revenue items, distorts our actual production costs as determined under GAAP.
Net debt is total debt less cash and cash equivalents. The debt to debt-plus-equity ratio takes total debt as reported and divides that by the sum of total debt plus total equity. The net debt to net debt-plus-equity ratio is net debt divided by the sum of net debt plus total equity, expressed as a percentage. These measures are disclosed as we believe they provide readers with information that allows them to assess our credit capacity and the ability to meet our short and long-term financial obligations.
The measures described above do not have standardized meanings under IFRS, may differ from those used by other issuers, and may not be comparable to such measures as reported by others. These measures have been derived from our financial statements and applied on a consistent basis as appropriate. We disclose these measures because we believe they assist readers in understanding the results of our operations and financial position and are meant to provide further information about our financial results to investors. These measures should not be considered in isolation or used in substitute for other measures of performance prepared in accordance with IFRS.
Reconciliation of Earnings per share to Adjusted Earnings per share
Reconciliation of EBITDA and Adjusted EBITDA
Reconciliation of Gross Profit Before Depreciation and Amortization
Steelmaking Coal Unit Cost Reconciliation
Copper Unit Cost Reconciliation
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
This news release contains certain forward-looking information and forward-looking statements as defined in applicable securities laws (collectively referred to in this news release as "forward-looking statements"). All statements other than statements of historical fact are forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Teck to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These forward-looking statements, including under the headings "Outlook," that appear in this release, include estimates, forecasts, and statements as to management''s expectations with respect to, among other things, anticipated cost and production forecasts at our business units and individual operations and expectation that we will meet our production guidance, sales volume and selling prices for our products (including settlement of steelmaking coal contracts with customers), our expectation of improved coal logistics chain performance and demand and coal per unit costs, capital expenditure guidance, plans and expectations for our development projects, the targeted capital cost and mine life of Quebrada Blanca Phase 2, expected production, production capacity of Quebrada Blanca Phase 2, and the estimated key project operating parameters and project economics of that project, expectation that grades at Highland Valley Copper will improve, the potential to extend the Pend Oreille mine life beyond early 2018, the expected amount that PILT payments would increase by if the Borough approves the arrangement with Teck Alaska, the impact of currency exchange rates, the expected timing and amount of production at the Fort Hills oil sands project, total Fort Hills project capital costs, the expected amount and timing of Teck''s share of costs, the timing of completion and commissioning of the secondary extraction units, the expected average production rate and timing of achieving 90% of the expected production rate and demand and market outlook for commodities. These forward-looking statements involve numerous assumptions, risks and uncertainties and actual results may vary materially.
These statements are based on a number of assumptions, including, but not limited to, assumptions regarding general business and economic conditions, the supply and demand for, deliveries of, and the level and volatility of prices of, zinc, copper and steelmaking coal and other primary metals and minerals as well as oil, and related products, the timing of the receipt of regulatory and governmental approvals for our development projects and other operations, our costs of production and production and productivity levels, as well as those of our competitors, power prices, continuing availability of water and power resources for our operations, market competition, the accuracy of our reserve estimates (including with respect to size, grade and recoverability) and the geological, operational and price assumptions on which these are based, conditions in financial markets, the future financial performance of the company, our ability to attract and retain skilled staff, our ability to procure equipment and operating supplies, positive results from the studies on our expansion projects, our steelmaking coal and other product inventories, our ability to secure adequate transportation for our products, our ability to obtain permits for our operations and expansions, our ongoing relations with our employees and business partners and joint venturers. Assumptions regarding Quebrada Blanca Phase 2 are based on current project assumptions and the final feasibility study. Assumptions regarding Fort Hills are based on the approved project development plan, as revised including by the updated schedule and project cost projections and the assumption that the project will be developed and operated in accordance with that plan, assumptions regarding the performance of the plant and other facilities at Fort Hills and the operation of the project. Assumptions regarding the impact of foreign exchange are based on current commodity prices. The foregoing list of assumptions is not exhaustive. Events or circumstances could cause actual results to vary materially.
Factors that may cause actual results to vary materially include, but are not limited to, changes in commodity and power prices, changes in market demand for our products, changes in interest and currency exchange rates, acts of foreign governments and the outcome of legal proceedings, inaccurate geological and metallurgical assumptions (including with respect to the size, grade and recoverability of mineral reserves and resources), unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications or expectations, cost escalation, unavailability of materials and equipment, government action or delays in the receipt of government approvals, industrial disturbances or other job action, adverse weather conditions and unanticipated events related to health, safety and environmental matters), union labour disputes, political risk, social unrest, failure of customers or counterparties (including logistics suppliers) to perform their contractual obligations, changes in our credit ratings, unanticipated increases in costs to construct our development projects, difficulty in obtaining permits, inability to address concerns regarding permits of environmental impact assessments, and changes or further deterioration in general economic conditions. Our Fort Hills project is not controlled by us and construction and production schedules and costs may be adjusted by our partners.
Statements concerning future production costs or volumes are based on numerous assumptions of management regarding operating matters and on assumptions that demand for products develops as anticipated, that customers and other counterparties perform their contractual obligations, that operating and capital plans will not be disrupted by issues such as mechanical failure, unavailability of parts and supplies, labour disturbances, interruption in transportation or utilities, adverse weather conditions, and that there are no material unanticipated variations in the cost of energy or supplies. Statements regarding anticipated steelmaking coal sales volumes and average steelmaking coal prices for the second quarter depend on timely arrival of vessels and performance of our steelmaking coal-loading facilities, as well as the level of spot pricing sales.
We assume no obligation to update forward-looking statements except as required under securities laws. Further information concerning risks and uncertainties associated with these forward-looking statements and our business can be found in our Annual Information Form for the year ended December 31, 2016, filed under our profile on SEDAR () and on EDGAR () under cover of Form 40-F.
WEBCAST
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