Teck Reports Unaudited Third Quarter Results for 2017
All dollar amounts expressed in this news release are in Canadian dollars unless otherwise noted.
(firmenpresse) - VANCOUVER, BRITISH COLUMBIA -- (Marketwired) -- 10/26/17 -- Teck Resources Limited (TSX: TECK.A and TECK.B, NYSE: TECK) ("Teck") reported adjusted profit attributable to shareholders of $621 million ($1.08 per share) in the third quarter compared with $152 million ($0.26 per share) a year ago.
"We are very pleased with our performance in the third quarter," said Don Lindsay, President and CEO. "We achieved strong operating results with our second highest quarterly sales for steelmaking coal and record zinc production at Antamina for the second consecutive quarter. With these strong operating results and favourable prices, our adjusted EBITDA was $1.4 billion, just over $700 million higher than in the third quarter of last year."
Highlights and Significant Items
This management''s discussion and analysis is dated as at October 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 and nine months ended September 30, 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 continue to benefit from strong operating performance, which has enabled us to capitalize on favourable commodity prices. For the 12 months ending September 30, 2017, we achieved adjusted EBITDA of $6.1 billion - a record for any 12-month period in Teck''s history. This was generated at average realized steelmaking coal prices of US$185 per tonne and copper prices of US$2.62 per pound, and was the result of an ongoing focus on controlling costs and optimizing production from our core assets. We note that the realized steelmaking coal price for the past ten years has averaged US$164 per tonne, or US$180 on an inflation-adjusted basis.
Third quarter prices for steelmaking coal, copper and zinc rose by 73%, 33% and 31%, respectively, compared with the same period a year ago. Steelmaking coal prices remained well supported in the quarter reflecting record high steel production in China during the third quarter following the previous record high crude steel production set in the second quarter and strong demand in the rest of the world. Copper prices reached a three-year high early in the quarter at US$3.13 per pound, while zinc prices reached a ten-year high in September at just under US$1.50 per pound. Partly offsetting the stronger commodity prices was the negative effect of a strengthening Canadian dollar during the quarter, as most of our products are denominated in U.S. dollars. Subsequent to quarter end, copper and zinc prices have risen further, reaching new multi-year highs of US$3.21 and US$1.53 per pound, respectively.
Construction progress on the Fort Hills oil sands project has now surpassed 96%. Five of the six major project areas have been turned over to operations with site construction now focused on secondary extraction. During the quarter the Fort Hills plant initiated froth production in order to accelerate commissioning. The project remains on track to produce first oil in late 2017.
Taken together, operational performance, strong markets for our key products and the approaching completion of Fort Hills have resulted in a successful quarter for the company and positions us well for ongoing profitability.
Profit and Adjusted Profit(1)
Profit attributable to shareholders was $600 million, or $1.04 per share, in the third quarter compared with $234 million, or $0.41 per share in the same period a year ago.
Adjusted profit attributable to shareholders in the third quarter, after adjusting for the items identified in the table below was $621 million, or $1.08 per share, compared with $152 million, or $0.26 per share, in the same period last year. The most significant of these adjustments relates to the after-tax charges that totaled $28 million on the collective agreements settled at the Highland Valley Copper and Trail Operations during the third quarter. In addition, we recorded a $24 million after-tax charge for a break fee paid in respect to the sale of our interest in the Waneta Dam.
The increase in our profit in the third quarter of 2017 was primarily the result of a significantly higher contribution from our steelmaking coal business unit due to strong operational performance and substantially higher prices and increased sales volumes, partly offset by higher unit operating costs. In addition, profit was also positively affected by higher copper, zinc and lead prices compared with a year ago. These items were partly offset by the negative effect of a strengthening Canadian dollar in the period compared with a year ago and copper sales volumes lagging production levels due to timing of vessel loadings.
Profit and Adjusted Profit
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 a $12 million charge to after-tax profits ($4 million before-tax) in the third quarter, or $0.02 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 third quarter from our steelmaking coal business unit was $641 million compared with $142 million a year ago. Gross profit before depreciation and amortization increased by $538 million from a year ago (see table below) as the benefits of significantly higher realized steelmaking coal prices and second highest quarterly sales of 7.54 million tonnes more than offset the effect of higher unit production costs. The average realized steelmaking coal price of US$159 per tonne was US$67 per tonne higher than the third quarter of 2016.
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 $34 million in the third quarter. Capitalized stripping costs were $136 million in the third quarter compared with $43 million a year ago.
Markets
Third quarter sales of 7.54 million tonnes were our second highest quarterly sales, 4% higher than a year ago, reflecting improved steelmaking coal market conditions. Record high steel production in China during the third quarter following the previous record high set in the second quarter, improving demand in the rest of the world and reduced steel exports from China, coupled with flat steelmaking coal supply relative to 2016 supported demand and pricing.
The transition to the index-linked pricing mechanism based on the average of key premium steelmaking coal spot price assessments for our quarterly contract sales has been completed. Quarterly priced sales represent approximately 40% of our sales. The balance of our sales are priced at levels reflecting market conditions as sales are concluded. Lower grade semi-soft coals and PCI coal pricing continue to be negotiated on a quarterly benchmark basis. Our product mix and timing of sales will continue to affect our realized pricing, as was previously the case.
Operations
Third quarter production was 6.80 million tonnes, slightly below the same period a year ago, primarily attributable to a product mix of lower-yielding coals. Geotechnical issues continued to affect our ability to access some coal reserves at two operations and also contributed to the slightly lower production when compared to the quarter a year ago.
The operations achieved record total material movement this quarter, moving over 79 million BCM''s of material, a 16% increase over the same quarter a year ago. The operations are now staffed to fully utilize equipment fleets; contract miners are in place and productivities improved in the third quarter. As a result, we are well positioned to recover the material movement shortfall that occurred in the first half of 2017.
Efforts to reduce site inventory in the third quarter resulted in additional coal being railed to the port and made available for sale. This reduction of high site inventory provides more flexibility for plant operations.
Our annual processing plant maintenance shutdowns are behind us and recovery plans are in place to make up the production shortfall throughout the balance of the year to meet the production guidance of 27 to 27.5 million tonnes.
Cost of Sales
Unit cost of sales in the third quarter were $51 per tonne compared with $43 per tonne a year ago, within our annual guidance range of $49 to $53 per tonne. During the first half of year, material movement fell below plan due to difficult weather conditions, higher employee turnover rates and geotechnical issues at some sites. These issues led to a shortfall in planned raw coal inventory going into the last half of the year. To mitigate this risk, contract miners were mobilized to accelerate waste removal and expose additional raw coal at some mine sites to provide more flexibility and optionality as we move into the fourth quarter. In addition, strip ratios are higher as anticipated, as we are mining in recently permitted areas at a number of our operations.
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 $14 per tonne for other depreciation.
Outlook
China''s announced implementation of steel and coke production controls during the winter creates uncertainty. We expect that steel and coke production in the rest of the world will continue to be strong, in return creating support for steelmaking coal demand. We expect coal sales in the fourth quarter of 2017 to be approximately 6.5 million tonnes. Vessel nominations for 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 and timely arrival of vessels, as well as the performance of the rail transportation network and port-loading facilities.
Material movement falling below plan combined with a number of operations mining in recently permitted areas has led to a shortfall in planned raw coal inventory going into the last half of the year. As a result, production of our non-premium steelmaking coal will increase in the fourth quarter to maximize production out of the mines and set up for the closure of Coal Mountain Operations in 2018. We are expecting a larger proportion of non-premium steelmaking coal sales in the fourth quarter, reducing our average realized price relative to premium steelmaking coal assessments to approximately 85%. We anticipate that we will recover our raw coal inventories at the sites and that we will transition to a more traditional product mix going into 2018.
With improved productivities and supplemental contract miner capacity, we are expecting to achieve total production for the year in the range of 27 to 27.5 million tonnes and unit cost of sales in the range of $49 to $53 per tonne. Although both are in line with guidance, we expect production at the lower end of the range and cost of sales nearer to the high end of the range. Original guidance for transportation costs remains unchanged at $35 to $37 per tonne.
Elk Valley Water Management Update
We continue to implement the water quality management measures required by the Elk Valley Water Quality Plan (the plan), which was approved in the fourth quarter of 2014 by the B.C. Minister of Environment and was followed by the issuance of an Elk Valley Water Permit covering water quality requirements for the Elk Valley watershed. The plan establishes short, medium and long-term water quality targets which are protective of the environment and human health for selenium, nitrate, sulphate and cadmium, as well as a plan to manage calcite formation. In accordance with the plan, we have constructed the first of up to six water treatment facilities contemplated by the plan.
We had previously announced that we were working to address an issue regarding selenium compounds in effluent from the West Line Creek active water treatment facility. We have successfully tested an additional treatment step to address the issue, and are proceeding with construction of plant modifications, to be completed in the third quarter of 2018 at a cost of approximately $15 million. We have delayed the commencement of construction of our next active water treatment facility, at the Fording River operation, to incorporate these design changes and expect to commence construction of that facility in 2018.
Our 2014 cost estimate for water quality management required under the plan contemplated total capital spending of approximately $600 million over a five year period from 2014 to 2018, including $120 million then already spent on the West Line Creek facility. Our spending during that period is expected to be in the $300 million range, taking into account facility design modifications and associated delays to the construction schedule. We currently estimate capital spending on water treatment over the next five years, from 2018 to 2022, in the $850 to $900 million range. The 2017 portion of that spending is reflected in our current sustaining capital guidance. We estimate our long-term costs of water management from 2023 onwards, including capital and operating costs, to be in the range of $6 per tonne, assuming annual production of 27.5 million tonnes. We continue with research and development on alternatives to active water treatment, which have the potential to significantly reduce capital costs for water treatment.
Currently, we expect that, in order to maintain water quality, some form of water treatment will need to continue for an indefinite period after mining operations end. The plan contemplates ongoing monitoring to ensure that the water quality targets set out in the plan are in fact protective of the environment and human health, and provides for adjustments if warranted by monitoring results. This ongoing monitoring, as well as our continued research into treatment technologies, could reveal unexpected environmental impacts or technical issues or advances associated with potential treatment technologies that could substantially increase or decrease both capital and operating costs associated with water quality management.
COPPER BUSINESS UNIT
Performance
Gross profit from our copper business unit for the quarter was $151 million compared with $17 million a year ago. Before a $13 million one-time labour settlement charge at Highland Valley Copper, gross profit before depreciation and amortization increased by $118 million in the third quarter compared with a year ago (see table below). This was primarily due to higher realized prices and additional zinc sales from Antamina as a result of record zinc production. These items were partially offset by lower copper sales volumes at Highland Valley Copper and Antamina as well as to slightly higher unit costs before by-products.
Copper production in the third quarter declined by 5% from a year ago primarily due to lower ore grades at Highland Valley Copper as anticipated in the mine plan. Production was expected to be lower in the first half of 2017 and is improving as the year progresses and grades recover. Despite continued good site cost performance, our cash unit costs before by-products increased 4% to US$1.66 per pound compared to US$1.59 per pound during the same period a year ago due to lower copper production. Significantly higher production of zinc and molybdenum combined with significantly higher zinc prices resulted in cash unit costs after by-products decreasing to US$1.27 per pound compared to US$1.34 per pound during the same period last year.
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 $77 million, including $28 million for sustaining capital and $35 million for new mine development related to the Quebrada Blanca Phase 2 project. Capitalized stripping costs were $33 million in the third quarter, similar to a year ago.
Markets
London Metal Exchange (LME) copper prices in the third quarter of 2017 averaged US$2.88 per pound, up 12% from the prior quarter and up 33% from the same quarter a year ago. Year to date prices have averaged US$2.70 per pound, a 26% increase over the same period last year. Copper prices hit a three-year high in the third quarter at the beginning of September at US$3.13 per pound due to a weaker U.S. dollar and increased investor interest. Prices then came off the highs, but maintained support over US$2.90 per pound through the rest of September. Improved demand in Europe and Asia has combined with reported exchange stocks falling during the third quarter by 12,100 tonnes despite another series of LME deliveries following the rise in price in September.
Total reported exchange stocks have fallen 218,900 tonnes year to date, ending September at 560,500 tonnes. Total reported global copper exchange stocks are now estimated to be 9.0 days of global consumption, below the estimated 25 year average of 11.9 days of global consumption. Stocks on the LME rose by 47,550 tonnes to 297,250 tonnes and stocks in SHFE warehouses declined 74,000 tonnes to 103,150 tonnes, their lowest level since October of last year. Metal imports into China, which had been down 27% to the end of June, were up 52% month on month in July and up 28% in August. Year to date refined metal imports into China are still down 16% over the same period last year.
Global mine production is currently projected by Wood Mackenzie to fall in 2017 from 2016 levels following several disruptions to production in the first half of 2017. Demand in China remained strong with better than expected performance in appliance, transport and machinery sectors. Chinese auto production rose by 4.7% in August, closing in on the 5% production growth target. According to the China Association of Automobile Manufacturers, new energy vehicle production rose by 33.5% in the period January to August 2017, with production in August up 67.3% year on year.
Operations
Highland Valley Copper
Copper production was 25,100 tonnes in the third quarter, or 8% lower than a year ago. Despite a 10% increase in mill throughput, copper production declined primarily due to planned 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. Ore grades and recoveries improved significantly from the second quarter of this year and production is expected to be slightly stronger in the final quarter of the year. Copper sales lagged production during the quarter due to timing of vessel loadings and are expected to normalize over the next quarter. Molybdenum production of 2.6 million pounds was 85% higher than production of a year ago due to higher grades.
Union employees ratified a new five-year collective agreement during the quarter. Operating costs, before a one-time labour settlement charge of $13 million, were similar to a year ago at $108 million in the third quarter.
A $72 million project to install an additional ball mill to increase grinding circuit capacity was started in September. The project is anticipated to increase overall mill throughput by 5% and copper recovery by over 2%, and is expected to be completed by mid-2019.
Antamina
Antamina processed less copper-only ore and more copper-zinc ore than during the same period a year ago, which was anticipated in the mine plan. The mix of mill feed in the quarter was 60% copper-only ore and 40% copper-zinc ore, compared with 73% and 27%, respectively, a year ago. As a result of higher copper grades, copper production in the third quarter of 110,400 tonnes was 5% higher than a year ago. Zinc production increased substantially and almost doubled from last year to a record 102,300 tonnes, primarily due to increased processing of copper-zinc ores combined with higher grades and recoveries.
Operating costs in the third quarter were similar to a year ago.
Carmen de Andacollo
Copper production in the third quarter of 19,700 tonnes was similar to a year ago as improved grades were offset by lower mill throughput.
Operating costs in the third quarter were similar to a year ago.
Quebrada Blanca
Since the first quarter of 2017, all supergene ore mined has been sent directly to the dump leach circuit. This has resulted in lower recovery and a longer leaching cycle at reduced operating costs compared to the previous operations of the heap leach circuit. As a result of these changes, copper production in the third quarter decreased to 5,100 tonnes compared with 8,600 tonnes a year ago.
Operating costs in the third quarter were US$19 million lower than a year ago, primarily as a result of suspending the crushing, agglomeration and stacking circuits associated with the previous heap leaching operation.
Depreciation and amortization charges were $38 million less than a year ago as a result of lower current production levels and increased confidence in our ability to recover additional copper from previously processed material.
Cost of Sales
Unit cash costs of product sold in the third quarter of 2017 as reported in U.S. dollars, before cash margins for by-products, were US$1.66 per pound compared to US$1.59 per pound in the same period a year ago. The higher unit costs were primarily due to the significant decline in production at Highland Valley Copper as a result of lower grades.
Cash margin for by-products increased significantly to US$0.39 per pound compared with US$0.25 per pound in the same period a year ago. This was primarily due to higher zinc prices as well as significantly higher sales volumes of zinc from Antamina and molybdenum from Highland Valley Copper. The higher by-product credits more than offset lower copper production in the quarter resulting in unit cash costs for copper, after by-products, of US$1.27 per pound compared to US$1.34 in the same period a year ago.
Copper Development Projects
Quebrada Blanca Phase 2
Quebrada Blanca Phase 2 is expected to have an initial mine life of 25 years and annual production capacity of 300,000 tonnes of copper equivalent production per year for the first five years of mine life. Project activities during the quarter focused primarily on execution readiness activities, advancing detailed engineering and design, and continuing progress on the Social and Environmental Impact Assessment (SEIA) regulatory approval process. A decision to proceed with development will 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 the second quarter of 2018 at the earliest.
NuevaUnion
Activities continued to advance the pre-feasibility study in the quarter, including environmental baseline studies and ongoing community engagement. We expect to complete the pre-feasibility study early in the first quarter of 2018.
Other Copper Projects
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 jurisdictions in the Americas.
Work is advancing on all five projects with primary focus on the Zafranal and San Nicolas assets. Activities are advancing on both projects in support of initiating Feasibility studies and the submission of Environmental Impact Assessments.
At Zafranal in Southern Peru, the project management team is focused on completing drilling and engineering studies along with community engagement activities, environmental and archaeological studies and the permitting work necessary to initiate a feasibility study in late 2017 and prepare an Environmental Impact Assessment for submission in the second half of 2018.
At San Nicolas in Zacatecas, Mexico, various studies and programs are advancing in support of preparation and submission of an Environmental Impact Assessment. On October 18, 2017, following receipt of Mexican anti-trust approval, we completed the previously announced acquisition of the 21% minority interest in San Nicolas held by Goldcorp Inc. for cash consideration of US$50 million, taking our ownership of the asset to 100%.
Outlook
We continue to expect 2017 copper production to be in the range of 275,000 to 290,000 tonnes. As a result of lower operating costs and higher by-product credits, we now anticipate full year copper unit costs to be in the range of US$1.70 to US$1.75 per pound before margins from by-products and US$1.30 to US$1.40 per pound after by-products. This is lower than our previous guidance for unit costs of US$1.75 to US$1.85 and US$1.40 to US$1.50, respectively.
Full year molybdenum production at Highland Valley Copper is now anticipated to be 7.5 to 8.0 million pounds contained in concentrate as a result of improved grades, up from 6.0 to 6.5 million pounds previously.
ZINC BUSINESS UNIT
Performance
Gross profit from our zinc business unit was $300 million in the third quarter compared with $293 million a year ago. Before a one-time $26 million labour settlement charge at our Trail Operations, gross profit before depreciation and amortization increased by $53 million as higher zinc and lead prices were partially offset by lower zinc concentrate sales volumes and higher royalty expenses.
Refined zinc production at our Trail Operations was 6% lower than the same period a year ago primarily due to reduced roaster availability and lower feed rates during the quarter, although production is similar year to date compared to last year. At Red Dog, zinc production was 3% higher than the same period a year ago due to increased mill throughput and higher recoveries.
The table below summarizes the gross profit change, before depreciation and amortization, in our zinc business unit for the quarter in comparison to the same period in 2016.
Property, plant and equipment expenditures include $37 million for sustaining capital, which included $18 million at Trail Operations and $15 million at Red Dog.
Markets
London Metal Exchange (LME) zinc prices averaged US$1.34 per pound in the third quarter of 2017, an increase of 14% over the previous quarter and up 31% over the same quarter last year. Year to date LME zinc prices averaged US$1.26 per pound, up US$0.38 per pound or 42% over the same period last year. Zinc reached a 10-year high in September at just under US $1.50 per pound, a price last seen in August 2007.
Total reported zinc exchange stocks fell 36,200 tonnes during the third quarter to 320,000 tonnes. Total exchange stocks are down almost 261,000 tonnes from the beginning of the year and are now estimated at 7.9 days of global consumption, well below the 25 year average of 23.4 days.
Global demand for refined zinc remained strong in the third quarter of 2017 with galvanized steel production up 6.3% year to date over the same period last year according to CRU. In China, CRU estimates that galvanized steel production rose 9.6% in the first half of 2017 compared with the same period last year. Galvanized steel prices have risen slightly in the third quarter in most regions with galvanized sheet prices up 3.6% in China and 3.8% to 4.1% in Europe and up 0.3% in the US.
Wood Mackenzie is forecasting an increase in global refined zinc demand in 2017 of 3.0% to 14.7 million tonnes, and that refined zinc production will be limited to a 0.9% increase, to 13.7 million tonnes, leaving the market in deficit again this year. Even with mine production increases of 7.2%, mine production is not keeping pace with prior year smelter capacity growth, leaving refined zinc production constrained by lack of concentrates. Environmental inspections, resulting in closures and production curtailments at both mines and smelters in China continues to limit production in Asia. Reflecting the concentrate deficit, spot treatment charges have fallen to historically low levels, which is a net benefit to Teck as the positive impact of lower treatment charges at our mines is larger than the effect of lower treatment charges at our Trail Operations. Metal imports into China, still down 3% year to date, rose 34% month on month in June, 236% in July and 123% in August as the arbitrage between the SHFE price and the LME price remained open.
Operations
Red Dog
Zinc production of 152,400 tonnes in the third quarter was 3% higher than the same period a year ago primarily due to higher mill throughput and recoveries which were partially offset by lower grades. Lead production of 25,800 tonnes declined by 7% compared with a year ago, as lower grades were partly offset by improved recoveries and higher mill throughput.
Earlier in the year, the amount of higher-grade Qanaiyaq ore sent to the mill for processing was reduced as this ore is metallurgically complex, particularly in the early stages of pit development where ores are highly oxidized. As we have gained processing experience with this ore, we continued to improve metallurgical recoveries and increased the amount of Qanaiyaq ore in the mill feed blend this quarter. Together with implementing changes in mine sequencing in the Aqqaluk pit to access higher grade ore, production increased significantly over the previous quarter.
Zinc sales of 163,600 tonnes in the third quarter were ahead of our previous guidance for the quarter due to higher production and strong demand as a result of general tightness in the global concentrate market. This tightness is also reflected in spot treatment charges, which continue to be significantly below annual contract terms. Offsite zinc inventory available for sale as of October 1, 2017 was approximately 308,000 tonnes of contained metal. We anticipate shipping a further 95,000 to 100,000 tonnes of contained metal for the balance of the shipping season.
Operating costs in the third quarter of US$71 million were similar to the same period last year. Capitalized stripping costs were US$5 million in the third quarter compared with US$8 million in the same period a year ago.
In September, we initiated a mill upgrade project which is expected to increase average mill throughput by about 15% over the remaining mine life, helping to offset lower grades and harder ore in the Aqqaluk pit. This project is expected to be complete by the fourth quarter of 2019 at a capital cost of US$110 million. Because the upgrade project will permit lower grade material to be processed, the current mine life, based on existing developed deposits, will remain unchanged through to 2031.
Trail Operations
Refined zinc production of 78,400 tonnes in the third quarter was 6% lower than the same period a year ago due to lower roaster availability.
Refined lead production in the third quarter of 22,900 tonnes was similar to a year ago. Silver production was 16% lower than a year ago primarily due to changes to the feed mix due to operating disruptions at some mines that supply lead concentrates, which required alternative concentrates to be processed. As a result of the changes in the feed mix, we now expect annual silver production of 20 to 22 million ounces, down from our previous guidance of 23 to 25 million ounces.
Operating costs, before a one-time labour settlement charge of $26 million related to the ratification of a new five-year collective agreement with Trail''s union employees, were similar to a year ago at $97 million in the third quarter.
Sustaining capital expenditures in the quarter included $7 million for advancing the Number 2 Acid Plant and $11 million for various small projects.
Pend Oreille
Zinc production during the third quarter of 8,200 tonnes was 9% lower than a year ago due to lower mill throughput, partially offset by higher grades.
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. Current mine planning efforts are focused on sustaining the operation through 2018, and there is still significant potential to extend the mine life further.
Outlook
We continue to expect Red Dog''s zinc production to be in the range of 525,000 to 550,000 tonnes, as we previously announced in September. As a result of increased Red Dog zinc production, we now expect total zinc in concentrate production, including co-product zinc production from our copper business unit, to be in the range of 645,000 to 665,000 tonnes, up from 590,000 to 615,000 tonnes.
The Red Dog shipping season is expected to be completed in the first week of November after extending the planned season two weeks due to favourable ice conditions. We expect to ship approximately 990,000 tonnes of zinc concentrate and 210,000 tonnes of lead concentrate. This represents all of Red Dog''s concentrates available to be shipped from the operation. We expect sales of approximately 180,000 tonnes of contained zinc in the fourth quarter, reflecting both increased concentrate volumes shipped and stronger demand from customers the normal seasonal pattern of Red Dog sales. This is higher than our previous guidance for fourth quarter sales of 165,000 tonnes.
In accordance with the operating agreement governing the Red Dog mine between Teck and NANA Regional Corporation Inc. (NANA), we pay a royalty based on net proceeds of production each quarter. This royalty rate increases by 5% every five years to a maximum of 50%. The royalty rate through September 30, 2017, was 30% and increased to 35% effective October 1, 2017.
ENERGY BUSINESS UNIT
Fort Hills Project
Overall construction of the Fort Hills oil sands project has surpassed 96% completion. Five of the six major project areas (mining, ore preparation, primary extraction, utilities and infrastructure) have been turned over to operations with site construction now focused on completing secondary extraction. First oil facilities in secondary extraction are 95% complete. At the end of the third quarter, 98% of the operations staff have been hired.
The Fort Hills plant has initiated froth production in order to accelerate commissioning. Froth production requires operating the mine, ore preparation, primary extraction, tailings and utilities areas of the Fort Hills plant. Bitumen froth produced at Fort Hills is being trucked to Suncor''s base plant facilities for further processing.
In the third quarter, our share of capital expenditures was $221 million. Our share of Fort Hills cash expenditures in 2017 is estimated at $780 million, unchanged from last quarter.
Oil production from the first of three secondary extraction units is expected near 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 within 12 months of first oil.
Allowing for planned maintenance, our share Fort Hills bitumen production is forecast to be approximately 36,000 barrels per day on an annualized basis. To meet pipeline requirements we will purchase approximately 11,000 barrels per day of diluent blend-stock, and sell approximately 47,000 barrels per day of blended bitumen.
The secondary extraction paraffinic froth treatment process allows Fort Hills bitumen to be blended and delivered directly to our customers without further upgrade. As a result, the Fort Hills bitumen will require less blending diluent to meet pipeline specifications. Further, it will be among the lowest life cycle carbon intensity of any Canadian oil sands production, with a lower carbon intensity than about half of the oil currently refined in the U.S.
We have developed a blended bitumen sales and logistics strategy that meets our key requirements of diverse market access and risk mitigation.
The Fort Hills partners have contracted for the construction of regional infrastructure including, pipelines, terminals and blend facilities through long-term take or pay tolling agreements. Regional infrastructure construction has been completed with all facilities in service and capable of receiving product as follows:
We have contracted a 425,000 barrel storage tank for our blended bitumen at Hardisty, and for 100,000 barrels of diluent storage capacity at Fort Saskatchewan, Alberta. This storage capacity will help mitigate variability in bitumen production and downstream pipeline capacity.
We have contracted long-term capacity for a portion of our production on existing export pipelines with access to the U.S. Gulf Coast and future export pipelines to Canada''s west coast. The remaining capacity will either be delivered to the U.S. refineries on Enbridge''s common carrier pipelines or be sold at Hardisty, Alberta on long-term supply agreements or on short-term monthly contracts.
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 2018, making 2019 the earliest a federal decision statement is expected for Frontier. Our expenditures on Frontier are limited to supporting this process. We continue to evaluate the future project schedule and development options as part of our ongoing capital review and prioritization process.
OTHER OPERATING INCOME AND EXPENSES
Other operating expense, net of other income, was $61 million in the third quarter compared with $81 million a year ago. Significant items included share-based compensation expense of $52 million and environmental care and maintenance costs of $46 million due, in large part, to regulatory changes. We also recorded a $28 million break fee to terminate the Waneta Dam purchase agreement with Fortis Inc. (see Note 5). Partly offsetting these items were positive pricing adjustments of $93 million as a result of the rise in base metal prices in the quarter.
The table below outlines our outstanding receivable positions, provisionally valued at June 30, 2017 and September 30, 2017.
Our finance expense was $46 million in the third quarter compared with $89 million 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. The primary reasons for the decrease in our finance expense were the lower outstanding debt balances and the favorable effect of a stronger Canadian dollar on our U.S. dollar denominated debt. In addition, a higher amount of interest was capitalized against our development projects, including $45 million for Fort Hills and $37 million for Quebrada Blanca Phase 2, reflecting our increased carrying values of both of these projects compared with a year ago. Interest capitalization will cease when each project reaches commercial completion.
Non-operating income in the third quarter was $23 million, of which $20 million was from the gain on the revaluation of the call option on our 8.5% long-term notes.
Income and resource taxes for the third quarter were $355 million, or 37% of pre-tax profits. This rate is higher than the Canadian statutory rate of 26% as a result of resource taxes and higher rates in foreign jurisdictions. 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.
The new British Columbia Government''s budget bill proposed to increase the provincial corporate income tax rate from 11% to 12% starting January 1, 2018. We estimate this change will result in an additional one-time deferred income tax expense of approximately $75 million to be recorded when the bill is enacted, in addition to its ongoing effect.
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 half of 2017, we retired US$1.3 billion of our term notes pursuant to cash tender offers, make-whole redemptions, and open market repurchases. As a result, the principal balance of our public notes is now US$4.8 billion.
We maintain various committed and uncommitted credit facilities for liquidity and for the issuance of letters of credit. The only financial covenant under our bank agreements is the requirement for our debt to debt-plus-equity ratio not to exceed 50%. This ratio was 24% at September 30, 2017.
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 September 30, 2017, there were no amounts outstanding under the US$3.0 billion facility and US$810 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.
We also have various other uncommitted 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 $901 million in the third quarter compared with $854 million a year ago.
In the third quarter we had a significant build-up of working capital which absorbed $418 million of cash in the period. The build-up almost entirely related to a significant increase in our accounts receivable balances due to a number of factors. These included usually high volumes of sales being recorded towards the end of the quarter and the effect of significantly higher commodity prices, including settlement pricing adjustments.
Investing Activities
Expenditures on property, plant and equipment were $390 million in the third quarter, including $221 million of new mine development for the Fort Hills oil sands project, $93 million on sustaining capital and $17 million on major enhancement projects. The largest components of sustaining expenditures were $22 million at our coal operations, $18 million at our Trail Operations and $15 million at Red Dog.
Capitalized production stripping costs were $175 million in the third quarter compared with $88 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
Debt interest and finance charges paid were $137 million in the third quarter compared with $175 million a year ago.
We paid our quarterly dividend of $0.05 per share, which totaled $29 million in the period.
OUTLOOK
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 September 30, 2017, $4.1 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.
Commodity markets are volatile. Prices can change rapidly and customers can alter shipment plans. This can have a substantial effect on our business and financial results. Demand for our products remains strong and prices for our products have risen substantially during 2017 compared with a year ago, which has contributed additional revenues and cash flows. Ongoing economic uncertainties in Europe and the United States and variable growth rates in China, India and other emerging markets have affected both demand and prices for some of our products. In addition, government policy changes, particularly in China, may have a significant positive or negative effect on the various products we produced. Price volatility will continue, but over the long-term, the industrialization of emerging economies, as well as infrastructure replacement in developed economies, will continue to be a major factor in the demand for the commodities we produce.
While price volatility remains a significant factor in our industry, we have taken significant steps to insulate our company from its effects. We have improved operations, reduced unit costs and are now enjoying significant gross profit cash margins. We have strengthened our balance sheet and credit ratings by reducing debt and are now nearing completion of our Fort Hills project. Further, the supply and demand balance for our products, particularly in base metals, is favorable. Combined, these factors provide a significant positive outlook for the company.
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 has an effective date of January 1, 2018. We are required to adopt the provisions of IFRS 15 on either a full or modified retrospective basis. We currently expect to apply the full retrospective approach in restating our prior period financial information.
As at September 30, 2017, we have gathered relevant facts and have reviewed a significant portion of our various revenue contracts with customers. Based on the work performed to date, we do not expect the timing and amount of our revenue from product sales to be significantly different under IFRS 15.
We are continuing to analyze the treatment of insurance and freight costs. Under IFRS 15, in our view, these services represent performance obligations that should be recognized separately. The revenue associated with the arrangement of insurance is not material and we will not present this as a separate revenue item. For the performance obligation related to shipping we are continuing to evaluate whether it is most appropriate to reflect these transactions as a principal to the shipping of product or an agent arranging shipping services on behalf of our customers. The final determination in this regard will not materially change the timing of recognition of revenue, but will affect whether revenue associated with our shipping performance obligation should be reported on a gross or net basis. We currently report our revenue on a gross basis so if we conclude that we are the agent in these transactions, our revenue will decrease but there will be no effect on our gross profit as our transportation costs will be netted against revenue and not presented within cost of sales. This would be a financial statement reclassification only. We expect to make this determination in the fourth quarter and quantify any financial statement effect for 2017 year to date.
We are also continuing to assess the effects of IFRS 15 on our gold and silver streaming arrangements. At the date of these transactions, we accounted for the arrangements as the sale of a portion of our mineral interests at Antamina and Carmen de Andacollo respectively. We did not recognize disposal gains on the transactions as a result of the requirements of IFRS at the dates of closing. We are currently evaluating whether these previously deferred gains can be recognized on transition to IFRS 15. Alternatively, if continued deferral is required, how the deferred amounts should be measured.
We have established proposed updates to our processes, internal controls and systems in response to the new IFRS 15 revenue framework. These changes will be effective January 1, 2018. In the fourth quarter, we will determine the appropriate additional financial disclosures required under IFRS 15 and ensure processes and system changes are made to meet these requirements.
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.
IFRS 9 introduces a new three-stage expected credit loss model for calculating impairment for financial assets. 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.
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.
The completed version of IFRS 9 is effective for us on January 1, 2018. We are currently assessing the effect of this standard and its related amendments on our financial statements. We have completed our initial review of the new standard and have identified a limited number of potential differences relevant to Teck. In particular we have reviewed the policy choice related to the classification of changes in fair value of our investment portfolio and have identified the need to change our processes for managing and estimating provisions for credit loss on our trade receivables.
As at September 30, 2017, we have concluded that we will make the irrevocable classification choice to record fair value changes on our current portfolio of investments in other comprehensive income. During the fourth quarter, we will complete our review of our processes for managing and estimating provisions for credit loss on our trade receivables. At this stage, we do not expect this standard to have a material effect on our financial statements.
Leases
In January 2016, the IASB issued IFRS 16, Leases (IFRS 16), which eliminates the classification of leases as either operating or finance leases for a lessee. Under IFRS 16, all leases are considered finance leases and will be recorded on the balance sheet. The only exemptions to this classification will be for leases that are 12 months or less in duration or for leases of low-value assets. The requirement to record all leases as finance leases under IFRS 16 will increase lease assets and lease liabilities on an entity''s financial statements. IFRS 16 will also change the nature of expenses relating to leases as the straight-line lease expense previously recognized for operating leases will be replaced with depreciation expense for lease assets and finance expense for lease liabilities. IFRS 16 includes an overall disclosure objective and requires a company to disclose (a) information about lease assets and expenses and cash flows related to leases; (b) a maturity analysis of lease liabilities; and (c) any additional company-specific information that is relevant to satisfying the disclosure objective. IFRS 16 is effective from January 1, 2019 and can be applied before that date but only if IFRS 15 is also applied. We are currently assessing the effect of this standard on our financial statements. As at September 30, 2017, we have developed an understanding of the requirements of IFRS 16 but have not commenced analysis of existing arrangements or possible changes that may result from adoption of IFRS 16.
OUTSTANDING SHARE DATA
As at October 26, 2017 there were 570.5 million Class B subordinate voting shares and 7.8 million Class A common shares outstanding. In addition, there were approximately 23 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.
The Toronto Stock Exchange (TSX) accepted our notice of intention to make a normal course issuer bid to purchase our Class B subordinate voting shares. Under the normal course issuer bid, we may purchase up to 20 million Class B subordinate voting shares during the period starting October 10, 2017 and ending October 9, 2018, representing approximately 3.5% of the outstanding Class B subordinate voting shares, or 3.9% of the public float, as at September 27, 2017.
We will make any purchases through the facilities of the TSX, the New York Stock Exchange or any other exchanges or alternative trading systems in both Canada and the United States, if eligible, or by such other means as may be permitted under the TSX''s regulations, including private agreements under an issuer bid exemption order or block purchases in accordance with the applicable regulations. Purchases made by way of private agreements under an issuer bid exemption order issued by a securities regulatory authority may be at a discount to the prevailing market price as provided in any applicable exemption order. We may purchase a maximum of 582,408 Class B subordinate voting shares (being 25% of the average daily trading volume) on any one day, except pursuant to permitted exceptions. The actual number of Class B subordinate voting shares to be purchased and the timing of any such purchases will generally be determined by us from time to time as market conditions warrant. In addition, we may from time to time repurchase Class B subordinate voting shares under an automatic securities purchase plan it has established with our broker, which will enable purchases during times when we would typically not be permitted to purchase our shares due to regulatory or other reasons. All repurchased shares will be cancelled. Security holders may obtain a copy of the notice of intention, without charge, by request directed to the attention of our Corporate Secretary, at our offices located at Suite 3300-550 Burrard Street, Vancouver, British Columbia, V6C 0B3.
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 September 30, 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.
Highland Valley Copper
Antamina
Carmen de Andacollo
Red Dog
Pend Oreille
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, unit costs, cash unit costs before and after by-product margins, cash margins for by-products, net debt, debt to debt-plus-equity ratio, net debt to net debt-plus-equity ratio and net debt to EBITDA 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.
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.
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Datum: 26.10.2017 - 01:01 Uhr
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