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Press Release: Teck Reports Unaudited Second -3-

26 Jul 2018 9:43 am

Second quarter production was 6.3 million tonnes, 6% lower compared to the same period a year ago. This was largely the result of declining production at Coal Mountain Operations as the operation reaches the end of its mine reserve. Coal Mountain Operations will process its last mined coal in the third quarter. We have continued to haul raw coal from Elkview Operations to Coal Mountain Operations for processing to make up the lost production relating to the pressure event that occurred at Elkview Operations in January. As disclosed in the first quarter, the coal dryer at Elkview Operations has been recommissioned and returned to full production.

The business unit achieved total material movement in the second quarter of approximately 77 million bank cubic metres of material, a 3% increase over the same quarter a year ago. Equipment utilization and productivities have returned to historical high performance levels, resulting in more total material moved than in the second quarter of last year when operating rates were challenged by above average employee turnover. Supplemental mining capacity provided by leased haul trucks and contract mining have further contributed towards record second quarter material movement at three operations, and record material movement for the coal business unit for the first half of 2018. Overall, this has led to an increase in raw coal inventories and restoring operational flexibility going forward.

Cost of Sales

Site cost of sales in the second quarter were $59 per tonne compared with $53 per tonne a year ago, which is within our annual guidance range of $56 to $60 per tonne. As anticipated, the decision to increase mining activity in contract mining, equipment rentals and labour resulted in higher costs, but will result in additional production to capture margin. In addition, diesel costs increased, predominantly as a result of higher prices. All of these factors, combined with longer haul distances and increased activity on mobile maintenance in the second quarter compared with a year prior, has increased the unit cost per tonne. This was anticipated when we set our 2018 guidance.

Second quarter transportation costs of $36 per tonne were 6% higher compared to the same period a year ago with an increase in rail fuel surcharges due to higher diesel prices. In the first quarter, we experienced additional vessel demurrage costs primarily attributable to the poor performance at Westshore Terminals. As a result, we are expecting full year transportation costs to be at the high end of annual guidance of $35 to $37 per tonne.

The tables below report the components of our unit costs in Canadian and equivalent U.S. dollars.
 
                                     Three months      Six months 
                                     ended June 30,     ended June 30, 
(amounts reported in CAD$ per 
tonne)                                 2018     2017        2018     2017 
Site cost of sales                 $      59  $    53   $      58  $    54 
Transportation costs                      36       34          37       34 
Unit costs(1)                      $      95  $    87   $      95  $    88 
 
 
                                     Three months      Six months 
                                     ended June 30,     ended June 30, 
(amounts reported in US$ per 
tonne)                                 2018     2017        2018     2017 
Site cost of sales                 $      45  $    39   $      46  $    41 
Transportation costs                      28       26          29       25 
Unit costs(1)                      $      73  $    65   $      75  $    66 
 

Notes:

1) Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information. Unit costs do not include deferred stripping or capital expenditures.

Our total cost of sales for the quarter also included an $11 per tonne charge for the amortization of capitalized stripping costs and $17 per tonne for other depreciation.

Outlook

Our annual steelmaking coal production guidance of 26 to 27 million tonnes remains unchanged, but currently expect it to be near the lower end of the range. As in prior years, annual production volumes can be adjusted to reflect market demand for our products, subject to adequate rail and port service.

The business unit continues to evaluate raw coal processing opportunities by capturing the latent production capacity of Elk Valley processing plants. A portion of Elkview Operations' raw coal inventory is currently being processed at Coal Mountain Operations.

We are expecting sales volumes in the third quarter of 2018 to be approximately 6.8 million tonnes, subject to our logistics chain performance. While demand for steelmaking coal remains strong, the risk and uncertainty of a trade war could affect sales and pricing levels.

Strong operating performance in the mines and changes in our mine sequence has resulted in an increase to capitalized stripping costs to approximately $470 million, above the original guidance of $390 million. High productivities and solid performance in the mines has led to an increase in raw coal inventory, blending options and operational flexibility that will enhance the business unit's ability to meet production targets.

We plan to invest approximately $12 million to complete and evaluate the MacKenzie Redcap detailed design study. MacKenzie Redcap development is expected to supply approximately 1.4 million tonnes of steelmaking coal production per year and has the potential to extend Cardinal River Operations for approximately nine years beyond the planned closure in 2020. Beyond 2020, that additional tonnage would be additive to the current planned production capacity of 27 million tonnes in the Elk Valley.

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. The Plan establishes short, medium and long-term water quality targets for selenium, nitrate, sulphate and cadmium to protect the environment and human health, as well as a plan to manage calcite formation.

We expect that in order to maintain acceptable water quality, some form of water treatment will be required for an indefinite period after mining operations end. The Plan contemplates additional water treatment and 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. Capital spending on water treatment in 2018 is expected to be approximately $80 million. This will include engineering and construction of the new Fording River South Active Water Treatment Facility, which commenced in May, and completion of facility modifications and recommissioning of the West Line Creek Active Water Treatment Facility, expected in the fourth quarter.

We are advancing R&D projects with the potential to significantly reduce capital and operating costs for water treatment. This includes a full-scale Saturated Rock Fill (SRF), which was commissioned in January 2018 and is successfully achieving near-complete removal of selenium and nitrate from mine-affected water. SRFs have the potential to replace or augment traditional treatment technology at approximately one-sixth the capital cost and half the ongoing operating cost.

A recent letter by the U.S. Commissioners of the International Joint Commission (IJC) outlining concerns related to water quality is not reflective of the extensive research and data exchange between U.S. and Canadian stakeholders. Teck continues to work closely with U.S. and Canadian governments and stakeholders as we implement the Elk Valley Water Quality plan. To date, we have no indication of a referral to the IJC.

COPPER BUSINESS UNIT
 
                                     Three months      Six months 
                                     ended June 30,     ended June 30, 
(CAD$ in millions)                     2018     2017        2018     2017 
Copper price (realized -- 
 US$/pound)                        $    3.14  $  2.58   $    3.15  $  2.63 
Production (000's tonnes)                 75       70         149      134 
Sales (000's tonnes)                      74       69         151      133 
Gross profit, before 
 depreciation and 
 amortization(1)                   $     390  $   253   $     805  $   448 
Gross profit                       $     275  $   119   $     568  $   155 
Property, plant and equipment 
 expenditures                      $     133  $    58   $     231  $   102 
 

Note:

1) Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.

Performance

Gross profit from our copper business unit was $275 million in the second quarter compared with $119 million a year ago. Gross profit before depreciation and amortization increased by $137 million compared with a year ago (see table below). This was primarily due to higher realized prices and sales volumes of copper, zinc and molybdenum. Depreciation and amortization charges were $19 million lower than the second quarter a year ago primarily as a result of our asset impairment charge in respect of Quebrada Blanca recorded in the fourth quarter of 2017 and the extension of mine life until the fourth quarter of this year.

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July 26, 2018 05:43 ET (09:43 GMT)
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