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Press Release: Teck Reports Unaudited Second -6-

26 Jul 2018 9:43 am

Global demand for refined zinc was stronger in the second quarter of 2018 with galvanized steel production up 2.1% over the previous quarter, according to CRU. In China, CRU estimates that galvanized steel production grew 5.5% in the second quarter over the prior quarter, which had been affected by environmental cuts to steel production. Galvanized steel prices in the U.S. have risen in the second quarter by 11% over the previous quarter and by 25% over the same time last year.

Operations

Red Dog

Zinc production of 153,600 tonnes in the second quarter was 20% higher than during the same period last year due to higher grades and recoveries.

Zinc sales of 83,800 tonnes in the second quarter was slightly ahead of our previous guidance of 80,000 tonnes. Offsite zinc inventory available for sale as of July 1, 2018 was approximately 18,000 tonnes of contained metal, compared to 28,000 tonnes at the same time last year.

Site operating costs in the second quarter of US$72 million were similar to last year. Capitalized stripping costs were US$3 million compared with US$5 million in the same period a year ago.

After our strong second quarter results, we now expect Red Dog's production of contained metal in 2018 to be in the range of 535,000 to 550,000 tonnes of zinc compared to previous guidance 525,000 to 545,000 tonnes.

Trail Operations

Refined zinc production of 74,600 tonnes in the second quarter was 2% higher than the same period a year ago.

Refined lead production in the second quarter of 16,200 tonnes was 27% lower than a year ago. This was primarily the result of treating lower grade lead concentrates compared to last year due to operating disruptions at some mines that supply lead concentrates, which required alternative concentrates to be processed. Silver production was 44% lower than a year ago primarily due to changes to the lead concentrate feed mix.

Operating costs were similar to a year ago at $113 million in the second quarter.

Sustaining capital expenditures in the quarter included $19 million for the Number 2 Acid Plant and $9 million for various small projects. The construction of the acid plant is over 60% completed, and on time and on budget, with commissioning planned in the second quarter of 2019.

We continue to expect Trail Operations to produce 305,000 to 310,000 tonnes of refined zinc, but now expect 65,000 tonnes of refined lead and 14 million ounces of silver (previously 70,000 tonnes and 16 to 18 million ounces respectively) due to limited concentrate feed availability.

Refined lead production is lower compared to previous years primarily due to a planned extended maintenance shutdown of the Kivcet furnace in the fourth quarter of 2018, which occurs once every four years. In addition, with the sale of our two-thirds interest in the Waneta Dam, energy costs at Trail Operations are expected to increase by approximately $75 million on an annualized basis.

Pend Oreille

Zinc production during the second quarter of 5,800 tonnes was 20% lower than a year ago due to reduced availability of higher grade ore sources and additional ground support requirements.

We expect ore availability to improve in the second half and expect production of zinc to be 30,000 tonnes in 2018, compared to our previous guidance of 35,000 tonnes. Production rates beyond 2018 are uncertain, although the potential exists to extend the mine life at similar rates for several more years.

Cost of Sales

Unit cash costs of product sold in the second quarter of 2018 as reported in U.S. dollars, before cash margins for by-products, were US$0.55 per pound compared to US$0.53 per pound a year ago. Operating costs were similar to a year ago, however, higher oil prices are expected to increase diesel costs at Red Dog in the second half of 2018 as new inventory is received with the 2018 sealift. Unit cash costs for zinc, after by-products, of US$0.52 per pound were US$0.02 higher than the same period a year ago.
 
                             Three months      Six months 
                             ended June 30,     ended June 30, 
(amounts reported in US$ 
per pound)                    2018     2017        2018     2017 
Adjusted cash cost of 
 sales(1)                  $   0.31   $ 0.27    $   0.30   $ 0.29 
Smelter processing 
 charges                       0.24     0.26        0.25     0.27 
Total cash unit costs 
 before by-product 
 margins(1)                    0.55     0.53        0.55     0.56 
Cash margin for 
 by-products(1 2)             (0.03)   (0.03)      (0.02)   (0.03) 
Total cash unit costs 
 after by-product 
 margins(1)                $   0.52   $ 0.50    $   0.53   $ 0.53 
 

Notes:

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

2) By-products includes both by-products and co-products.

Outlook

We now expect overall zinc metal production to be between 655,000 and 670,000 tonnes, compared to our previous guidance of 645,000 to 670,000 tonnes.

The Red Dog concentrate shipping season commenced on July 6, 2018. We expect sales of 160,000 tonnes of contained zinc in the third quarter, reflecting the normal seasonal pattern of Red Dog sales.

ENERGY BUSINESS UNIT

Fort Hills Oil Sands Mining and Processing Operations(1 4)
 
                                                          June 
(CAD$ in millions)                                        2018 
Blended bitumen price (realized US$/bbl)                $ 53.32 
Bitumen price (realized CAD$/bbl)(2)                    $ 64.59 
Operating netback (CAD$/bbl)(3)                         $ 13.85 
Production (million bitumen barrels)                        0.7 
Production (average barrels per day)                     24,978 
Sales (million blended bitumen barrels)                     1.2 
Gross profit, before depreciation and amortization(3)   $    13 
Gross profit                                            $     1 
 

Notes:

1) Fort Hills results are effective from June 1, 2018.

2) Blended bitumen revenue net of diluent expense.

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

4) Fort Hills figures presented at our working interest of 21.3%.

Our 21.3% interest in the Fort Hills oil sands mining and processing operations is the primary asset in our energy business unit. Fort Hills produces a paraffinic froth treated (PFT) bitumen, which is 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. In addition, bitumen processed using the PFT process requires less diluent to meet pipeline specifications as compared to non-PFT bitumen.

Bitumen production from the first two secondary extraction trains commenced in the first quarter, followed by the third and final train in May. Commissioning is now complete and construction activities at site are focused on site cleanup, including the demobilization of temporary construction facilities. The plant was successfully tested at 90% of design nameplate capacity during a weeklong reliability test in the quarter and although operations are still in the early stages, the startup has exceeded our expectations with respect to both production volumes and product quality.

While the plant facilities have exceeded expectations, unusually wet weather and resulting soft ground conditions have affected mine production in June and July. We do not expect this to have a material effect on operations for the year as a whole. The focus is now on optimizing mining capacity to reliably sustain production in excess of 90% of plant capacity by the fourth quarter of 2018.

We receive our share of bitumen from the Fort Hills oil sands mining and processing operations and are responsible for the blending, transportation and sales of the product after the transfer point. Following the completion of commissioning, we concluded the facility had achieved commercial production and operating results from Fort Hills are included in our consolidated results from June 1, 2018.

Prior to June, our share of bitumen production was 2.9 million barrels and our sales of blended bitumen were 2.6 million barrels. Fort Hills has produced 17.0 million barrels of bitumen since first oil in January, of which our share was 3.6 million barrels. Our share of production exceeded 27,000 barrels per day in the second quarter, which was greater than our guidance of 12,000 to 20,000 barrels per day for the quarter. As a result of the strong start-up and commissioning, production guidance has been increased to 8.5 million to 10 million barrels of bitumen for the year, up from 7.5 million to 8.5 million barrels previously.

In the second quarter, our share of Fort Hills capital expenditures were $87 million, including $11 million for major enhancements, $1 million for sustaining capital and $75 for new mine development. In addition, we capitalized production ramp-up costs, net of sales proceeds during the final construction and ramp-up phase in April and May of 2018. Sales proceeds exceeded production ramp-up costs by $14 million in the second quarter.

Crude Oil Prices

Net bitumen realizations are influenced by the North American crude oil benchmark prices of NYMEX WTI, Canadian heavy crude oil (WCS differential at Hardisty is a common reference) and diluent (condensate at Edmonton). Bitumen price realizations can also be affected by specific bitumen quality and spot sales.

NYMEX WTI is the current light oil benchmark for North American crude oil prices. WTI averaged US$67.88 per barrel in the second quarter. Current global crude oil supply/demand balances suggest that WTI pricing will remain at these higher levels for the foreseeable future. However, government policy and trade war uncertainty could negatively affect both demand and prices.

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