Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Greg Waller – VP, IR and Strategic Analysis

Don Lindsay – President and CEO

Ron Millos – SVP, Finance and CFO

Leon Manual – SVP and General Counsel

Bob Docker [ph]

John Gingell – Controller

Analysts

Brett Levy – Jeffries and Company

Dave Katz – JPMorgan

Justine Fisher – Goldman Sachs

Oscar Cabrera – Merrill Lynch

Jeff Cramer – UBS

Kerry Smith – Haywood Securities

Ian Howat – National Bank Financial

Greg Barnes – TD Newcrest

Ralph Lafferty – Credit Suisse

Teck Resources Limited (TCK) Q2 2009 Earnings Call Transcript July 23, 2009 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, welcome to Teck’s second quarter 2009 earnings conference call. (Operator instructions) This conference is being recorded on July 23, 2009. I will now like to turn the meeting over to Mr. Greg Waller, Vice President, Investor Relations & Strategic Analysis. Please go ahead.

Greg Waller

Thanks very much, Matt. Good morning, everyone, and thank you for joining us this morning.

Before we start, I'd like to draw your attention to the forward-looking information slides in our presentation package on pages 2 and 3. This presentation contains forward-looking information regarding our business. Various risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward-looking statements.

At this point, I'd like to turn the call over to Don Lindsay.

Don Lindsay

Thanks very much Greg and good morning to all. I am pleased to report that we have now delivered on most of the steps in the plan that we announced last November. These achievements reflect the efforts of a great team of people here over the last nine months; I am pleased to be able to discuss our progress with you this morning.

I would like to start with a review of the highlights of the past few months before I review the financial and operating results, I will then turn the presentation over to Ron Millos, our senior vice president, finance & CFO to address the more in depth financial topics. I should say a number of the other members of the management team are on the call this morning and available to answer your questions.

Turning to slide 5, we completed a number of refinancing steps in the quarter and one of which we just completed subsequent to the end of the quarter. On the morning of our earnings call last quarter; we were able to announce that we had reached agreement with our lenders to amend the bridge and the term loan facility. The very positive results of these amendments in addition to all of the other steps that we have taken over the past eight months in executing on the plan put us in position to go to the bond market in early May.

The bond offering was very well received. We raised $4.2 billion in a combination of five, seven and ten-year notes. This offering was well over-subscribed and provided net proceeds of $3.9 billion, which was used to repay a substantial portion of the bridge loan. In June we announced a non-binding agreement with BC Hydro to sell a one-third interest in the Waneta Dam for $825 million Canadian and we expect this transaction to close before year-end. Then in early July we announced a $1.5 billion US private placement to China Investment Corporation, which is China’s sovereign wealth fund manager.

Turning to slide 6, also in the quarter we advanced our non-core asset sale processes with the closing of the Hemlo sale and the announcement of our sale of our interest in the Pogo mine for US $245 million and it subsequently closed in early July. We had previously also announced the sale of an interest in future gold production from Andacollo, which we expect will close in this quarter. The value shown here is our 90% share and reflects the current value of Royal Gold shares, which make up part of the consideration. The net proceeds of these transactions have what will all be used to repay outstanding debt.

Turning to slide 7, we were also in advance discussions regarding the sale of our interest in the Morelos gold project in Mexico and are progressing the sale process of our gold exploration properties in Turkey and proceeds from the expected sales of these properties will also be applied to the remaining term debt.

On slide 8 I would now like to turn to the highlights of our financial results. We believe we delivered solid results again in this quarter. Operating profit before depreciation and amortization was $841 million and net earnings were $570 million. In reflecting the significant refinancing steps we have taken since the end of the quarter, we recently fully repaid the bridge facility and the term facility has been reduced to $2.7 billion. Looking ahead, the closing of the gold asset transaction and the sale of our interest in Waneta will enable us to continue pre-paying the term debt. Our cash balance at the end of June was $750 million.

On slide 9 we show the comparative earnings results for the quarter. Earnings from continuing operation in the quarter were $521 million or $1.07 per share on a fully-diluted basis. These results compared to net earnings of $500 million or $1.12 per share in the same quarter last year. But as you will see on the next slide, we did have a large exchange rate impact on our debt in the quarter that significantly influenced the result and this is shown on slide 10. The strengthening of the Canadian dollar this quarter caused a restatement of the value of our debt in Canadian dollar terms and about half of this non-cash translation gain is taken into income and we have removed this from adjusted net earnings. We also recorded gains on asset sales and we incurred a one-time charge in the quarter as we wrote off a portion of the bridge and term loan financing cost as a result of the payments we made on those loans. Both of these should be deducted from earnings as non-reoccurring items. As a result, adjusted net earnings were $213 million or $0.44 per share, which is about 20% better than the consensus estimate. At the comparative net earnings line, we removed the impact of final pricing adjustments in the quarter and the higher copper price in the quarter mainly contributed to a positive pricing adjustment in the quarter.

On slide 11 and turning to a review of prices for the quarter, prices of all of our key products were down compared to the same quarter last year. However we are selling some coal on a carryover basis at last year’s contract prices, which results in a realized price well above the new contract price. The Canadian dollar was weaker this quarter compared to being near parity last year mitigating somewhat the impact of the lower metal prices. For example in coal, our most important product (inaudible) the realized price was 20% lower than last year in US dollar terms but only 8% lower in Canadian dollar terms. The year-over-year change in copper, zinc and led is more significant and it is in the 20% to 40% range in Canadian dollar terms.

So considering how much weaker prices were generally on a year-over-year basis, I think the quarterly results were quite respectable and reflect the strong suite of assets we have and the positive impact of the cost containment measures we implemented last fall. These metal prices did strengthen over the quarter as shown in the next chart, which does provide some encouragement for Q3 and going forward.

So turning to slide 12 as these charts show, the copper price ended the quarter $0.52 per pound higher than it was when it started. Zinc and led were up in similar amounts in percentage terms. Average prices were only moderately higher than at the start of the quarter so settlement adjustments were minimal this quarter but positive overall. These charts also show the change in LME inventories in the quarter, curtailment and closures announced in the past month throughout the industry at curtailed supply and restocking activity has supported the demand side.

On slide 13 in our coal business, our share of production and sales is higher on a year-over-year basis reflecting our acquisition of Fording's interest last year. On a 100% basis, sales were 24% lower compared to the second quarter last year but 30% higher in the first quarter this year. Unit site [ph] cost were higher compared to last year due to lower production volume and higher strip ratios. We expect though that improvement in these factors, as the year progresses will result in lower site operating cost. Unit transportation cost were 15% lower compared to Q2 and primarily due to the impact of lower coal prices pursuant to coal price participation provision in our port contract. We have also recently announced a reduction in our rail rates that will contribute to overall lower transportation cost for the year and that is retroactive to (inaudible). Our cash operating profit was 60% [ph] higher than last year, which is the result of our ownership increasing to 100%.

Turning to slide 14, I would like to take a moment to review the rail rate results we announced recently. The rate levels for the next year were set as a result of the statutory final offer arbitration process. There are three key points that come out of this decision. First is that we will have lower rail rates for the year and we believe that these new rates will be influential in rate determination for future years. Secondly is that there is no coal price linkage in the new rail tariff. We believe that the railways should not be a participant in the resource value and that they are more than adequately compensated to the rates that are in place without such a link.

And third is that we now have some choice in our use of rail carriers from the five mines in the Elk valley. As shown on the map for some of the (inaudible) Elk valley on the CP system we will be able to interchange this to the CN system at Kamloops for delivery to Vancouver. CN has direct access to our merchant coal terminal in North Vancouver and this arrangement facilitates our increasing use of that facility. Our Investor Day events this September will feature a closer look at this part of our business so I encourage you to attend.

Turning to copper on slide 15, overall production was about the same as Q2 last year but our sales volume was 25% lower which largely reflects the timing of our delay in cathode sales. There also were some timing differences in concentrate sales from Antamina and Highland Valley. We expect the sales in Q3 will be restored to more normal levels roughly equal to production. The operating profit before depreciation and pricing adjustments is equivalent to a cash margin of US$1.25 per pound of copper sold and this cash margin changes of course with operating costs, treatment charges and byproduct credits but it demonstrates the continued strength of our copper business for a weighted average overall cash cost for the quarter were approximately $0.90 per pound.

Turning to slide 16, I would like to give you an update on our project at Andacollo, which is transitioning the mine from cathode to concentrate production. Unfortunately Tim Watson our senior VP, project development is not available today to discuss this so I will just give you a brief update only. The picture of the mill site highlights some of the major components of the project but keep in mind that this will be an open-air mill so there is no need for a building to enclose it in this climate. What you see here is very much what it looks like when it is complete and you can see pretty well that the full plant from crushing and conveying through (inaudible) flotation, filtration and all the ancillaries are pretty much there. Mechanical equipment installation is virtually complete and the focus for a concentrator is completing piping and electrical installation. Commissioning is still scheduled for the fourth quarter this year with full production in the first half of 2010.

Now turning to zinc on slide 17, zinc and led concentrate production levels were only slightly lower than the same quarter last year which is actually quite good considering that since this time last year we have closed both the Lennard Shelf operation and the Pend Oreille mine. Zinc in concentrate production include zinc concentrates produced in Antamina which we treat as a copper mine whereas the financial results are for the zinc division only. Production of refined zinc at Trail was only slightly lower than Q2 ’08 even though we continue with the curtailment of metal production that we initiated last November to adjust to customer demand. Last year in Q2 Trail was having some operating issues that were restricting production. Our zinc business continues to be cash positive in the quarter despite reduced sales volume and significantly lower prices demonstrating our low cost position in this segment.

Now I will now turn the call over to Ron Millos to address some financial issues.

Ron Millos

Thanks Don. I am moving on to slide 19. This slide shows our debt position as at July 22 reflecting our current equity issue and other payments that we have made on the term debt. As Don noted earlier, the bridge debt has now been completely repaid and the term debt has been reduced to $2.7 billion US. We have also staggered the maturity with the bonds that we issued in May so the maturity profile of our debt has now been significantly stretched out. Our total debt is now under US $8 billion or about $8.9 billion Canadian and that leaves us with a net debt to net debt plus equity ratio of about 37%, and for reference this ratio was about 51% at March 31.

On slide 20, we have summarized our changes in cash for the quarter. Cash flow from operations was $421 million in the quarter, our working capital change was slightly negative as it normally is at this time of the year due to the seasonality of our business up at the Red Dog mine. We made net debt repayment of $1.21 billion in the quarter from our tax refunds and the proceeds of our asset sales. Capital expenditures were $148 million in the quarter and investments were $72 million primarily for our share of the funding of the Fort Hills project. The rate of spending overall but of Fort Hills in particular has now been significantly reduced and proceeds from asset sales that closed in the quarter were $132 million. After allowing for the effect of the exchange rates on cash and the cash flow from discontinued operations, our net change in cash in the quarter was a decrease of $882 million to a current balance of $750 million at the end of June. In accordance with the terms of our amended terms credit facility, we are subject to a cash suite on a quarterly basis. For this quarter the calculation does not require our payment.

Slide 21 shows our final pricing revenues for the second quarter. As we highlight each quarter, pricing adjustments on our sales of our various products can have a significant impact on revenues. Outstanding provisionally priced receivables at the end of any quarter, final price based on contractual quotational periods for subsequent period and that results in positive or negative price adjustments. Overall for the quarter pricing adjustments were positive but relatively minor compared to the volatility you have seen over the past year. The largest change was in copper where we had 96 million pounds of copper receivables, which was settled in the second quarter at $0.28 per pound higher than the price they were provisionally booked at the end of the first quarter. In Canadian dollar terms, this increased our revenues in the quarter by about $28 million. We also incurred a small positive adjustment in zinc while led sales were unaffected. We also recorded pricing adjustments on sales booked during the quarter as these are mark-to-market at quarter end and with the increases in metal prices at quarter end this contributed an addition of $27 million in revenue.

I do remind you that when analyzing the impact of price changes on our final pricing revenues, refining and treatment charges and the Canadian US dollar exchange rate must be included in your calculation and in addition when trying to analyze the impact on our net earnings you need to consider taxes and royalties.

Turning to slide 22, as annual net gold prices are established in US dollars, we hedged approximately 80% of our Canadian dollar cost exposure relative to those contract sales in order to protect our operating margins. At the end of June, we had about US $840 million outstanding at an average exchange rate of $1.13 Canadian per US dollar and these hedge contracts mature and relatively equalling through April of 2010. As previously reported, we hedged a portion of our copper production into July and the remaining balance of those hedges is shown here and we received nearly all of the expected $1.1 billion tax refund rising from the coal acquisition we have about $15 million left to come in. We expect that probably in August or September.

With that I will turn the call back to Don Lindsay.

Don Lindsay

Thank you Ron and turning to slide 24, I just have some summary comments to make. We have come through a very difficult nine-month period and it is clear that the world economy is not fully back on track yet but we have seen very encouraging signs in our coal business. What is clear though is that Teck has come through this period in very good shape, we have very strong asset base in coal, copper and zinc businesses and we continue to deliver on the plan that we put in place last November. We are re-establishing a strong balance sheet through our non-core asset sales, debt rescheduling and a recent strategic investor issue. We are well positioned to continue to grow shareholder value. We have significantly internal growth prospects in our copper and oil sands businesses and the steps that we have been taking should enable us to invest in those assets when the timing is right.

With that, I would like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from telephone lines. (Operator instructions) Our first question is from Brett Levy from Jeffries and Company. You may go ahead.

Brett Levy – Jeffries and Company

Hi guys. Great job managing through all of these tough financial markets and commodity markets, it is a tough thing to get through, you guys did very well. Let me first ask, are you guys done selling stuff? It seems like you have gotten your balance sheet for the most part fixed, is there anything else you want to sell and would it be significant or only smaller stuff at this point.

Don Lindsay

Hi. At this point I would say nothing significant, we are going to finish the smaller gold assets that we have previously dealt and which I just described. We have earlier been on the public record about looking for a 20% partner in our coal business but I have also said that we will be taking our time on that and it is also quite clear that given the strategic investor that we have now that it is not something that we need to do from a financial point of view. We do have the view that if there is a partner out there that would really strengthen the business, we would look at that quite seriously and we think that there is a possibility because of the discussions that we have had with a number of parties. There were two categories that I have previously referred, one is a very large customer that would buy 20% of the business and pay a pretty healthy price and at the same time take a 20% share of production and that of course would take up the market for everybody and probably affect pricing which we think would be good for the business.

The other model is unitizing Australian coal production with Canadian coal production which I will not go through all the details today but we think would make a very, very strong competitor in the world market. So we are open to those kinds of discussions, let me put it this way, the buyers are more interested in us right now than we are in them, so we are going to wait and watch how the core market develops over the next year and we think it is coming our way and looking very positive. That is just a summary comment, there is no question that demand has picked up strongly and the issue actually is being able to go up to demand, we are finding that it is more and more difficult actually to increase production and I think you will see that throughout the industry. We have not been able to meet the full demand at this stage.

Brett Levy – Jeffries and Company

That said obviously watching coal prices slip from up north of 300 to kind of where they are now, it seems as if – obviously iron ore is up 40% from its trough in March on the spot market, can you give a little bit of color as to what you might be seeing for 2010? Do you think you would clear 200 bucks a ton or I know you are talking [ph] your position and I know it is a bit early but really I get a sense that even maybe more than iron ore Metcoal is really tightening up.

Don Lindsay

We would hesitate to put a price on the table for next year but what we can say is the trend line is definitely positive, spot price is clearly above where the (inaudible) we are unable to meet our customer demand so trend line is very good but I would not want to make the prediction of what the actual price would be for next year.

Brett Levy – Jeffries and Company

Where are you selling on spot right now?

Don Lindsay

Actually our issue is coal availability and I have actually spent the last two days with all of our coal management teams in Elk valley and visiting the mines (inaudible) in Calgary today seeing what we can do about increasing production because you cannot ramp up production quite as quickly as you would like to and that is the issue that we are having and I think the industry is having. So for the moment, we are not doing spot sale so we can produce some more coal.

Brett Levy – Jeffries and Company

But where are you seeing spot prices right now?

Don Lindsay

We would not want to comment specifically other than to say that they are significantly above the bench mark though. I think there are a number of other sources, coal newsletters –

Brett Levy – Jeffries and Company

I got it. I just wanted to get a sense as to what you guys are seeing from your customers. All right thanks, I will get back in queue.

Don Lindsay

Thank you.

Operator

Thank you. Our next question is from Dave Katz [ph] from JPMorgan. You may go ahead.

Dave Katz – JPMorgan

Hi. I was hoping that you would talk a little more specifically about the growth of coal assets, you are saying right now that you are tight in that one cannot ramp up as quickly as one would like, I know in the past you have said that you could grow to $30 million with relatively little CapEx, do you think that tightness supports that or is that something that you would wait and see if it is a temporary phenomenon or not?

Don Lindsay

We do not think it is a temporary phenomenon and I have asked our coal management team to get those plans out again and refreshed. We have done a lot of detailed work between mid 2007 and mid 2008 on that plan to get to 30 million tons, actually that was specifically designed to get to 28 million tons by 2012 and then 30 by 2014. We do not know if that is possible in that schedule but it is certainly still possible to get to those production levels and the capital was in the grand scheme of things moderate meaning in the $400 million, $500 million range overall over a number of years. We are going to redo all that now just to refresh it because we do believe that the demand will be there. There is no doubt that the plans for building very large steel plants on the coast of China are continuing and that will have a significant effect on long-term demand for seaborne met coal.

Dave Katz – JPMorgan

Okay and then with the oil sands CapEx in 2010, given the increase we have seen in oil prices, is there any plan on the deference that you guys had talked about earlier?

Don Lindsay

Nothing has been changed. There is not going to be very much spent in 2010 either on Fort Hills as (inaudible) reviews the project or on other projects which are still in a quite early stage, so that is not a significant factor in the company for a while yet.

Dave Katz – JPMorgan

Okay and then finally, you mentioned in the slides that obtaining investment grade rating is a key goal at this point, what are the steps that you foresee of taking that would help put you there other than the steps that you have already taken?

Don Lindsay

I guess it certainly remains a very key goal and we have made a lot of progress towards getting to our target ratios. Our net debt to debt plus equity is now down to 37% and we have a target of 25% to 30%, we think that as we close the Waneta transaction and the other gold assets that will reduce the term loan by more than another $1 billion. And then cash flow from the end of June to the end of the year at current prices should certainly reduce the term loan to below $1 billion and thereafter we paid out by just cash flow. So it will not be that long before we will be in the target ratios but whether you will then get the upgrade to investment grade would depend upon the rating agencies themselves and their outlook for the industry and I think if you go back and look at the releases that they published on their view for the world that that has not changed yet then it may be some time but that is something that is sort of out of our hands but certainly the actions that we are taking will get us back into the ratios required reasonably soon.

Dave Katz – JPMorgan

Thank you very much.

Operator

Thank you. Our next question is from Justine Fisher from Goldman Sachs. You may go ahead.

Justine Fisher – Goldman Sachs

Good morning. Can you talk about the permitting situation at Red Dog and how that is progressing? I think you guys had mentioned that you wanted to see some traction, I think it was the third quarter of ’09 as far as accessing the new ore body there?

Don Lindsay

I am going to turn that one back to Vancouver.

Leon Manual

Hi this is Leon Manuel, General Counsel. The permitting is on schedule and the supplemental and environmental impact statement will likely go public the first week of August. The earliest the permits could go final is the first week of September but realistically we expect some slippage in the final stages and expect the final permit to be issued around the first week of October.

Justine Fisher – Goldman Sachs

And so if they are issued then the development of the new ore body should go as planned, right?

Leon Manual

As long as there is not an appeal at that point.

Justine Fisher – Goldman Sachs

Okay and if there is an appeal, what are the consequences for Red Dog, would it shut down entirely, how do you guys deal with that if there are any other slip-ups beyond the normal permitting process?

Leon Manual

Well it depends on the nature of the appeal and what specific components of the permits are appealed and of course we will review that at the time. It is possible that if the appeal does go to the heart of the permitting process that that could delay our access to the ore body but we really have to see. And the site is working very hard with NGOs and other interested parties who have commented on the process to satisfy their concerns and mitigate to the extent possible the likelihood of an appeal. But that of course is not in our hands.

Justine Fisher – Goldman Sachs

Okay. And then one last question on copper production Don, can you just go over again, so the sales in the quarter were 58,000 tons where production were 78,000 tons and I know that you guys have reduced your full-year guidance but are we going to see such a disconnect between sales and production for the last couple of quarters of the year as well?

Don Lindsay

It is unlikely. The reason for the difference in Q2 was primarily one shift that ended up in Q1 and we think in Q3 that sales and production will generally be matched but this does happen from quarter to quarter. You go back over the last five years and we probably had three different quarters where a (inaudible) ended up in the earlier or later quarters than we thought. So it is not really a major factor overall, for the year things should be relatively equal.

Justine Fisher – Goldman Sachs

Okay, super, thanks so much.

Operator

Thank you. Our next question is from Greg Barnes from TD Newcrest. You may go ahead.

Greg Barnes – TD Newcrest

Thank you operator. Don, just a question for you, in the conference call or in the press release you mentioned that Q3 sales may be constrained by your ability to produce clean coal. So are you implying you might not be able to meet that 6-million ton guidance because you cannot produce that much?

Don Lindsay

Well we have not changed the guidance because it is still our target and there is certainly production capability but it is tight and we are going to have to be really focused and some things will have to go our way. If it did not hit by Q3 it would end up in Q4. So overall for the half I think it is fine for the year, we certainly think it is fine but I go back to the comments I made earlier, you just cannot ramp up quite as quickly as you like so we are all focused on that, I have been working with the management the last couple of days literally looking at each mine and what it can do. Over the longer term they can ramp up quite substantially but when you have a turnaround in demand that has happened so quickly you cannot just turn on the tap and get production that quickly.

Greg Barnes – TD Newcrest

Sure.

Don Lindsay

We will work though it, it is going to be close.

Greg Barnes – TD Newcrest

Okay. (inaudible) is turning around I am sure you want to capture that, it looks like you might be kept out at 24 million tons this year and maybe next, so do you think you can push it, push it higher than that even next year?

Don Lindsay

Just to be clear, in 2009 the guidance that we had that was 18 to 20 and we said we will be up the upper range and that is still the case and --

Greg Barnes – TD Newcrest

Yes, I understand that just production capacity though, if you are doing 6 million tons in Q3 that would imply 24 million tons annually.

Don Lindsay

I see. You know and so then your question is, can we do that?

Greg Barnes – TD Newcrest

Yes.

Don Lindsay

Yes we can.

Greg Barnes – TD Newcrest

Can you push 24 million, 25 million in 2010?

Don Lindsay

I do not want to say anything definitive but certainly the installed capacity is in that range. We have done as high as I think 25.6 not that long ago and we will have more capital availability (inaudible) point of view which we will devote to making sure that happens but there is no guarantees but certainly the installed capacity is there, the plant capacity is certainly there.

Greg Barnes – TD Newcrest

Okay. I was curious about your comments about the trend towards more spot sales and matching your sales more closely with customer requirements, what are you leading us towards there?

Don Lindsay

I think you are seeing that in different markets, there has been a lot of talk about iron ores as you know moving from annual to perhaps quarterly and a lot of spot business being done and of course the additional business that we have done this year and our competitors have done this year has essentially been spot mostly to China and the increase in the imports in China has happened so rapidly from an annual rate last year of 3.2 million tons to over 20 this year and that is customer by customer and ship by ship and we are just trying to keep up with it. It has not yet evolved into a long-term contract with those major plants and I do not know if it is going to. It will be interesting to see how that evolves.

Greg Barnes – TD Newcrest

The benchmark system is cracking then?

Don Lindsay

I would not want to make too strong a statement on it but it will probably remain quite firm with the long-term customers that we have had in Japan and Korea and so on, I think it has worked quite well and those have been great customers but with other parts to market it may stay spot and we are just making observations here, we do not know yet.

Greg Barnes – TD Newcrest

Okay, thanks a lot Don.

Operator

Thank you. Our next question is from Oscar Cabrera from Merrill Lynch. You may go ahead.

Oscar Cabrera – Merrill Lynch

Hi, good morning everybody. Job well done in the quarter. Continuing with the coal theme, can you please remind us in terms of capacity relaxation or capacities at the mine and in the rail, what is the bottleneck there?

Don Lindsay

It is a range of things. It is not rail at the moment, it is people, shovels and trucks are stripping the coal mine by mine and literally bench by bench it is different constraints, when you are wound down because with steel industry dropped by 40% last fall and getting back up just takes some time. So there is no one big constraint.

Oscar Cabrera – Merrill Lynch

Okay. My understanding was that the rail has a capacity of 27 million tons, you just mentioned that you can do close to 26 million tons, so is the rail capacity 27 million tons?

Don Lindsay

Actually I have got Bob Docker [ph] who could make a comment on that.

Bob Docker

Oscar, you are probably referring to the capacity that CP has to carry coal, of course we are tripping on both CP and CN and we do not trip all of our coal westbound, a certain portion of our coal also goes eastbound. I would not see CP as having a constraint right now to carry the products we have but they have to speak to their capacity because it is impacted, the capacity for coal is heavily impacted by what other commodities they are using and also the length of train sets we have and a number of other factors but rail is not a constraint at the moment.

Oscar Cabrera – Merrill Lynch

So sort of like a follow-up to that would be how long do you think it will take you guys to ramp up production to the levels that we have seen before like around 25 million tons?

Don Lindsay

The short answer is we do not know and I did hear you say 26 and I should point out that we have not done that before, I think we did 25.6 as the maximum. It may take a couple of years to ramp up to a new record level. It takes a bit of capital not a huge amount and it takes some time and orders – there is leap time for orders, equipment and things like that and there is no question that eventually you get there but we just do not know what the timetable is going to be. The bottom line is coal is going to remain quite tight because of these issues throughout the industry which will likely have an effect on price and where we end up exactly I know everyone will be trying to put some numbers in their model and we cannot be too precise on these numbers at the moment.

Oscar Cabrera – Merrill Lynch

Fair enough, thank you.

Operator

Thank you. Our next question is from Jeff Cramer from UBS. You may go ahead.

Jeff Cramer – UBS

Hi, good morning. Just wanted to follow up a little more on kind of the rate of change in demand and shipments into China, do you see that continuing to increase in July on the coal side?

Don Lindsay

We do not have that clear visibility on July at this stage. A lot of it depends on the mines in (inaudible) province that are closed and whether they would re-open or not and we will have to watch that day by day. We have people in China that pay close attention to this but at the moment the forecasts are that on an annualized basis that they are going to import something more than 20 million tons.

Jeff Cramer – UBS

Okay. I guess as far as other parts of Asia that you export into, what are you seeing as far as changes in demand now?

Don Lindsay

Some of our core customers there have accelerated shipment partly due to their worry that China is going to capture more than they had anticipated, so that has been quite encouraging and quite positive for us. But for the overall tonnage for the year, I am not sure that there is significant changes versus the contract that we had already settled but the timing has clearly been a bit faster so whether that has an effect at the end of the year, too early to say. I mean I should comment, I know the nature of your question, I understand why you asked them but trying to do it on a month-to-month basis is just a little difficult. I think you have to look at over a longer period of time.

Jeff Cramer – UBS

Sure, I appreciate that. Your shipments are guided to 6 million tons in the third quarter, some of that falling tonnage form the fourth quarter and we know fourth quarter may go a bit slower traditionally on a seasonal basis but that is the reason for the potential gap between the two.

Don Lindsay

No, it would be the exact opposite, I should be clear on that. We are remaining with the 6 million ton guidance for the third quarter our issue will be making the production not the sales. Sales are definitely there and in excess of that and so we believe the fourth quarter will be higher than the third quarter and it will be able to get the production by then. It is not an issue of sales, we backed off from getting more sales because we cannot meet the sales now.

Jeff Cramer – UBS

Okay and just partly on the two labor negotiations that are going on right now, is there any reason to think those would end amicably?

Don Lindsay

No, the discussions are going just fine.

Jeff Cramer – UBS

Okay, thank you.

Operator

Thank you. Our next question is from Kerry Smith from Haywood Securities. You may go ahead.

Kerry Smith – Haywood Securities

Thanks operator. Don have you seen any re-land at all in coal sales into Europe and North America?

Don Lindsay

Moderate but there is no doubt that Asia is the strength in the market. There are some interesting signs like we have made shipments to customers that went for a long time and that sort of thing but there is not enough to say that there has been a significant output.

Kerry Smith – Haywood Securities

Okay and would there be any, maybe Ron can answer this, would there be any carryover tonnage in Q3 from the ’08 contract?

Ron Millos

Yes.

Kerry Smith – Haywood Securities

And can you give me any indication as to how many tons that might be?

Ron Millos

I think the way I would like to leave it and I am looking at Bob here in the Calgary office but we have announced the total carryover tonnage, we do have the schedule quarter by quarter with our customers and how that goes, but again, because of the variability of ships arriving and that sort of stuff, if we gave you one number Murphy’s law is it would end up being wrong. So I think it is best to stay with the total over the longer period of time that we have disclosed because we have a much higher level of confidence in that.

Kerry Smith – Haywood Securities

Okay, and just finally the –

Ron Millos

And then I should point out obviously that carryover tonnage number has increased again from the last number we have disclosed and that is another indication that has drawn the market.

Kerry Smith – Haywood Securities

What is the last carryover number you gave? Just remind me.

Ron Millos

It was 2.3 – it started at 1.5 million tons, then 2.3 million tons and now 3 million tons.

Kerry Smith – Haywood Securities

Right, okay.

Ron Millos

And you know the margin on that is quite significant, so we are --

Kerry Smith – Haywood Securities

Right, right, okay. And just finally, is there any – as know as the debt gets – or as the term facility gets retired or paid down, is there a point at which it is paid down so that you would no longer have any restrictions on your M&A capability and the cash report, are those restrictions in place until it is completely retired?

Ron Millos

Well, the term loan has the restrictions that it has and they would remain in place as long as it is outstanding. We intend to pay it off as soon as we can. We don't have any M&A claims in any event, because we have got tremendous internal growth as it is. We are sort of past the phase of adding resources to the company. If you go back over three or four years, we were resource challenged in 2005 and particularly on the copper side, but we have tripled the resources in copper and now moved into a phase where it is congregating those resources to production cash flow and Andacollo is a good example of that. We had only 35% of the Elk Valley coal four years ago, now we have got 100% and we're focusing more on increasing production and capturing the additional sales. So, we don't really see any need for M&A for the foreseeable future for quite some time.

Kerry Smith – Haywood Securities

Okay, great. Thanks a lot.

Operator

Thank you. (Operator instructions). Our first question is from Ian Howat from National Bank Financial. You may go ahead.

Ian Howat – National Bank Financial

Yes, hi. Just a couple of follow-ups. Did I correctly hear you say that the carryover is now going to be 3 million tons, I don't see it in the release, but --

Don Lindsay

That is correct.

Ian Howat – National Bank Financial

Okay. And then, again going forward, you don't foresee reaching those 30 million – or it is not in the plan currently to reach the 30 million ton level for some significant period of time?

Don Lindsay

Yes, that would take a while. You know, that is probably a –

Ian Howat – National Bank Financial

Four or five years?

Don Lindsay

Four or five years, that is right.

Ian Howat – National Bank Financial

Okay. And lastly, when you are at a dam [ph] is there any potential for actually increasing the electricity capacity of that to your benefit?

Don Lindsay

I will turn that one back to Vancouver but not much to –

Greg Waller

Ian, it is Greg. We did those upgrades of the four turbine units over the last six or seven years I guess so we have increased the capacity there already. So, at this point, there is not much more we could do at – as we needed to increase power production.

Ian Howat – National Bank Financial

And there is no more water available that you could access? Like downstream or anything else?

Greg Waller

No. In fact, there is a – we sold, you may recall we sold a number of years ago the expansion rates on the small amount of water that is available to a – (inaudible) British Columbia and if they proceed with that and I think it is likely they will probably in the middle part of this decade, that will reduce power available from them.

Ian Howat – National Bank Financial

Okay, thanks very much.

Don Lindsay

Ian, just to follow up. The 3 million carryover tons that is in the coal year, I should point out --

Ian Howat – National Bank Financial

Okay, all right. Thanks very much.

Operator

Thank you. Our next question is from Greg Barnes from TD Newcrest. You may go ahead.

Greg Barnes – TD Newcrest

I saw you making some encouraging noises about zinc too in the press release. How is zinc demand shaping up for you?

Don Lindsay

Well, better than expected, though obviously we haven't seen a major recovery in the US yet but we can give some positive indications, demand has exceeded supply for three straight months now. We have still got the curtailment underway. At some point, we will take a look at that closely, we wouldn't want to go too quickly, but at the same time, our inventories have run down to quite low levels and our customers obviously have quite low inventories and are asking for kind of one-day delivery. So it has tightened up quite a bit, but we're going to watch it quite carefully.

Greg Barnes – TD Newcrest

And on the coal inventories, you drew them down I think by about 700,000 tons in Q2, are you below comfortable levels now and what tonnage do you have in inventory at the mine and at the port?

Don Lindsay

That is just fine, down here we are actually at levels that we are fairly comfortable with. We are a little less than a million ton out of the coast, but that is a level that we are fairly comfortable with. At the mine site, it is not at bad levels either.

Greg Barnes – TD Newcrest

Okay. And just finally for Ron, on your US dollar hedging, you said you have hedged about $800 million US to reflect your costs.

Ron Millos

No, that is what is outstanding at the end of June, Greg.

Greg Barnes – TD Newcrest

Okay. I think Fording used to hedge basically all of the US dollar revenue exposure from coal, are you planning to do the same or – what are you looking at?

Ron Millos

We have basically done the same thing there, but we are hedging the exposure versus the 100%. So we factored US dollar operating costs, those types of things out of there and have hedged about 80% of that exposure over the coal year.

Greg Barnes – TD Newcrest

Okay, are you planning to do more or not?

Ron Millos

We will look at it down the road.

Greg Barnes – TD Newcrest

Okay, thank you.

Operator

Thank you. Our next question is from Ralph Lafferty from Credit Suisse. You may go ahead.

Ralph Lafferty – Credit Suisse

Hi, guys, thanks for taking my question. Ron, can you help us out on the tax rate guidance. It is not clear that 24% effective tax rate in the quarter, how much of that was the forty tax pools and how much of that was the FX gains being taxed at a lower rate. Can you help us with a number going forward? Thanks.

John Gingell

It is John Gingell the controller here in Vancouver. The tax pools don't really affect the overall tax rate, they affect the cash portion of it. The FX gain was about 12% of that number, so we would have been about 36% otherwise.

Ralph Lafferty – Credit Suisse

And so 36% you would reckon is a good rate going forward?

John Gingell

It really depends on where our income is derived from, but that has traditionally been around that level.

Ralph Lafferty – Credit Suisse

John, maybe just to elaborate on how that FX gain is taken out effectively so that it reduces the tax rate.

John Gingell

The FX gain is a capital item, so it is taxed at one half the rate that it otherwise might and so that is 15% in Canada.

Ralph Lafferty – Credit Suisse

Okay, I got it, thank you, great.

Operator

Thank you. There are no more further questions registered. I would like to turn the meeting back to Mr. Lindsay for some closing remarks.

Don Lindsay

Thank you very much all for attending and we look forward to speaking with you again.

Operator

That ends the conference for today. You may now disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Teck Resources Limited Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts