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Executives

Greg Waller - VP, IR & Strategic Analysis

Don Lindsay - President & CEO

John Gingell - Controller

Scott Wilson - Treasurer

Ray Reipas - VP, Energy

Boyd Payne - SVP, Coal

Tim Watson - SVP, Project Development

Analysts

Meredith Bandy - BMO Capital Markets

Orest Wowkodaw - Canaccord

Greg Barnes - TD Newcrest

Haytham Hodaly - Salman Partners

John Tumazos - Very Independent Research

Mark Author - Credit Suisse

Andrew Wells - IHS McCloskey

Harry Mateer - Barclays Capital

Brett Levy - Jefferies & Company

Fraser Phillips - RBC Capital Markets

Vishal Gupta - Desjardins Securities

Oscar Cabrera - Meryll Lynch

TECK RESOURCES LIMITED (TCK) Q1 2010 Earnings Call April 21, 2010 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teck's first quarter 2010 results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference is being recorded on Wednesday, April 21, 2010.

I would now like to turn the conference call over to Greg Waller, Vice President, Investor Relations & Strategic Analysis. Please go ahead, sir.

Greg Waller

Thanks very much. Good morning everyone and thanks for joining us this morning for our first quarter 2010 conference call. Before we start, I'd like to draw your attention to the forward-looking information slides on pages two and three of our presentation package. This presentation contains forward-looking information regarding our business. Various risks and uncertainties may cause actual results to vary. Teck does not assume any obligation to update any forward-looking statements.

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

Don Lindsay

Thank you, Greg. Good morning everyone and thank you all for joining us. There is a lot of good news to comment on today. We have hit the debt reduction targets that we originally put in place in July of 2008 and we have hit much faster than original planned in spite of this severe economic recession that we've been through.

We have investment grade ratings from three of the four North American rating agencies reflecting the progress of our debt reduction and the strength of our underlying business. Moody's report on their review is expected shortly. And we are starting to benefit from the much higher coal prices that will deliver a significant boost to our financial results in upcoming quarters.

I will start with the review of the results for the quarter and then turn the presentation over to John Gingell, our Controller and Scott Wilson, our Treasurer to address some more in-depth financial topics. Ron Millos, our Senior Vice President, Finance who usually handles this portion is currently away. There are number of other members of management team here with me on the call and they will be available to answer any questions.

Turning to slide five, there are number of highlights in the quarter. This quarter was in fact a record for the first quarter revenues at $1.9 billion and this is significant as the first quarter is usually our weakest quarter of the year due to some seasonality issues and I'll come back to this in a bit.

Operating profit before depreciation and amortization was $844 million, earnings were $908 million and EBITDA for the quarter was over $1.5 billion. I should note that we've changed our earnings reporting this quarter to the new standard for dealing with minority or non-controlling interest our reportable earning is attributable to shareholders.

We also had some unusual gains in the quarter from the [loss or] asset sales program. In (inaudible) we've achieved first concentrate production and first shipment is scheduled from next week. And in our coal business, we have contracted for most of our sales for the quarter at U.S. $200 per ton, but the more recent settlements was high as $235 per ton.

Turning to slide six, we showed you the asset sales which closed during the quarter, proceeds from these transactions were over $1 billion in the quarter and it contributed to a total from the program of approximately $1.6 billion. And I think that it's very important to note that total asset sale program got a lot of media attention, they only represented 5% of our total asset base of approximately $30 billion and none of our core assets were (inaudible). Even half of the asset program was in gold and that was something we didn't have two or three years ago. With the automation of the acquisition debt facilities, we have reached the bottom end of our original target net-debt plus equity ratio with a net-debt ratio of 25%.

Slide seven shows how we have reduced our bridge and term debt over the past 18 months. So at the end of the quarter, we have paid --- we have further paid down a term debt and we have given notice to the banks that the final payment on the term debt will made tomorrow morning. The result is that we will repay these facilities which were originally U.S. $9.8 billion completely repaid in less than 18 months.

Slide eight shows our earnings and a comparison to last year. Earnings of $908 million represent $1.54 per share, these compared to $0.50 per share last year for the same quarter. But of course we did have a very large asset sale gain this quarter.

We show our view of comparative earnings for the quarter on slide nine, the largest non-recurring items this quarter is the gain on asset sales that we recognized $639 million. With the other normal adjustments, adjusted earnings were $210 million or $0.36 per share for the quarter. Other comparative earnings factors to consider, that we don't normally accrued in the chat, but I think are important include the large SG&A expense in the quarter due to the appreciation on our stock price. Stock-based compensation and other items added about $32 million to G&A expense pre-tax, which we have not removed here in adjusted earnings, if we had this would have pushed up adjusted EPS by about $0.04 per share.

Also we had unusually high non-cash cost in coal this quarter that impacted our earnings by about $0.04 per share. So if you adjusted for these items as well earnings would have been about [$0.04] per share for the quarter. (Inaudible) expectations mixed earnings for the quarter, but I'd like to remind you the guidance that we provided in our last quarterly call, an issue that needed to be considered. I expect that some of these elements of the guidance (inaudible) for the quarter.

Slide 10 highlights the items that we suggested that needed to be focused on when we had this call last quarter. The seasonality in our sales at Red Dog includes lead and this impacts unit cost there as well as due to the loss for the by product credits. In coal, even though spot price has been very strong, we were still selling most of it on the basis of the 2009 coal product pricing at $128 a ton. Our overall realized price was still only U.S. $140 per ton.

Lower copper production at (inaudible) and Andacollo, as it is in transition, some capital production and cost rate production had impacts on unit costs in copper. And indeed we did incur slightly negative adjustments on settlement of sales from the prior quarter. With (inaudible) transaction this quarter as sales of surplus power were reduced. The other factor we try to be very clear though was not to assume our guidance for coal sales for the year could be divided equally over this four quarters. The production would ramp up as the year progress and we believe that's on target. So as I said, I suspect (inaudible) to be various points missing in most estimates.

Slide 11, I'll just emphasize the impact of the seasonality in our earnings mainly due to our zinc business of course with the Red Dog shipping seasons. In slide 11 we have summarized our quarterly distribution of earnings on average for the past five years. As we can see, we passed less than 20% of our earnings particularly occurred in the first quarter was more than 25% and each of the subsequent three quarters. And this will change going forward across with coal being the largest share of our business, but it does emphasize the impact of seasonality and sales volumes and the impact on unit costs that we have on our business.

Slide 12, provides a breakdown of our operating profits in quarter. To bring all your attention our coal business is getting currently, operating profits from our copper business was greater than our coal business for the quarter. This will change in Q2 of course as we start to realize the much higher coal prices, and it again emphasis the point that we have a very profitable and growing copper business, that deserves attention.

On slide 13, turning to prices for the quarter, prices for our base metals were all up healthily compared to the same quarter last year. Canadian dollar was stronger this quarter compared to last year, mitigating somewhat the impact of the higher metal prices. Coal was still much lower than last year as the majority of the coal being sold reflects the 2009 contract year pricing.

Slide 14, turning to our operating results for the quarter. In our coal business our share of production of sales was more than 40% higher on a year-over-year basis reflecting the substantial recovery we assumed in the very week quarter in the steel industry last year. Our production was in an annualized rate of nearly 23 million tones.

Our sales were in fact 5.25 million tones for the quarter as we had indicated that our sales guidance for the year will be back-end loaded, if you had been assuming 5.5 million tones for the quarter this difference of 25,000 tones represents the timing of ship loading of just one ship (inaudible) term loss for the quarter, out of the total of about 55 ship loadings.

Going forward we are expecting much stronger sales in Q2. The average realized price US$140 per ton is consistent with our guidance with approximately 400,000 tones of sales during 2008 prices.

Unit site cost remained up at $55 in cash cost which in fact 12% lower than last year and $6 in costs from the impact of selling some older high cost inventory. Our cost guidance for the year is still to be in the range of $55 per tone. Again with the combination of higher prices we are expecting a significantly expanded margin in coal in the coming quarters.

Unit transportation cost at $30 per ton were lower due to the impact of reduced rail rates and lower coal prices impacting coal price participation provisions in our coal contracts. We've established new contracts for rail and port handling, rail rates will be similar to last year with no coal price linkage and port rates will see only about 20% of their coal move or coal price linkage this year and most importantly next year the coal price linkage will be gone completely from our coal contract. And so we think these two changes in rail and port are very significant and make our coal business much more valuable overall than ever once before.

Slide 15, In our copper business unit our overall production is 72,000 tons is up 4%, versus Q1 last year, due to reductions at Antamina and as we process a greater proportion of copper and zinc ores in the quarter. At higher value as ore availability is reduced, and I want to coil as a tradition, transition from cathode production to concentrate production is underway.

Sales volume was off by 15% reflecting that sales were unusually high in Q1 '09 due to the timing of shipping. The weighted average overall cash cost for the quarter were about $1.10 per pound. Cash costs have increased somewhat in a few of the operations consistent with our guidance for the year. Highland valley experiencing reduced production and the resulting impact on unit cost is expected to continue through the balance in 2010.

Quebrada Blanca cost has increased somewhat as well as it is now moving more waste material to maintain ore production rates. And Andacollo is in transition from cathode to concentrate production as a result unit costs are higher there. These higher costs have been partially offset by Antamina's low cost position.

Slide 16, zinc concentrate production for the quarter was 2% lower than last year as a reduction of Red Dog due to lower ore grade was offset by higher production in Antamina due to a greater quality of copper zinc ore (inaudible). I should note that even though we show Antamina's share of zinc production in these figures, the financial results of Antamina are fully recorded in our copper business.

Production of refined zinc at Trail for the quarter was higher than last year as we had curtailment metal production in 2009. Our zinc business contributed $155 million in cash operating profits this quarter, up considerably from last year as the zinc price at $4 per pound is almost double last year's quarter guidance.

I'd now like to turn the call over to John Gingell to address some financial issues.

John Gingell

On slide 18, I have summarized our changes for cash for the quarter. Cash flow from operations was $412 million in the quarter. Our working capital change was positive this quarter, which is unusual as it is normally negative at time of the year due to the shipment seasonality. We had a large declined in inventory and receivables this quarter.

Capital expenditures and investment ware $151 million for the quarter. Net proceeds from asset sales in the quarter totaled $1.83 billion. We made debt repayments of $2 billion and $19 million in the quarter with net proceeds from asset sales and operating cash flow.

After allowing for the effect of exchange rates on cash and non controlling interest, our net change in cash in the quarter was a decrease of $555 million to a balance at the end of the quarter of $774 million.

Slide 19 shows our final pricing revenues for the fourth quarter, as we highlight each quarter, pricing adjustments on sales of our various products can have a significant impact on revenues, outstanding provisionally price receivables at the end of any quarter are finally priced based on contractual quotation periods for subsequent periods resulting in positive or negative price adjustments. Final pricing adjustments for this quarter were overall positive, but relatively minor compared to the quarterly volatility we have seen over the past year.

On settlements within the quarter for largest impact was in zinc, where we had 221 million pounds of receivable settled in the quarter at $0.10 per pound lower than the price at which they were provisionally booked in Q4. We also incurred negative adjustments in contracted price since total negative adjustments to revenue of $18 million, this represents $0.02 per share on an after-tax basis.

We also recorded pricing adjustments on sales booked in the quarter and these are mark-to-market at quarter end. With the increase in metal prices at quarter end, this contributed an additional $27 million pre tax in revenue. Remember, when analyzing the impact of price change is on our final pricing revenues, refining and treatment. The Canadian dollar exchange rate must be included in the calculation. In addition, when trying to analyze the impact on net earnings you need to consider taxes and royalties.

Turning to slide 20, I would like to highlight the guidance we have given for the coming quarter. Again we should be aware of the seasonality in zinc and net sales use the shipping season at Red Dog and the impact on unit cost, these are received net sales.

We expect coal sales in the range of 6.0 million to 6.5 million tons in the quarter, at pricing between US%180 and US$185 per ton, which includes what the impact of all types of coal sold expected carryover from 2009 and 2008 and expected power sales. Coal costs of the year expected in the range of Canadian dollars $55 per ton for site costs and Canadian dollar $33 ton for transportation costs including for tailor.

Copper production will continue to be low at ton value and then to coal and coal was in transition from capital production to concentrate production. This will have consequent impact on unit cost as well. Settlement adjustments at difficult coal at this point that's could be potentially negative and of course with the closing of the Waneta transaction, our sales of surplus power (inaudible) will be eliminated at full level of productions. (Inaudible) is one of the key things we are thinking about as you develop your rating estimates for the quarter.

Now, I'll turn the call over to Scott Wilson.

Scott Wilson

Okay, thank you John. Turning to slide 22, as Don noted earlier, a debt position at the end of the quarter has been reduced the US$5.8 billion, but we have since given notice to the banks that we would be repaying the balance of the term debt. The pro forma debt position as of tomorrow, when final term debt payment will be made is shown on in the slide.

This represents a reduction in our total debts since the end of the year of US$2.3 billion and as Don noted, Canadian $8 billion since we close the Fording acquisition. Our debt-to-debt plus equity ratio was 26% and with the cash deducted our net debt to net debt plus equity ratio will be 25%.

Our credit ratings are summarized on slide 23, as you may have seen last week S&P revised our rating from BB+ up two launches into Investment Grade to BBB stable. Moody's last provision to our rating was back in February Ba1 and on credit watch positive for a possible further upgrade. Further upgrades from a Moody's report us back into Investment Grade as well.

You may recall that debt amendment we entered into last year at this time included a first priority security interest in all of tax asset and certain restricted convenience, when we achieve Investment Grade ratings from S&P and Moody's with stable outlooks, this security package and restricted convenience will fall away.

Don back to you.

Don Lindsay

Thank you, Scott. Turning to slide 25, I'd like to briefly update you on the status of our permitting process of Red Dog, which we are trying us to care to comment the development of the Aqqaluk project, the project which is a key to standing life for Red Dog for another 20 years.

Slide 25 summarizes the recent test we've been true, the EPA issued the key permit in January, were just start position to attach based on a full SEIS and Aqqaluk. Those conditions are determined to be fully protective of the environment in a consistent with management operating for last 12 years.

The issuance of the permit was appealed by two environmental law firms with the support of six residents of the region. In order to deal with the appeal, the EPA will choose certain discharge condition in the new permit and then stated that we can continue to operate on the basis of our old permit, while the new permit issues a result.

Unfortunately we can't meet one specific discharge criteria and that is for the level of total dissolved solids in the water. Legal situation is complex with various motions and clause motions in play in the 2010 permit appeal. We're on discussions with EPA to clarify the implications of our ongoing non-compliance and I hope to clarify situation prior to the end of May. Other than this, we can't give you much more of an update at this time.

On slide 26, in summary before I turn it over to questions, we have achieved a lot over the past year, and very happy that we've been able to report that we have completely eliminated the acquisition debt of US$9.8 billion that we took on in October 2008 at the peak of the financial crisis, when we did this within an 18 month time period -- and target debt ratios achieved the credit metrics to quantify for Investment Grade rating and we have starting to see these main confirmed.

Going forward, our coals business is very exciting with the very strong pricing we're looking at and with the increasing production that we had and all for a very nominal amount of capital, but although we look at our copper production growth as well, which will grow by more than 10% this year and 40% in the bulk of which that occur over the next 24 months. We will be moving forward this year with our other development projects to putting our shareholder value over the coming years.

With that, I'd like to turn it over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Meredith Bandy, BMO Capital Markets.

Meredith Bandy - BMO Capital Markets

I'm looking at the net guidance and it's 24 million ton, which is inline with the previous guidance, but I'm wondering if you still think you could get to the 25, which was the high end of the range and also you mentioned in the release, you're taking steps to maximize production levels and I'm wondering if you could give us more guidance on what the steps might be and what the ultimate production could be?

Don Lindsay

I'll make a brief comment and then turn it over to Boyd Payne, who is here with me. We put out the annual guidance above a quarter ago at 23.5 to 25 and of course for the year with the reasonably wide range in terms of a lot to happen during the year related to equipment delivery and also shipments.

As we go to quarterly pricing just going to be given the outlook for each quarters going forward. We are still committed to be original annual guidelines and we feel that we're going to be a range for that, but we couldn't comment much more than the range that we actually put out at this stage, but a lots of challenges and lots of update. With that, I'll turn it over to Boyd.

Boyd Payne

In terms of the production, everything are on track, we haven't get any sense on equipment rewarded during the recent period to be here coming in on time, but based on year unfold they have see that equipment arise and amounted up and operates as we expand production, so I think the range is still well. We're very confident, but I won't want to comment any further on the range.

In terms of pricing, the game has changed that is quarterly pricing and the markets were very strong. Coal, very, very strong coal and I wouldn't expect much more activity until we start negotiating foreign exports. We're seeing the things being impressive of the way opted, but our own marketing activity will start doing up for interactions with our customers for the next quarter in about a month.

Meredith Bandy - BMO Capital Markets

Then just follow-up, so is the second half production is that essentially all un-priced?

Boyd Payne

At this point, yes.

Operator

Your next question comes from Orest Wowkodaw, Canaccord.

Orest Wowkodaw - Canaccord

Just a clarification on first question, so you're still sticking with the production guidance of 23.5 to 25 and it's just your sale guidance of 24, is that correct?

Don Lindsay

That's 23.5 to 25 on production guidance and obviously we'll match sales with our production.

Orest Wowkodaw - Canaccord

Just in terms of Red Dog, when you talk about potentially impacting production there in the fall, are you talking about the complete shutdown or just a partial shutdown?

Don Lindsay

We have to backup a bit that in order to keep continuous production, we would have to start pre-stripping Aqqaluk actually next month and probably by the end of next month. Otherwise, we will be in a situation where we won't have access to the new ore body by the time the current main pit runs out. So we have access to ore and that becomes to shutdown.

Orest Wowkodaw - Canaccord

So would you keep running the main pit sort of reduced grade until it fully runs out or would you considering just shutting down completely?

Don Lindsay

It will depend on what we anticipate from the EPAs as we go forward in attempting to clarify what is clearly and extremely complex legal situation. It was the permits that we need or the authorities that we need for going to come into effect, then there's a possibility of running at reduced in more inefficient situations as we move forward and we would probably do that. On the other hand if we felt that we're not going to get the clarification that we needed then we would go for shutdown, the situation is clarified.

Operator

Your next question comes from Greg Barnes, TD Newcrest.

Greg Barnes - TD Newcrest

Don, with the debt pay down, now you're generating significant free cash flow and I know if you got about 15% free cash flow yield. What is that strategy going forward from here?

Don Lindsay

Well, we do have significant growth projects down the road and to take your point that we know that will finalized capital for sometime probably until 2012 at the earliest. So we have at least two, four years of (inaudible) significant surplus cash flow and that's current prices and we anticipate that the core price versus the 200 well will probably actually be higher.

So it's a good question, but I think building up some cash on the balance in anticipation of the nature capital projects down the road, it's not about idea and we're taking quarter-by-quarter and just see how that goes and I don't have much more answer in that at this point.

Greg Barnes - TD Newcrest

One question (inaudible) from that, in the press release you talked about, they could not concern to the oil sands projects and moving into engineering studies and looking (inaudible) not to satellite operation from TRS pose and then in the CapEx guidance, you talked about the potential to increase CapEx, if commodity prices allow that. Is that seemed to imply that you're putting ahead on some of these oil sands per (inaudible) faster than you were thinking (inaudible)?

Don Lindsay

No, I have Ray Reipas here, who will give more detail, but basically we don't anticipate any significant capital and oil sands for quite sometime, but we are doing, is moving ahead with the project you mentioned Frontier that come and continuing to add value to those projects by moving with along regulatory process. Ray, do you want to give some detail a lot.

Ray Reipas

Yes, with regards Frontier and Equinox, you'll note that we've started engineering studies to prepare a regulatory application for those two projects, which we hope to file for the first half of 2011. The regulatory process as in Alberta, they've been takes a couple of years to go through. So those projects will advancing, or still a little bit longer out than they've been talking today.

Don Lindsay

The timeframes are quite long actually, so those two projects we mentioned if a little bit quite few years before we get to the decision, but you've (inaudible) in any large capital.

Greg Barnes - TD Newcrest

No further commentary on front, on Fort Hills from a Suncor just came out, what they're going to do?

Don Lindsay

We have nothing (inaudible) there, they optimistic on the project and things was great fit in our portfolio long term, but it's seem Suncor's (inaudible) now they complete their studies and up towards end of the year (inaudible) .

Operator

Your next question comes from Haytham Hodaly, Salman Partners.

Haytham Hodaly - Salman Partners

Just to follow-up a little bit on the Aqqaluk comments. I guess you mentioned that it has to begin free striping Aqqaluk by the end of next month, in order to continue operations uninterrupted. You also mentioned in the quarter, there is a contingency plan to minimize any potential disruptions, could you just outline what kinds of things are considered in this contingency plan?

Don Lindsay

In terms of the properties I said before, it really depends for us on where we think we are going to get with and the discussions were going on continually. If we are confident that we will end up with the assurances and clarification that we need then we can continue here certainly turning the mill back a little bit continuing to operate in the main zone as we strip Aqqaluk. Starting in May is ideal, obviously these things can vary a bit in terms of time one of the problems that there could be weather dependency, if we don't start by May then we are into break up then we have to move on from that point. The other aspect of course is Red Dog supply of ore to Trail and we have to consider what opportunities and options there are with regard to and all the people are looking at that issue, don't think we can add any detail at this point, but that is another factor that obviously influences the future.

Haytham Hodaly - Salman Partners

Could you just maybe, since you just touched on Trail what proportion of the overall Trail fee comes from Red Dog?

Don Lindsay

Approximately half.

Haytham Hodaly - Salman Partners

Approximately half, okay. And then maybe a question for Don or one of your cohorts there, (inaudible) I don't look any demand out of China, what you seeing right now?

Don Lindsay

Just a finish on the previous subject, I just should point out that, in fact on Trail won't be for quick sometime because we have still got the full shipping season this year for concentrate from Red Dog and we've already been in discussion with Quadra concentrate, if this whole scenario occurs which we're cautiously optimistic but I want to say that we would be able first concentrate our threshold, just that people don't misunderstand on Trail. Actually the question was copper and zinc in China, was that question?

Haytham Hodaly - Salman Partners

Just the copper and zinc, I was looking at what you are seeing in terms of demand out of China is this…

Don Lindsay

Well, I guess the first comment was the overall in the Chinese economy in consumption commodities and we had a visit two weeks ago and I had good meeting with our partners with CIC and then there have been (inaudible) with Chinese government as well, but basically the phrase that they use that they were going to accelerate urbanization and that seems like fairly optimistic statement, but they're really moving into tier 2 and tier 3 cities and they're also building railways at north-south and east-west three or four (inaudible) going into actions and just extraordinary consumption of steel and copper associated with those.

So generally we see the change in economy continuing to growing at a significant rate in the industrial production in particular to continue to grow within the 18% or 19% range now and that (inaudible). We're seeing the import numbers for copper recently and they are exceeding peoples expectation certainly for the first quarter, and I'd say that the imports of steelmaking coal and metallurgical coal has also been very higher than last year, so far it looks good.

Operator

Your next question comes from the line John Tumazos, Very Independent Research.

John Tumazos - Very Independent Research

Two further questions on the Aqqaluk permit. First, I read the plaintiffs suit against you. And it didn't seem to document any injury to these two coastal fishing villages, 100 miles or so from the mine. It dealt in procedure and passed violations and other stuff. How does the work that they have in objection without defining evidentiary injury? Second, what is the technical reason why you can't control the total dissolved solids filtration technologies or how their methods may be or investments would be an option?

Don Lindsay

Okay, well I'll take the first question and I think Peter may comment as well Peter (inaudible) but I'm glad you raised the issue, because it is very much a regulatory struggle I guess and it's very important to people to be aware that before there was a mine there, there were no fish in the Red Dog Creek because of the natural occurring grade of the (inaudible) in the region. Since there has been a mine and we treat the water, there are no fish at (inaudible) in the Red Dog Creek.

And so we have an extremely high degree of coppers from the coiled water and EPA for five years did a very detailed research into this farm, so that hasn't made them the issue here. It has been a debate over the thresholds particularly for TDS, the total dissolved solid. And at this point and even years ago when the [current] level was that we don't know the technology to get the TDS levels down to the limits that they have been talked about. So that was in my overview comment, now I will turn over to either Peter or Doug to address the second question.

Unidentified Company Representative

Commenting on the first question (inaudible) Don, it is a procedural relationship for the opponent as we understand it and there are issues in play that has implications for the regulatory permitting process with other projects in Alaska and nationally. So we really are caught in a situation where people have issues, look was the way in which EPA is issuing these permits generally in a state as to certify them.

With respect to the question on treatment technology, I think that the main issue is the volume of water that has to be discharged during a short window, during a year something like 1.5 billion gallons of water that has to be discharged in a short window measuring in 100 days or so. And so this technology that works at best scale to treat TDS was just nothing that's commercially feasible to deal with that volume of water being discharged during that short period.

Unidentified Company Representative

And over the years, we have taken whatever steps we can, introduced new water treatment facilities, sand filters and various other things. The TDS actually comes into the water as a result of treating for metals. So the metals are removed and replaced by salt that what TDS is in effect to fill. And there is substantial metals that have to be treated and so we deal with that. Part of the motivation for us is in fact the operation of our mill itself, because the TDS is, the lower rate is the better that the mill perform.

So we've got guidance, but the reality is all of the water studied that we have be done by the years by the state of Alaska, by ourselves and by other have shown absolutely no harm downstream at these kind of levels. We have substantial studies in history back around 1998 demonstrating this issue technology dealing with CVS that really hasn't changed over time and in that's part of the issue that we're working through with various parts and norms of the EPA right now.

Operator

Your next question comes from the line Mark Author, Credit Suisse.

Mark Author - Credit Suisse

With your incipient (inaudible) and interest rates pretty much at all time lows, would you think of trying to reduce your interest expense sometimes this year through maybe an exchange or tender to lower that absolute interest-rate level?

Don Lindsay

The short answer would be, yes we would think of it. We will be considering various options associated with that. We wanted to get to this point first and that we're hearing that those of the things will be okay, yes.

Mark Author - Credit Suisse

But overall debt levels are about where you wanting though?

Don Lindsay

I wouldn't mind continuing to reduce debt programs are very successful and going further wouldn't be such a bad idea. Well the things on the economic outlook and the cost of doing that and what our CapEx might be to the moment which could be generating substantial surplus cash and so you kind of wonder why you carry that much debt, so all these things are across and under review.

Operator

Your next question comes from the line of Andrew Wells, IHS McCloskey.

Andrew Wells - IHS McCloskey

As I wondering if you could confirm your $200 and $235 prices, are those [FOB] at the port?

Don Lindsay

No.

Andrew Wells - IHS McCloskey

Okay. And secondly, I'm wondering if you couldn't give any more breakdown on the qualities of your the $24 million that you're intending to produce this year?

Don Lindsay

We are on track, our historical average is approximately 10% non-prime deal making course, the 10% split between (inaudible) , very similar to the [press]. And last year, I should just be little careful, very strange year last year, we actually produced a little more non-coking than average of last year, but if you look at our historical averages, that's very well.

Andrew Wells - IHS McCloskey

Okay. So a 10% TCI on the rest hard coking coal, is that right?

Don Lindsay

Within the 10% there is thermal and TCI.

Operator

Your next question comes from Harry Mateer, Barclays Capital.

Harry Mateer - Barclays Capital

Just some questions on CapEx, can you give us a sense, I know you're on the budget yet and some of the projects are still under review, but give us a sense for directionally in just kind of size it for us. What could CapEx get over the next couple of years? What sort of range should be expecting?

John Gingell

We just over a $1 billion this year and that included recent amount of capital that were devoting to the coal business for the growth programs we talked about and the copper business back to the Highland Valley and Carmen de Andacollo. Going forward, we have the projections reasonably detailed for 2011, 2012.

We expect that it would decline in both years, not by that much, but we will finish the copper projects by early 2012, and the coil finish this year and our volume in middle of 2011. So that part declines and coal, we tried to front end load as much as we could for 2010, in terms of equipments orders and so that announce copper will go down a bit in 2011, 2012 and so slightly declined. I do want to cost range in this statement because loss from change over a couple of years, but that's what we note at this point.

Operator

Your next question comes from Brett Levy, Jefferies and Company.

Brett Levy - Jefferies & Company

If you guys start to generate free cash flow, can you talk about what you are hearing from Moody's in terms of the timing of an upgrade and then also can you talk a little bit of what you're looking for in terms of acquisitions or growth opportunity?

John Gingell

On the first one, we really can't comment. It's up to Moody's to review on their schedule and so we're just wait and see when it comes, and acquisition, we don't have anything in mind at the moment. I'd never-say-never, we also don't see at the moment that as much of a need.

We have quite substantial growth coming, in copper we really do have 40% in growth in copper business and copper production from 2009 levels and we should hit that by early to mid 2012. So that's about 24 months and that's from three projects that what you'll call Brownfields projects. They don't expansion with their amount for their partners there.

Sand and coil, the capital is essentially behind us and we're in ramp up stage and we're pleased with else going and then a prime value returned to coal production. So that's coming soon in its quite material and then beyond that we have two large projects that we're very exited about that are in pre-feasibility stage from Gleichen and this is hypogene project and we're still got -- can receive.

So the copper business can really grow substantially over the next six or seven years and I look back and say with that four or five years, if we haven't done any thing our copper business would only be the 22% piece of that to near that we have, instead we have five copper mines of strong cash flow and with the three good growth projects and good growth I think so. We gladly, we did the acquisition, we did with very pleased with them, but I am not sure that we need anymore again never-say-never, but we have a lot of growth.

In coal, we have 50% growth in coal production over what we did in 2009 and we think we can achieve that in four years and the resources is there, we can manage resources, its just a collective side, it requires the equipment -- we're going to do the striping and make that happen, it takes time, but it certainly there to be done and so if we get a full 50% growth in follow again that takes where the needs of acquisition.

Then we fully expect Suncor will finish the studies and we'll get a positive decision on Fort Hills at some point. The current studies, Suncor will be finished at the end of this year and then we have to move to both these ability and redo in the future. So we don't expect to sanctioning of the project of 2012 at the earlier, ultimately there will be (inaudible) again, so that would give us a whole oil sand position with cash flow. So if we just execute on the copper program, the coal program and also over the next five, six, seven years that's one of our goals and make sure why we leave acquisition.

Once again never-say-never, but we don't feel any real need at the moment, anything that I think we've looked at has been relatively small and what I call. It's not performing with $1 billion, that's about 30% of our market capital, while we're going to need that much and that's the kind of things that we've kind of looked at, but that is current interest so far.

Brett Levy - Jefferies & Company

It sounds like you're going to get well below 25%, and you're comfortable with that?

John Gingell

Yes, there's no question of that the surplus cash flow is just rolling on. We're actually enjoyed that for a while.

Operator

Your next question comes from Fraser Phillips, RBC Capital Markets.

Fraser Phillips - RBC Capital Markets

I just wanted to check two things Don. One, as mentioned I think Boyd mentioned, that all the coal for second half is un-priced, so is that mean that you essentially moved entirely the quarterly pricing for the contracts?

Don Lindsay

Yes, it does, but I would say is, this is the first quarter that the industry has gone into the transition. I think it to say that the customers would still prefer to a large degree annual pricing if they could get it and I can tell you, we have offered annual pricing, that has significant premium towards the quarterly pricing was landing and they haven't accept that and I suspect there's been number of discussions right that with all of the customers, because that's starting point.

So we can't, the thing that we say that the whole industry has completely shifted to quarterly, we may find as Boyd said in the next set of discussion in June, but some preposition of the business will good annual to the customers if we're happy with the price, but I think we just have to wait and see how it involves right now that still in transition.

(Multiple Speakers)

Boyd Payne

For the quick clarifications, we do have some material price that carryover. We have some material and primary results over that contracts now changed to July, 01. So there's fixed piece like that and we actually have a couple of residual annuals at small pieces.

Fraser Phillips - RBC Capital Markets

Don, the other thing I was curious, but it's just with respect to the copper projects. Do you see now or would you do anticipate with reconstruction that required infrastructure in the country that you see a situation where availability of labor etc. make it tight and make it a difficult to pursue, I mean not specifically your projects for perhaps all the projects that mine recoveries want to get done over the next couple of years?

Don Lindsay

We got a number of different people to provide some incite into that between Tim Watson, our Senior VP, Project Development, who joined within a copper business.

Tim Watson

With respect to the availability of labor, the reconstruction of infrastructure I think you maybe aware is predominately sale for San Diego and you look at the timing of that, I think you're going to see that comments relatively quickly. When you look at the development plans that we have in place, it's still going to be at least a couple of years before we moved into the field than any meaningful way on say something like a Quebrada another opportunity. So, in terms of the impact that the reconstruction will, I think much of that will be well underway in advanced a long before we advance into the field.

Operator

Your next question comes from Greg Barnes, TD Newcrest.

Greg Barnes - TD Newcrest

Just wondering, if you could give us some idea or further ideas on Quintech coal qualities what type of pricing that coal might timing CapEx anything would help us value on that?

(Multiple Speakers)

Don Lindsay

Thanks very much. We're putting our project team together clearly to get a feasibility level decision some time as soon as we get it organized. We haven't done anymore in the field, we haven't done anymore drilling or what we have you so were basically still working up, the same historical information we always had. We are going to accelerate our efforts to bring listing to reconcile a feasibility level decision. I am not really prepared to comment on differential of pricing we have really done that level of work. We will and as soon as we have something Greg, come forward it, but this has directly ensured that heavy pressure is coming to make this all happens.

Greg Barnes - TD Newcrest

You must have some idea what the coal quality and then how comprised of valley?

Don Lindsay

It is not valley coal, clearly, but what's fascinating in the changing world here, the all norms don't prevail. It's possible if you just take a look at what we've just done. We have announced that we have priced our Elk Valley Coal clearly at 200, that's the same number you'll note as the Australia third-parties no differential, no change so, previously there always differential.

I think what we need to do is examine how strong the market is at any given time, because that will determine that differentials more than just a quality. There are situations where those metric qualities get higher price just by sure demand alone. So, we really have to look at more than just the historical information.

Greg Barnes - TD Newcrest

What time has done asked for you to give him the feasibility in selling point?

Don Lindsay

I think with the yesterday noon, we're going to try to have that work wrapped up September, 2011 we should be in the position put that capital admire I think.

Greg Barnes - TD Newcrest

To move that with that work on the ground, you can imagine we got to go back and then permitting, those are the issues that have to get that we are working on that could be right now, but that lead time on those things…

Greg Barnes - TD Newcrest

So September 2011 you would like to be moving ahead with developing?

Don Lindsay

Yes, that correct.

Operator

Your next question comes from Vishal Gupta, Desjardins Securities

Vishal Gupta - Desjardins Securities

Just a quick follow-up question on the surplus cash on the balance sheet going forward, any thoughts on reinstating a common share development program?

Don Lindsay

Yes, we have been thinking about that, I think I stated publicly that when we saw way clear to completely eliminating the term loans and we would go back to Board to recommend them something it is the Board's decision and we know that there is a range of auctions and range of timing as to when we might do that for this, definitely very high loss and then I say we look at something that's more comparable to us, other companies that's expect to that we are compared to do and we look at their yields and to have ratios and settlement, we probably do pretty conservative that as we do that, but yes it's fair to say that the dividend is a high priority.

Vishal Gupta - Desjardins Securities

Just one other thing is the permitting at Red Dog going to affect the timing of such a reinstatement at all?

Don Lindsay

No.

Operator

Your next question comes from Oscar Cabrera, Merrill Lynch.

Oscar Cabrera - Merrill Lynch

Just looking at your zinc supplied, demand supply balance, what are you looking at over the next three years and if you take Red Dog out what would that supply demand balance look like?

Andrew Stonkus

I'm obviously balance settle a best of marketplace for this year and into the future years, so Red Dog was the operating that the debt facility or even the growth larger than your current projected. So the years have not converted down and I can preserve not going to the situation we see as the year coming for us is that going to be not coming out of the ground. On the metal side, currently we were a look at a slight surplus for this year, but that could quickly change do you looks not be mind.

Oscar Cabrera - Merrill Lynch

Thanks, Andrew and then if I can just get your attention back down to Chile. Do you (inaudible) weaken in metrics we took down there, talked about the lack of skilled labor billability, talked about the changes in water policy. One of the other things has come up on recently is most by the Chilean government increase royalties and taxes, as a matter of fact (inaudible) was referring to it a little bit earlier on. Just wondering if the government as approach you guys with thoughts about doing this with existing operations and/or Greenfield projects?

Andrew Stonkus

The government hasn't approached us directly, but we are aware that they're in discussions with other industry partners that we have, and I think its early days to know what actually is going to happen. I make this comment, a terrible earthquake and tragedy there and they need to rebuild the country and the copper industries the biggest components of your economy and everyone should do their fair steps.

So, I actually don't have any problem with what's been discussed, I think it's the right thing and a lot of the companies that Rob, I show you we should be doing whatever we can to help. So I think the order of magnitude that they're talking to those is appropriate, and the kind of structure and it has been temporary and then coming back to normal within the government's timeframe. So far what we've seen we think it's fair, but we don't really have anything else to talk about until we see a definitive proposal.

Oscar Cabrera - Merrill Lynch

I'm approaching on that trend and then just lastly, on your net goal sales expectations for next quarter, can you give us a sense of what the carryover tonnage is going to be?

Andrew Stonkus

Yes, the carryover tonnage then I'm sitting here on exactly have you figured, okay it's relatively small over the exact quarter of numbers, but actually what we've done is Greg Waller speaking, what we've done of course is given guidance on pricing for the quarter that takes in these steps of the new contracts of the carryover contracts the full realized price we'd expect. So that we don't have to get into getting details about carryover and loading you guys have try calculate the number.

Operator

Thank you. There are no further questions registered at this time. So, I'll return your meeting back to you gentlemen.

Greg Waller

Okay, we'd like to thank you all for attending this Investor Conference Call. We look forward to doing it again and join. Thanks very much.

Operator

Thank you. The conference call has concluded. You may disconnect your telephone lines at this time, and we thank you for your participation.

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Source: TECK RESOURCES LIMITED Q1 2010 Earnings Call Transcript
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