Teck Reports Unaudited Fourth Quarter Results
Teck Resources Limited reported adjusted profit attributable to shareholders of $700 million ($1.21 per share) in the fourth quarter compared with $930 million ($1.61 per share) a year ago. Annual adjusted profit attributable to shareholders for 2017 was $2.6 billion, or $4.45 per share, compared with $1.1 billion, or $1.91 per share in 2016. Annual profit attributable to shareholders was $2.5 billion, or $4.34 per share, compared with $1.0 billion in 2016, or $1.80 per share.
“We are very pleased with our results for the year, with adjusted earnings and EBITDA of $2.6 billion and $5.7 billion, respectively,” said Don Lindsay, President and CEO (above). “With our strong operating results, we achieved record revenues and cash flow from operations in 2017. Our financial position is very strong and with the startup of Fort Hills and favourable markets for our key products, we are well positioned for the coming year.”
Highlights and Significant Items
- In 2017, we achieved record revenues of $12.0 billion and record cash flow from operations of $5.1 billion as a result of a favourable commodity price environment and our ongoing focus on cost control at all our key assets.
- Adjusted profit was $700 million ($1.21 per share) in the fourth quarter compared with $930 million ($1.61 per share) in the fourth quarter of last year. Profit attributable to shareholders was $760 million ($1.32 per share) in the fourth quarter compared with $697 million ($1.21 per share) a year ago. Annual adjusted profit attributable to shareholders was $2.6 billion, or $4.45 per share, compared with $1.1 billion in 2016, or $1.91 per share. Annual profit attributable to shareholders was $2.5 billion, or $4.34 per share, compared with $1.0 billion in 2016, or $1.80 per share.
- EBITDA was $1.6 billion in the fourth quarter, the same as a year ago. Adjusted EBITDA for the quarter totaled $1.5 billion compared with $1.9 billion last year. Our annual EBITDA was $5.6 billion in 2017 compared to $3.4 billion in 2016 and adjusted EBITDA was $5.7 billion compared with $3.5 billion in 2016.
- Gross profit was $1.3 billion in the fourth quarter compared with $1.6 billion a year ago and before depreciation and amortization was $1.7 billion compared with $2.0 billion in the fourth quarter of 2016.
- Cash flow from operations of $1.5 billion in the fourth quarter was the same as a year ago. Cash flow from operations for the year was a record $5.1 billion compared with $3.1 billion in 2016.
- Our liquidity remains strong at approximately $4.8 billion, including US$3.0 billion of undrawn, committed credit facilities and $1.0 billion of cash at February 13, 2018. During the quarter, we extended the maturity date of our US$3.0 billion credit facility from July 2020 to October 2022. We expect to realize $1.2 billion in cash on closing of the sale of our two-thirds interest in the Waneta Dam, which we do not expect to close before the third quarter of 2018.
- Fort Hills produced its first oil on January 27 and remains on track to reach 90% of capacity by the end of 2018. The first train is currently producing and ramping up to capacity. The two remaining secondary extraction trains are mechanically complete, are currently being insulated and expected to begin producing on schedule in the first half of 2018.
- During the fourth quarter, we acquired an additional working interest in Fort Hills, increasing our interest to 20.89% from 20.0% for a cost of $121 million. Our interest has continued to increase and depending on the final project cost and funding elections we make, we expect our final ownership interest to be approximately 21.3%.
- In December, we paid a dividend of $0.45 per share consisting of a supplemental dividend of $0.40 per share and our regular base quarterly dividend of $0.05 per share, which totaled approximately $260 million. In addition, taking into account our strong cash position, we also announced our intention to apply an additional $230 million to the repurchase of shares through March 31, 2018, of which 5.9 million Class B subordinate voting shares were repurchased for $175 million in the fourth quarter.
- In November, for the first time, we were named as one of Canada’s Top 100 Employers by Mediacorp.
We recorded strong financial results in the fourth quarter recording gross profits of $1.3 billion, cash flow from operations of $1.5 billion, and EBITDA of $1.6 billion. These results were primarily the consequence of a favourable commodity price environment and our ongoing focus on cost control at all of our key assets. In 2017, we achieved record annual cash flow from operations of $5.1 billion, annual adjusted EBITDA of $5.7 billion and annual gross profit before depreciation and amortization of $6.1 billion.
In light of our strong profits and cash flows in 2017, we retired US$1.3 billion of our term notes, returned $344 million to shareholders in the year through dividends and paid $175 million to repurchase 5.9 million Class B subordinate voting shares in the fourth quarter. Our board has directed management to purchase an aggregate of $230 million of Class B subordinate voting shares by the end of March 2018.
Fourth quarter prices for copper and zinc were 29% higher compared with the same period a year ago. Our realized U.S. dollar steelmaking coal prices increased by 7% from the third quarter of 2017, but were 18% lower than the fourth quarter of 2016 when spot prices had reached US$300 per tonne. Copper prices reached a three-year high closing the year at US$3.25 per pound and zinc prices reached a ten-year high in October at US$1.51 per pound. A stronger Canadian dollar during the quarter partly offset the higher commodity prices as our products are sold in U.S. dollars.
Fort Hills achieved first oil on January 27 and remains on track to reach 90% capacity by the end of 2018. All three secondary extraction trains are mechanically complete. The first train is now producing and ramping up to capacity. The second and third trains are currently being insulated and are expected to begin producing on schedule in the first half of 2018.
With the completion of our Fort Hills project, our strong financial position, favourable markets for our key products and an improved oil price market, we are well positioned for ongoing profitability and strong cash flows.
Profit and Adjusted Profit(1)
Profit attributable to shareholders was $760 million, or $1.32 per share, in the fourth quarter compared with $697 million, or $1.21 per share, in the same period a year ago.
Adjusted profit attributable to shareholders in the fourth quarter was $700 million, or $1.21 per share compared with $930 million, or $1.61 per share, in the same period last year. The table below outlines the adjustments we make to arrive at adjusted profit. The most significant of these adjustments relates to a $131 million after-tax impairment reversal related to our steelmaking coal assets as a result of an improvement in the outlook for steelmaking coal prices. We also recorded one-time deferred income tax adjustments related to the reduction of U.S. corporate tax rates as a consequence of tax reform, partly offset by British Columbia’s provincial corporate tax increase. In addition, we included an adjustment for an environmental provision primarily related to enacted changes in environmental soil standards that affect our Trail Operations.
The decrease in our adjusted profit in the fourth quarter of 2017, in comparison with the prior year, was primarily the result of a decline in the contribution from our steelmaking coal business unit as a result of lower prices and sales volumes compared with the fourth quarter of 2016. In addition, the weaker U.S. dollar in the fourth quarter compared with a year ago also had a negative effect on our earnings. Partly offsetting these items were stronger copper and zinc prices in the fourth quarter, both of which reached multi-year highs.
Steel Making Coal Performance
Gross profit in the fourth quarter from our steelmaking coal business unit was $638 million compared with $1.2 billion a year ago. Gross profit before depreciation and amortization in the fourth quarter declined by $522 million from a year ago (see table below), primarily due to a US$37 per tonne decrease in the average steelmaking coal price and partly due to lower sales volumes.
Fourth quarter sales of 6.4 million tonnes were 8% lower than a year ago and were negatively affected by two CP mainline derailments in November, coupled with underperformance at Westshore Terminals in the fourth quarter. Fourth quarter sales volumes in 2016 represented record volumes for that period.
Elk Valley Water Management Update
As previously disclosed, we continue to implement the water quality management measures required by the Elk Valley Water Quality Plan (the “Plan”), which was approved in the fourth quarter of 2014 by the B.C. Minister of Environment. The Plan establishes short, medium and long-term water quality targets for selenium, nitrate, sulphate and cadmium to protect the environment and human health, as well as a plan to manage calcite formation. In accordance with the Plan, we have constructed the first water treatment facility contemplated by the Plan.
We had previously announced that we were working to address an issue regarding selenium compounds in effluent from the first active water treatment facility (“AWTF”) at our Line Creek operations. We have successfully tested an additional treatment step to address the issue, and are proceeding with construction of plant modifications, to be completed in the third quarter of 2018 at a cost of approximately $17 million. We will commence construction of our next active water treatment facility at the Fording River operation in the second quarter of 2018, using the same treatment process as West Line Creek and incorporating the additional design changes to address selenium compounds. In 2017, we constructed our first saturated fill project at Elkview at a total cost of $41 million and commissioned the project in January 2018. This alternative treatment strategy has the potential to replace active water treatment plants in the future and/or enhance our ability to meet the objectives of the Elk Valley Water Quality Plan. We also completed the successful installation and commissioning of our first calcite management system at Greenhills operations to support our understanding of calcite treatment and prevent calcite precipitation in the environment downstream from our operations.
Capital spending on water treatment in 2018 is expected to be approximately $86 million, taking into account facility design modifications as well as the engineering and commencement of construction of the Fording River AWTF. This compares to approximately $12 million of capital spending on water treatment in 2016 and $3 million of capital spending on water treatment in 2017, which was included in our 2017 sustaining capital.
Based on our current plans, total capital spending on water treatment over the next five years, from 2018 to 2022, is expected to be in the $850 to $900 million range. This contemplates completion of modifications to the Line Creek AWTF, the construction of the Fording River AWTF and two others elsewhere in the Elk Valley as well as the commencement of construction of a fifth AWTF. Delays in construction caused by the technical issues faced at the Line Creek AWTF have required us to plan for the construction of more than one AWTF at a time, increasing annual expenditures in the 2019 to 2022 period.
Based on current water quality modeling data and treatment technologies, up to four additional AWTFs will be required in the 2023 to 2032 period. Annual capital expenditures in this ten-year period are expected to be lower and more evenly distributed at an annual average of approximately $65 million. Planned AWTFs have varying capacities and capital costs.
2017 operating costs for Elk Valley water quality management were approximately $0.75 per tonne of clean coal produced. Operating costs are expected to increase gradually over the next 15 years to the $5 to $6 per tonne range as additional AWTFs come on stream.
If our Elkview saturated fill project performs as expected, there is potential for further saturated fills to subsequently reduce capital and operating costs associated with active water treatment. We continue with research and development on alternatives to active water treatment, which have the potential to significantly reduce capital costs for water treatment. These include saturated rock fills, described above, which rely on biological processes in water collected in former mining areas to improve water quality, as well as various forms of caps and other reclamation techniques which have the potential to reduce the quantity of water requiring treatment. These technologies, although unproven, have the potential to significantly reduce active treatment costs over the long term.
All of the foregoing estimates are uncertain. Final costs of implementing the Plan will depend in part on the technologies applied and on the results of ongoing environmental monitoring and modeling. The timing of expenditures will depend on resolution of technical issues, permitting timelines and other factors. We expect that, in order to maintain water quality, some form of water treatment will need to continue for an indefinite period after mining operations end. The Plan contemplates ongoing monitoring to ensure that the water quality targets set out in the Plan are in fact protective of the environment and human health, and provides for adjustments if warranted by monitoring results. This ongoing monitoring, as well as our continued research into treatment technologies, could reveal unexpected environmental impacts or technical issues or advances associated with potential treatment technologies that could substantially increase or decrease both capital and operating costs associated with water quality management.