Teck Resources Limited (TSX: TCK.A and TCK.B, NYSE: TCK) announced net earnings
of $570 million, or $1.17 per share, in the second quarter. Our operating profit
before depreciation was $841 million. Earnings from continuing operations before
non-recurring items and positive pricing adjustments were $177 million. At June
30, 2009, our cash balance was $750 million.
Don Lindsay, President and CEO said, "Our major operations performed well in the
second quarter. We have also made substantial progress with our debt reduction
plan. The US$5.81 billion bridge loan related to our acquisition of Fording's
assets has now been paid in full and the US$4 billion term loan has been reduced
to US$2.74 billion. Our total debt has now been reduced by $4.6 billion since we
completed the Fording transaction in October 2008, and we expect further
reductions of approximately $1 billion upon the sale of the future gold
production from our Andacollo mine and the Waneta Dam, which are expected to
close later this year."
"We are also pleased to have CIC as a major investor in our company and to
establish a relationship with a major financial institution with a deep
understanding of China, the world's largest consumer of our principal products,"
said Mr. Lindsay.
Highlights and Significant Items
- Net earnings in the quarter were $570 million, or $1.17 per share.
- Operating profit before depreciation was $841 million.
- Earnings from continuing operations before non-recurring items and positive
pricing adjustments were $177 million.
- Since we completed our acquisition of Fording in October 2008, our US$9.81
billion of bridge and term debt has been reduced by US$7.1 billion to US$2.74
billion. The reduction was from cash on hand, cash flow from operations, tax
refunds, proceeds from asset sales, the 5, 7 and 10-year notes issued in May and
the strategic investment by China Investment Corporation ("CIC") in July.
- With the amendments to and payments made on our bridge and term loans, debt
due by the end of October 2009 has been reduced from US$6.3 billion to US$106
million.
- In July, Moody's Investor Services upgraded our credit rating to Ba2 with a
positive outlook from Ba3 with a negative outlook.
- In May we issued US$4.225 billion of 5, 7 and 10 year notes and used the net
proceeds to repay the majority of the bridge loan.
- In July, we issued 101.3 million Class B subordinate voting shares to a
wholly-owned subsidiary of CIC for proceeds of US$1.5 billion and used the net
proceeds to retire the outstanding balance of the bridge loan and reduce the
balance of the term loan.
- In June, we entered into a memorandum of understanding to sell a one-third
interest in the Waneta Dam to BC Hydro for $825 million. This transaction is
subject to completion of due diligence, receipt of certain third-party consents
and regulatory approvals and is expected to close in the fourth quarter of this
year.
- We expect the sale of an interest in the future gold production from the
Andacollo copper mine to Royal Gold, Inc. ("Royal Gold") to close in the third
quarter. Gross proceeds to Andacollo, of which our share is 90%, are expected to
be US$218 million and 1.2 million common shares of Royal Gold.
- We have completed negotiations with more than 80% of our traditional coal
customers, with pricing consistent with previously announced settlements at
US$128 per tonne for our highest quality coal products. We expect our 2009 coal
sales to be at the upper end of our previously announced guidance range of 18 to
20 million tonnes. We expect our average realized selling price for the 2009
calendar year to be in the range of US$155 to US$160 per tonne. We have
cancelled or reduced the length of our scheduled summer production curtailments
where possible in order to meet customer demand.
- In July we announced the completion of statutory rail rate arbitration
proceedings in respect of rates for certain westbound coal shipments that are
expected to result in savings of approximately $70 million for the 2009 coal
year. In addition, we have entered into an agreement that allows us to ship up
to 3.5 million tonnes of coal for delivery by Canadian National Railway between
Kamloops, BC and the Vancouver area ports through March 1, 2010. This important
development provides for a choice of rail carriers for some coal exports from
western Canadian mines for the first time that we are aware of.
- We expect copper production of approximately 250 million pounds in 2009 and
approximately 185 million pounds in 2010 at our Highland Valley copper mine
based on our preliminary assessment of recent geotechnical issues. We have
engaged third party geotechnical consultants to further assess the extent of the
issues. That work is expected to be completed by the end of the fourth quarter
of 2009.
This management's discussion and analysis is dated as at July 22, 2009 and
should be read in conjunction with the unaudited consolidated financial
statements of Teck Resources Limited (Teck) and the notes thereto for the six
months ended June 30, 2009 and with the audited consolidated financial
statements of Teck and the notes thereto for the year ended December 31, 2008.
In this news release, unless the context otherwise dictates, a reference to "the
company" or "us", "we" or "our" refers to Teck and its subsidiaries. Additional
information, including our annual information form and management's discussion
and analysis for the year ended December 31st 2008, is available on SEDAR at
www.sedar.com.
This document contains forward-looking statements. Please refer to the
cautionary language under the heading "CAUTIONARY STATEMENT ON FORWARD-LOOKING
INFORMATION" below.
Earnings and Adjusted Earnings(i)
Net earnings were $570 million, or $1.17 per share, in the second quarter
compared with $497 million or $1.12 per share in the same period last year. Net
earnings in the second quarter included non-cash foreign exchange translation
gains of $413 million on our long-term debt. Earnings also included positive
after-tax pricing adjustments of $36 million from rising copper prices and an
after-tax gain of $33 million from the sale of our Hemlo gold operations. Partly
offsetting these items was the write-off of $87 million of previously
capitalized debt financing fees as a result of the repayment of the majority of
our bridge loan in the quarter.
(i) Our financial results are prepared in accordance with Canadian GAAP (GAAP).
This news release refers to adjusted net earnings, comparative net earnings,
operating profit and operating profit before depreciation and pricing
adjustments, which are not measures recognized under GAAP in Canada or the
United States and do not have a standardized meaning prescribed by GAAP. For
adjusted net earnings and comparative net earnings, we adjust net earnings as
reported to remove the effect of unusual and/or non-recurring transactions in
these measures. Operating profit is revenues less operating expenses and
depreciation and amortization. Operating profit before depreciation and pricing
adjustments is operating profit with depreciation, amortization and pricing
adjustments added or deducted as appropriate. Pricing adjustments are described
under the heading "Average Commodity Prices and Exchange Rates" below. These
measures may differ from those used by, and may not be comparable to such
measures as reported by other issuers. We disclose these measures, which have
been derived from our financial statements and applied on a consistent basis,
because we believe they are of assistance in understanding the results of our
operations and financial position and are meant to provide further information
about our financial results to shareholders.
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
(in millions of dollars) 2009 2008 2009 2008
--------------------------------------------------------------------------
Net earnings as reported $ 570 $ 497 $ 811 $ 842
Add (deduct):
(Earnings) loss from discontinued
operations (49) 3 66 (1)
Derivative (gains) losses 31 (12) 57 (10)
Asset impairment - 12 - 12
Asset sales and other (13) (4) (181) (12)
Foreign exchange gains on debt (413) - (210) -
Write-off of debt refinancing
fees 87 - 87 -
Tax items - - (30) (11)
-------------------------------------
Adjusted net earnings 213 496 468 820
Pricing adjustments (note 1) (36) 7 (79) (67)
-------------------------------------
Comparative net earnings $ 177 $ 503 $ 389 $ 753
-------------------------------------
(1) See FINANCIAL INSTRUMENTS AND DERIVATIVES section for further
information.
Business Unit Results
Our second quarter business unit results are presented in the table below:
Operating
profit before
depreciation
and pricing Operating
(in millions of dollars) Revenues adjustments profit
--------------------------------------------------------------------------
2009 2008 2009 2008 2009 2008
--------------------------------------------------------------------------
Copper $ 408 $ 773 $ 187 $ 523 $ 183 $ 461
Coal 954 544 515 322 394 309
Zinc 345 488 81 128 59 99
--------------------------------------------------------------------------
Total $ 1,707 $ 1,805 $ 783 $ 973 $ 636 $ 869
--------------------------------------------------------------------------
Operating profit from our copper business unit was $183 million in the second
quarter after recording $56 million of positive pricing adjustments. This
compares with an operating profit of $461 million in the second quarter of 2008
when pricing adjustments were negligible. The decline in operating profit was
due to significantly lower copper prices, which were 45% lower compared with the
same period last year. In addition, sales volumes were 30% lower than the second
quarter of last year due to the timing of shipments, as some sales from Highland
Valley Copper had been advanced into the first quarter.
Operating profit from our coal business unit was $394 million in the quarter
compared with $309 million in the second quarter of 2008. Our results in the
second quarter reflect our 100% ownership interest in Teck Coal compared with a
40% direct interest last year. Despite our increased ownership, operating
profits were significantly affected by lower sales volumes, reduced coal prices
and higher unit operating costs resulting from lower production levels. Coal
sales volumes on a 100% basis were 5.0 million tonnes in the second quarter
compared with 6.6 million tonnes last year, as our customers reduced their coal
deliveries in response to lower steel demand. Coal prices declined by 19% and,
including the higher priced 2008 carryover tonnage, averaged US$165 per tonne in
the second quarter. Partially offsetting these factors was a stronger US dollar
compared with last year.
Operating profit from our zinc business unit was $59 million in the second
quarter after recording $2 million of positive pricing adjustments. This
compares with an operating profit of $99 million after the impact of $9 million
of negative pricing adjustments in the second quarter of 2008. The reduction in
operating profit was due to lower zinc and lead prices, which declined by 30%
and 35% respectively from a year ago.
As a result of the sale of our Hemlo and Pogo gold operations, results from
these two operations are included in discontinued operations.
Our year-to-date divisional results are presented in the table below.
Operating
profit before
depreciation
and pricing Operating
(in millions of dollars) Revenues adjustments profit
--------------------------------------------------------------------------
2009 2008 2009 2008 2009 2008
--------------------------------------------------------------------------
Copper $ 855 $ 1,489 $ 355 $ 895 $ 341 $ 896
Coal 1,828 765 1,034 348 823 324
Zinc 693 1,061 141 311 99 254
--------------------------------------------------------------------------
Total $ 3,376 $ 3,315 $ 1,530 $ 1,554 $ 1,263 $ 1,474
--------------------------------------------------------------------------
Revenues
Revenues from operations were $1.7 billion in the second quarter compared with
$1.8 billion a year ago. Revenues from coal operations increased by $410
million, with the increase attributable to our increased ownership in Teck Coal.
This was offset by reduced copper and zinc revenues of $508 million due to lower
metal prices and lower copper sales volumes.
Average Metal Prices and Exchange Rates(i)
Three months Six months
ended June 30 ended June 30
2009 2008 % Change 2009 2008 % Change
--------------------------------------------------------------------------
Copper (LME Cash - US$/pound) 2.12 3.83 -45% 1.84 3.68 -50%
Coal (realized - US$/tonne) 165 204 -19% 181 154 +18%
Zinc (LME Cash - US$/pound) 0.67 0.96 -30% 0.60 1.03 -42%
Gold (LME PM fix - US$/ounce) 922 897 +3% 915 912 -%
Molybdenum (published price-
US$/pound) 9 33 -73% 9 33 -73%
Lead (LME Cash - US$/pound) 0.68 1.05 -35% 0.60 1.18 -49%
Cdn/U.S. exchange rate
(Bank of Canada) 1.17 1.01 +16% 1.21 1.01 +20%
(i) The average commodity prices disclosed above are provided for information
only. Our actual revenues are determined using commodity prices and other terms
and conditions specified in our various sales contracts with our customers. The
molybdenum price is the major supplier selling price published in Platts Metals
Week.
Sales of metals in concentrate are recognized in revenue on a provisional
pricing basis when title transfers and the rights and obligations of ownership
pass to the customer, which usually occurs upon shipment. However, final pricing
is typically not determined until a subsequent date, often in the following
quarter. Accordingly, revenue in a quarter is based on current prices for sales
occurring in the quarter and ongoing pricing adjustments from sales that are
still subject to final pricing. These pricing adjustments result in additional
revenues in a rising price environment and reductions to revenue in a declining
price environment. The extent of the pricing adjustments also takes into account
the actual price participation terms as provided in the concentrate sales
agreements. In the second quarter we had positive pricing adjustments of $58
million ($36 million after non-controlling interests and taxes) compared with
negative adjustments of $11 million ($7 million after non-controlling interests
and taxes) last year. The amount consists of $31 million of pricing adjustments
on sales from the previous quarter and $27 million on sales that were initially
recorded at the average price for the month of shipment and subsequently
revalued at quarter end forward curve prices.
At March 31, 2009 outstanding receivables included 113 million pounds of copper
provisionally valued at an average of US$1.83 per pound and 95 million pounds of
zinc valued at an average of US$0.60 per pound. During the second quarter, 96
million pounds of copper included in the March 31, 2009 receivables were settled
at an average final price of US$2.11 per pound and 95 million pounds of zinc
were settled at an average final price of US$0.65 per pound, resulting in
positive after-tax pricing adjustments of C$21 million ($31 million before tax)
in the quarter. Positive after-tax pricing adjustments on current quarter sales
were C$15 million.
At June 30, 2009, outstanding receivables included 88 million pounds of copper
provisionally valued at an average of US$2.31 per pound and 118 million pounds
of zinc valued at an average of US$0.71 per pound.
Cash Flow from Operations
Cash flow from operations, before changes in non-cash working capital items, was
$421 million in the second quarter compared with $733 million in the same period
last year. The decline in cash flow was mainly due to lower operating profits
from our copper division, partially offset by higher operating profits from our
coal division as a result of our increased ownership in Teck Coal. The change in
non-cash working capital was minimal in the second quarter compared with a $232
million use of cash in the same period last year primarily as a result of a
reduction of accounts payable due to large tax payments related to significant
earnings from 2007.
BUSINESS UNIT RESULTS
The table below shows our share of production and sales of our major commodities.
Units
(000's) Production Sales
---------------------------------------------------------------------------
Second Year-to- Second Year-to-
Quarter date Quarter date
----------- ----------- ----------- -----------
2009 2008 2009 2008 2009 2008 2009 2008
--------------------------------- ----------- ----------- -----------
Principal
products
Copper
(note 1
and 2) tonnes 52 53 100 99 40 54 97 98
Copper
Cathode
(note 2) tonnes 26 27 53 53 18 27 45 52
------------------------------------------------------
78 80 153 152 58 81 142 150
------------------------------------------------------
Coal
(note 3)
Direct
share tonnes 4,279 2,601 8,245 4,958 5,004 2,630 8,691 4,933
Indirect
share tonnes - 781 - 1,488 - 789 - 1,480
------------------------------------------------------
4,279 3,382 8,245 6,446 5,004 3,419 8,691 6,413
------------------------------------------------------
Refined
zinc tonnes 60 61 118 135 63 69 120 142
Zinc
(note 1
and 4) tonnes 173 171 340 346 118 120 248 255
Major
by-products
Molybdenum
(note 1) pounds 1,793 1,728 3,704 3,369 1,783 2,198 3,650 3,810
Refined
lead tonnes 19 20 38 46 20 21 37 45
Lead
(note 1) tonnes 31 35 64 74 - 5 1 8
---------------------------------------------------------------------------
(1) Production and sales volumes of base metals refer to metals contained
in concentrate.
(2) We include 100% of production and sales from our Highland Valley Copper,
Quebrada Blanca and Andacollo mines in our production and sales volumes,
even though we own 97.5%, 76.5% and 90%, respectively, of these
operations, because we fully consolidate their results in our financial
statements.
(3) The direct share of coal production included our 40% proportionate share
of production from Teck Coal until October 30, 2008 prior to our
acquisition of Fording and 100% thereafter. The indirect share of coal
production was the pro rata share of production represented by our
19.95% interest in units of Fording.
(4) The Lennard Shelf zinc mine ceased production in August 2008 and the
Pend Oreille zinc mine was placed on care and maintenance in February
2009.
REVENUES AND OPERATING PROFIT
QUARTER ENDED JUNE 30
Our revenue, operating profit before depreciation and pricing adjustments and
operating profit by business unit are summarized in the table below:
Operating
profit (loss)
before
depreciation Operating
and pricing profit (loss)
($ in millions) Revenues adjustments (note 2)
--------------------------------------------------------------------------
2009 2008 2009 2008 2009 2008
--------------------------------------------------------------------------
Copper
Highland Valley Copper $ 154 $ 259 $ 55 $ 171 $ 74 $ 160
Antamina 138 256 75 189 89 178
Quebrada Blanca 77 190 41 116 17 92
Carmen de Andacollo 21 43 10 29 (1) 24
Duck Pond 18 25 6 18 4 7
--------------------------------------------------------------------------
408 773 187 523 183 461
Coal (note 1) 954 544 515 322 394 309
Zinc
Trail 281 402 39 64 26 52
Red Dog 94 97 48 64 40 50
Other 11 35 (1) (9) (2) (12)
Inter-segment sales (41) (46) (5) 9 (5) 9
--------------------------------------------------------------------------
345 488 81 128 59 99
--------------------------------------------------------------------------
TOTAL $ 1,707 $ 1,805 $ 783 $ 973 $ 636 $ 869
--------------------------------------------------------------------------
(1) On October 30, 2008, we completed the acquisition of Fording's assets
which increased our direct ownership interest in Teck Coal from 40% to
100%. The results summarized in the above table reflect our increased
ownership from October 30, 2008.
(2) After depreciation, amortization and pricing adjustments.
REVENUES AND OPERATING PROFIT
SIX MONTHS ENDED JUNE 30
Our revenue, operating profit before depreciation and pricing adjustments and
operating profit by business unit are summarized in the table below:
Operating
profit (loss)
before
depreciation Operating
and pricing profit (loss)
($ in millions) Revenues adjustments (note 2)
--------------------------------------------------------------------------
2009 2008 2009 2008 2009 2008
--------------------------------------------------------------------------
Copper
Highland Valley Copper $ 340 $ 529 $ 106 $ 315 $ 146 $ 349
Antamina 264 446 138 298 166 325
Quebrada Blanca 171 361 82 197 24 164
Carmen de Andacollo 45 88 22 53 - 42
Duck Pond 35 65 7 32 5 16
--------------------------------------------------------------------------
855 1,489 355 895 341 896
Coal (note 1) 1,828 765 1,034 348 823 324
Zinc
Trail 573 843 70 141 44 116
Red Dog 185 267 77 156 61 137
Other 25 75 - 5 - (8)
Inter-segment sales (90) (124) (6) 9 (6) 9
--------------------------------------------------------------------------
693 1,061 141 311 99 254
--------------------------------------------------------------------------
TOTAL $ 3,376 $ 3,315 $ 1,530 $ 1,554 $ 1,263 $ 1,474
--------------------------------------------------------------------------
(1) On October 30, 2008, we completed the acquisition of Fording's assets
which increased our direct ownership interest in Teck Coal from 40% to
100%. The results summarized in the above table reflect our increased
ownership from October 30, 2008.
(2) After depreciation, amortization and pricing adjustments.
COPPER
Highland Valley Copper (97.5%)
Operating results at the 100% level are summarized in the following table:
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
2009 2008 2009 2008
--------------------------------------------------------------------------
Tonnes milled (000's) 11,033 10,924 22,005 21,383
Copper
Grade (%) 0.32 0.31 0.31 0.31
Recovery (%) 86.0 84.3 85.1 83.7
Production (000's tonnes) 30.2 28.1 57.6 54.7
Sales (000's tonnes) 21.2 28.2 55.7 53.8
Molybdenum
Production (million pounds) 1.6 0.9 3.0 1.7
Sales (million pounds) 1.5 1.0 2.8 1.8
Cost of sales ($ millions)
Operating costs $ 61 $ 80 $ 152 $ 144
Distribution costs $ 6 $ 7 $ 14 $ 14
Depreciation and amortization $ 13 $ 11 $ 28 $ 21
Operating Profit ($ millions)
Before depreciation $ 87 $ 171 $ 174 $ 370
After depreciation $ 74 $ 160 $ 146 $ 349
--------------------------------------------------------------------------
Highland Valley Copper's operating profit, before positive pricing adjustments,
was $42 million in the second quarter compared with $161 million a year ago.
Positive pricing adjustments of $32 million were recorded in the quarter
compared with $1 million of negative price adjustments last year. The decline in
operating profit was due to significantly lower copper prices and timing of
shipments, as approximately 4,000 tonnes of shipments that had been scheduled to
occur in the second quarter were shipped in the first quarter.
Copper production in the second quarter increased by 7% to 30,200 tonnes
compared with the same period last year as a result of higher ore grades and
improved mill recoveries.
As previously announced, certain geotechnical issues have been indentified which
will restrict access to ore in the Valley pit for at least the next 18 months.
The shortfall is expected to be partially made up with lower grade ore from the
Lornex and Highmont pits. Although the mill is expected to run at full capacity,
the blend of ores available will have lower grades, throughput rates and
recovery. Based on preliminary assessments, we now expect that Highland Valley's
copper production will be approximately 115,000 tonnes in 2009 and approximately
85,000 tonnes in 2010.
Remedial actions are expected to include at least 40 million tonnes of
additional soil stripping above the east wall before the planned placement of a
rock buttress to provide long term stability and release of the 2013 extension
ore. In addition, a smaller buttress is currently being constructed on the south
wall to provide stability for the current production areas in the Valley pit.
Based on preliminary estimates, Highland Valley's life-of-mine ore reserves will
not be affected by the changes to the east wall design, but are expected to be
reduced by approximately 2%, depending on the final design of the south wall
remedial actions. Final remedial designs and a new life-of-mine plan are
expected to be completed by the end of the fourth quarter of 2009.
The permit amendment for the next phase of mine life extension to 2019 was
received in the second quarter and pre-production stripping of the west wall has
commenced. West wall stripping is currently scheduled for completion in 2013.
Antamina (22.5%)
Operating results at the 100% level are summarized in the following table:
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
2009 2008 2009 2008
--------------------------------------------------------------------------
Tonnes milled (000's)
Copper-only ore 3,360 4,950 7,163 8,842
Copper-zinc ore 5,077 2,779 9,127 5,405
--------------------------------------------------------------------------
8,437 7,729 16,290 14,247
Copper (note 1)
Grade (%) 1.19 1.38 1.20 1.30
Recovery (%) 80.5 90.2 81.9 90.1
Production (000's tonnes) 80.9 94.5 159.9 168.6
Sales (000's tonnes) 74.4 103.0 162.8 165.7
Zinc (note 1)
Grade (%) 2.79 3.74 2.86 3.67
Recovery (%) 81.0 86.8 82.2 87.6
Production (000's tonnes) 108.6 91.4 201.0 169.0
Sales (000's tonnes) 102.0 102.5 187.5 160.5
Molybdenum
Production (million pounds) 1.1 3.8 3.2 7.6
Sales (million pounds) 1.1 5.4 3.6 8.9
Cost of sales (US$ millions)
Operating costs $ 86 $ 126 $ 206 $ 211
Distribution costs $ 27 $ 51 $ 47 $ 73
Royalties and other costs
(note 2) $ 50 $ 79 $ 58 $ 132
Depreciation and amortization $ 25 $ 37 $ 49 $ 67
Our 22.5% share of operating
profit ($ millions)
Before depreciation $ 94 $ 187 $ 178 $ 339
After depreciation $ 89 $ 178 $ 166 $ 325
--------------------------------------------------------------------------
(1) Copper ore grades and recoveries apply to all of the processed ores.
Zinc ore grades and recoveries apply to copper-zinc ores only.
(2) In addition to royalties paid by Antamina, we also pay a royalty to
the vendor of our interest in Antamina equivalent to 7.4% of our share
of cash flow distributed by the mine.
Our 22.5% share of Antamina's operating profit, before positive pricing
adjustments, was $70 million in the second quarter compared with $179 million in
the same period last year. Our share of positive pricing adjustments in the
second quarter was $19 million compared with $1 million of negative price
adjustments in the same period a year ago.
Tonnes milled in the second quarter increased 9% compared with 2008, as the SAG
mill motor was increased to a higher speed in June compared to a reduced SAG
mill speed in the same period last year. As a result of mine sequencing, the
concentrator processed 40% copper-only ore and 60% copper-zinc ore in the
quarter compared to 64% copper-only and 36% copper-zinc during the second
quarter last year.
Despite higher mill throughput, copper production in the second quarter was 14%
lower at 80,900 tonnes compared with 94,500 tonnes last year primarily due to
the lower proportion of copper-only ore throughput and lower grades and
recoveries in the quarter. Zinc production in the quarter increased by 19% over
last year to 108,600 tonnes due to processing a greater amount of copper-zinc
ore.
Sales volumes of copper were 28% lower than the second quarter of last year
reflecting the lower production levels, while sales volumes of zinc were similar
to the second quarter last year.
We are currently negotiating changes to Antamina's labour agreement, which
expires on July 24, 2009.
Quebrada Blanca (76.5%)
Operating results at the 100% level are summarized in the following table:
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
2009 2008 2009 2008
--------------------------------------------------------------------------
Tonnes placed (000's)
Heap leach ore 2,048 1,958 3,884 3,627
Dump leach ore 2,631 2,082 4,204 4,582
--------------------------------------------------------------------------
4,679 4,040 8,088 8,209
Grade (TCu%) (note 1)
Heap leach ore 1.16 1.38 1.19 1.30
Dump leach ore 0.57 0.60 0.54 0.62
Production (000's tonnes)
Heap leach ore 15.7 16.5 31.4 32.0
Dump leach ore 6.1 5.0 12.0 10.4
--------------------------------------------------------------------------
21.8 21.5 43.4 42.4
Sales (000's tonnes) 14.3 22.1 35.5 42.0
Cost of sales (US$ million)
Operating costs $ 29 $ 60 $ 69 $ 113
Inventory adjustments (note 2) $ - $ 10 $ - $ 33
Distribution costs $ 2 $ 2 $ 4 $ 4
Depreciation and amortization $ 21 $ 24 $ 48 $ 44
Operating profit ($ millions)
Before depreciation $ 42 $ 116 $ 83 $ 208
After depreciation $ 17 $ 92 $ 24 $ 164
--------------------------------------------------------------------------
(1) TCu% is the percent assayed total copper grade.
(2) Inventory adjustments consist of mark-to-market adjustments of work in
process inventory at the time of the acquisition of the mine in August
2007, which were charged to earnings as the inventory was sold.
(3) Results do not include a provision for the non-controlling interests'
23.5% share of Quebrada Blanca.
Quebrada Blanca's operating profit, before pricing adjustments, was $16 million
compared with $91 million in the second quarter of 2008. Positive pricing
adjustments were negligible, both this year and last.
Copper production in the second quarter of 21,800 tonnes was similar to last
year. Sales volumes of 14,300 tonnes in the second quarter were 35% lower than
the same period last year due to the timing of shipments.
Operating costs in the second quarter, before changes in inventory, were US$45
million compared with US$62 million a year ago as a result of lower fuel,
sulphuric acid and other consumable costs. Quebrada Blanca is also realizing the
benefits of operating its power house more efficiently which has partially
reduced the need to purchase power from significantly higher priced third party
sources. In addition, second quarter operating costs in 2008 had been affected
by a US$9 million signing bonus related to new collective bargaining agreements.
Carmen de Andacollo (90%)
Operating results at the 100% level are summarized in the following table:
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
2009 2008 2009 2008
--------------------------------------------------------------------------
Tonnes placed (000's)
Heap leach ore 879 960 1,838 1,853
Dump leach ore 363 50 600 265
--------------------------------------------------------------------------
1,242 1,010 2,438 2,118
Grade (TCu%) (note 1)
Heap leach ore 0.60 0.66 0.62 0.64
Dump leach ore 0.31 0.27 0.30 0.25
Production (000's tonnes)
Heap leach ore 3.9 3.9 8.1 7.7
Dump leach ore 0.8 1.3 1.9 2.7
--------------------------------------------------------------------------
4.7 5.2 10.0 10.4
Sales (000's tonnes) 3.7 5.0 9.0 10.3
Cost of sales (US$ million)
Operating costs $ 10 $ 11 $ 17 $ 23
Inventory adjustments (note 2) $ - $ 2 $ - $ 8
Distribution costs $ 1 $ 1 $ 2 $ 2
Depreciation and amortization $ 8 $ 5 $ 19 $ 13
Operating profit (loss)
($ millions)
Before depreciation $ 9 $ 29 $ 23 $ 55
After depreciation $ (1) $ 24 $ - $ 42
--------------------------------------------------------------------------
(1) TCu% is the percent assayed total copper grade.
(2) Inventory adjustments consist of mark-to-market adjustments of work in
process inventory at the time of the acquisition of the mine in August
2007, which were charged to earnings as the inventory was sold.
(3) Results do not include a provision for the non-controlling interests'
10% share of Andacollo.
Andacollo incurred an operating loss of $1 million in the second quarter
compared with an operating profit of $24 million in the second quarter of 2008.
Pricing adjustments in each period were minimal.
Copper production of 4,700 tonnes in the second quarter was consistent with the
current mine plan, but 10% lower than a year ago as the mine is transitioning
from mining the supergene deposit to the primary hypogene zone scheduled for
commissioning later this year.
Sales volumes in the second quarter were 26% lower than the same period last
year, due to the timing of shipments.
The development of Andacollo's concentrate project is progressing, with
commissioning scheduled for the fourth quarter of 2009 and commercial production
levels expected in the first quarter of 2010. The development consists of the
construction of a 55,000 tonne per day concentrator and tailings facility and is
expected to produce 76,000 tonnes (168 million pounds) of copper and 53,000
ounces of gold in concentrate annually over the first 10 years of the project.
The capital cost forecast for the project is US$425 million using a US$1 equals
535 Chilean pesos exchange rate, of which US$331 million has been spent from
inception to June 30, 2009.
On April 6, 2009, Andacollo announced the sale of an interest in future gold
production from the Andacollo mine to Royal Gold, Inc. ("Royal Gold"). Proceeds
to Andacollo are expected to be US$218 million and 1.2 million common shares of
Royal Gold. Royal Gold will be entitled to payment based on 75% of the payable
gold produced until total cumulative production reaches 910,000 ounces of gold,
and 50% thereafter. Closing is subject to customary conditions and is expected
to occur in the third quarter of 2009.
Duck Pond (100%)
Duck Pond's operating profit was $4 million in the second quarter as a result of
$4 million of positive pricing adjustments. This compares with an operating
profit of $7 million in the same period last year. Copper and zinc production in
the quarter was 3,600 tonnes and 5,700 tonnes, respectively, compared with 3,700
tonnes and 5,100 tonnes in the same period last year.
Underground ramp development to access the lower portion of the orebody was
completed in the second quarter with new primary mining areas scheduled for
production in the third quarter. The availability of these lower ore zones is
expected to improve mill throughput and recovery going forward.
Development Projects
During the second quarter an Advanced Concept Study was completed on the
Quebrada Blanca Hypogene project and a Pre-feasibility Study was commenced. The
Pre-feasibility Study is scheduled to be completed in the second quarter of
2010. Work on our Galore Creek, Relincho and other copper development projects
was limited during the second quarter.
COAL
Teck Coal Partnership (100%)
Operating results at the 100% level are summarized in the following table:
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
2009 2008 2009 2008
--------------------------------------------------------------------------
Production (000's tonnes) 4,279 6,504 8,245 12,396
Sales (000's tonnes) 5,004 6,575 8,691 12,333
Average sale price
US$/tonne $ 165 $ 204 $ 181 $ 154
C$/tonne $ 191 $ 207 $ 210 $ 155
Operating expenses (C$/tonne)
Cost of product sold $ 55 $ 45 $ 57 $ 46
Transportation $ 33 $ 39 $ 34 $ 38
Depreciation and amortization $ 24 $ 5 $ 24 $ 5
Our share of operating profit
($ millions) (note 1)
Before depreciation $ 515 $ 322 $1,034 $ 348
After depreciation $ 394 $ 309 $ 823 $ 324
--------------------------------------------------------------------------
(1) Results of Teck Coal represent our 100% direct interest commencing
October 30, 2008 and 40% prior to that date.
On October 30, 2008, we acquired all the assets of Fording, which consisted of
Fording's 60% interest in Teck Coal (formerly Elk Valley Coal Partnership). The
transaction increased our interest in the partnership from an effective interest
of 52% to a 100% interest. We began to fully consolidate the results of Teck
Coal on October 30, 2008.
The lower production and sales volume levels in the second quarter and the first
half of 2009, compared with the same periods in 2008, reflect reduced demand for
steel and hard coking coal. Significant decreases in coal sales to steel mills
in Europe and the Americas were partially mitigated by increased demand from
Chinese customers for seaborne coking coal, which has been sold at prevailing
spot prices. A portion of the lost sales volume with our long-term contract
customers was replaced by spot sales into the thermal and PCI coal markets. We
expect our sales of thermal and PCI coals to comprise approximately 14% of our
sales volume for the 2009 calendar year and approximately 10% for the 2009 coal
year, which is consistent with our expected long-term average thermal and PCI
product mix of 10%. We also expect the recent trend towards increased spot sales
to continue in the future as we seek to contract with our traditional customers
for annual tonnages that more closely match their requirements and buying
patterns.
The lower average U.S. dollar selling prices in the second quarter compared with
the same quarter in 2008 primarily reflect the lower contract price settlements
for the 2009 coal year that commenced April 1. During the second quarter of
2009, approximately 1.5 million tonnes of carryover tonnage was sold at the
higher 2008 contract prices.
The increases in unit cost of product sold for the second quarter and first half
of 2009, compared with the same periods in 2008, primarily reflect lower
production levels, which increase fixed costs per tonne of coal produced, as
well as higher strip ratios and higher labour costs. These cost increases were
partially offset by lower diesel fuel prices. Additional stripping of waste
during the first half of the year is expected to benefit strip ratios and unit
costs in the second half of 2009.
The decrease in unit transportation cost for the second quarter primarily
reflects lower contractual rail rates with Canadian Pacific Railway for the
westbound transportation of coal from our five British Columbia mine sites under
the new rates that apply for the year commencing April 8, 2009. The decrease in
unit transportation costs for the first half of 2009 reflects the lower
contractual westbound rail rates as well as lower ocean freight and vessel
demurrage costs, partially offset by higher port loading costs, which are
variable in part with average selling prices.
The increases in depreciation and amortization expense reflect the amortization
of non-cash purchase accounting adjustments related to our acquisition of
Fording's interest in Teck Coal.
We now expect 2009 coal sales to be at the upper end of the previously announced
range of 18-20 million tonnes. Third quarter sales are expected to be
approximately 6 million tonnes, although third quarter sales volume could be
constrained by clean coal production. Significant increases in sales to China
contribute to our increased confidence in higher sales volumes. Where possible,
previously planned temporary production shutdowns at several mines have been
cancelled or reduced in length in order to meet the increased demand. We have
completed negotiations with more than 80% of our traditional customers, with
pricing consistent with previously announced settlements at US$128 per tonne for
our highest quality coal products. We expect our average realized selling price
for the 2009 calendar year to be in the range of US$155 to US$160 per tonne.
Increased production and sales for the remainder of the year are expected to
significantly reduce site unit operating costs, as the per tonne impact of fixed
costs, which typically represent about 25% of the cost structure, is reduced.
Strip ratios are expected to reduce by approximately 20% in the second half of
2009 compared to the first half. Site costs in the 2009 calendar year are
expected to be in the range of C$53 to C$56 per tonne. Unit transportation costs
for calendar 2009 are expected to be in the range of $33 to $35 per tonne.
The union labour agreement for our Line Creek Operations expired on June 1, 2009
and we are currently in the process of negotiating a new labour agreement.
ZINC
Trail (100%)
Operating results at the 100% level are summarized in the following table:
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
2009 2008 2009 2008
--------------------------------------------------------------------------
Metal production
Zinc (000's tonnes) 59.3 61.5 117.7 135.2
Lead (000's tonnes) 18.8 20.5 38.1 46.1
Metal sales
Zinc (000's tonnes) 62.9 68.6 120.3 141.6
Lead (000's tonnes) 19.8 21.2 37.0 44.9
Power
Surplus power sold (GW.h) 424 314 700 503
Power price (US$/MW.h) $ 21 $ 62 $ 27 $ 67
Cost of sales ($ millions)
Concentrates $ 143 $ 221 $ 301 $ 475
Operating costs $ 75 $ 90 $ 153 $ 176
Distribution costs $ 24 $ 27 $ 49 $ 52
Depreciation and amortization $ 13 $ 12 $ 26 $ 25
Operating profit ($ millions)
before depreciation
Metal operations $ 30 $ 45 $ 50 $ 109
Power sales $ 9 $ 19 $ 20 $ 32
--------------------------------------------------------------------------
$ 39 $ 64 $ 70 $ 141
Operating profit ($ millions)
after depreciation
Metal operations $ 21 $ 35 $ 31 $ 90
Power sales $ 5 $ 17 $ 13 $ 26
--------------------------------------------------------------------------
$ 26 $ 52 $ 44 $ 116
--------------------------------------------------------------------------
Trail metal operations operating profit declined to $21 million in the second
quarter compared with $35 million in the same period last year due mainly to
significantly lower zinc and lead prices. The weaker Canadian dollar partially
offset the lower metal prices and sales volumes. Refined zinc production
curtailments that began in late 2008 continued throughout the second quarter to
better match production to market conditions. Refined zinc production in the
second quarter of 2008 was also negatively impacted by technical issues in the
leaching/purification area, which resulted in zinc production being similar to
that under our current curtailment plan.
We expect to continue with our refined zinc production curtailments at Trail
until demand improves. We now expect that this may occur over the next few
months. Our forecast zinc production for 2009 will be between 235,000 tonnes and
255,000 tonnes. Lead production is not affected by our curtailment program.
On June 17, 2009 we announced the execution of a non-binding memorandum of
understanding with BC Hydro regarding the proposed sale of a one-third interest
in the Waneta Dam for $825 million. The transaction is subject to completion of
due diligence and definitive documentation, and to receipt of certain third
party consents and necessary regulatory approvals. We expect the transaction to
close by year end.
Upper Columbia River Basin (Lake Roosevelt)
Teck American continued work to fulfill its obligations under the settlement
agreement reached with the United States and the EPA in June 2006 to complete a
remedial investigation and feasibility study of the Upper Columbia River
("RI/FS"). A final comprehensive work plan for the site was developed late in
2008 and subject to acquiring required permits, field work on the RI/FS, which
was expected to commence in the second quarter of 2009, is now expected to
commence in the third quarter.
Motion proceedings continued on the Lake Roosevelt litigation in the Federal
District Court for Eastern Washington. On September 19, 2008, the Court
dismissed the claims for penalties while the EPA order (the "UAO") was
outstanding. On March 9, 2009, the Court granted the plaintiffs' motions for an
award of the costs of litigating the UAO claims. The plaintiffs have appealed
the dismissal of the UAO claims and once the costs awarded the plaintiffs are
quantified, Teck Metals Ltd. ("TML") intends to appeal the cost award to the 9th
Circuit. The second phase of the case, dealing with liability under CERCLA for
cost recovery and natural resource damages is scheduled to be heard in October,
2010. At this time it is not possible to estimate the extent and cost, if any,
of response costs, for natural resource damages and assessment costs which may
be claimed until there has been substantial progress on the RI/FS.
Teck American entered into an agreement with Washington State under its
voluntary cleanup program to remove approximately 5,000 cubic yards of sand
containing slag deposited years ago from its Trail, BC smelter and Black Sand
Beach along the northern reach of Lake Roosevelt. Regulatory processes and
planning is now underway. Work is scheduled to begin in September 2010 and will
take approximately 1 to 2 months to complete. The material will likely be
transported to Trail for disposal. The cost of the project is expected to be
less than $1 million.
Red Dog (100%)
Operating results at the 100% level are summarized in the following table:
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
2009 2008 2009 2008
--------------------------------------------------------------------------
Tonnes milled (000's) 819 749 1,609 1,524
Zinc
Grade (%) 21.0 20.5 21.1 20.9
Recovery (%) 83.3 84.8 82.7 84.3
Production (000's tonnes) 143.0 130.0 280.4 268.5
Sales (000's tonnes) 92.2 76.3 188.1 179.7
Lead
Grade (%) 5.6 6.2 5.7 6.7
Recovery (%) 67.6 68.8 69.0 65.9
Production (000's tonnes) 30.9 31.8 63.2 67.3
Sales (000's tonnes) - 2.8 - 2.8
Cost of sales (US$ millions)
Operating costs $ 23 $ 19 $ 51 $ 45
Distribution costs $ 16 $ 14 $ 35 $ 32
Royalties (NANA and State) $ (2) $ 6 $ (4) $ 35
Depreciation and amortization $ 9 $ 9 $ 20 $ 19
Operating profit ($ millions)
Before depreciation $ 50 $ 59 $ 85 $ 156
After depreciation $ 40 $ 50 $ 61 $ 137
--------------------------------------------------------------------------
Red Dog's operating profit, before pricing adjustments, was $37 million in the
second quarter compared with $55 million in the same period last year. Positive
pricing adjustments were $3 million in the second quarter compared with $5
million of negative pricing adjustments in the second quarter of 2008. The
decline in operating profit was mainly due to lower zinc prices.
Zinc production in the quarter increased 10% to 143,000 tonnes compared to the
same period last year as a result of performance improvement initiatives. These
initiatives have increased throughput resulting in shorter than expected
maintenance shutdowns and improved mill online time.
The 2009 shipping season commenced on July 3, 2009 with planned shipments of
1,025,000 tonnes of zinc concentrate and 220,000 tonnes of lead concentrate
compared with 920,000 tonnes and 247,000 tonnes, respectively for the 2008
shipping season. Zinc sales volumes in the third and fourth quarter of 2009 are
estimated to be 168,000 tonnes and 198,000 tonnes of metal in concentrate,
respectively.
We continue to work towards the approval of a Supplemental Environmental Impact
Statement ("SEIS") for the Aqqaluk deposit, the next ore body scheduled to be
developed by Red Dog. The mine's effluent discharge permit is expected to be
renewed in conjunction with the SEIS. The final SEIS is expected to be released
for public review this summer and the final permits are expected to be issued in
the fourth quarter of this year.
ENERGY
Fort Hills Project
The timing of a final investment decision on the Fort Hills oil sands project
remains uncertain, pending both improvements in commodity prices and financial
markets and completion of the merger of Petro-Canada, 60% owner of the project,
and Suncor. Spending on the project has been significantly reduced and the
workforce downsized to reflect the lower level of activity.
Frontier and Equinox Projects
Engineering studies continue on the Equinox oil sands project, including pilot
plant test work to support the design assumptions used for both the Equinox and
Frontier oil sands projects. A draft Design Basis Memorandum study for Equinox
is under review by the joint venture partners. The joint venture continues to
advance the project through the permitting process. Engineering studies have
started on the Frontier Project.
Other Oil Sand Leases
During the 2009 winter drilling season 54 core holes were completed on Leases
421, 022 and 023 (Lease 421 Area), bringing the total core holes completed to
59. Preliminary results indicate 49 of the core holes contain prospective oil
sands that range in thickness from 10 to 40 metres (averaging 19 metres) with
overburden thicknesses ranging from 17 to 68 metres (averaging 39 metres).
Results from the core analysis for the 2009 wells are expected to be available
in the fourth quarter of 2009.
COSTS AND EXPENSES
Administration and general expenses were $49 million in the second quarter
compared with $41 million last year. The increase was mainly attributable to
higher stock-based compensation, which is linked to the increase in our share
price.
Our interest expense increased significantly to $172 million in the quarter
compared with $17 million a year ago. The primary cause of the increase was the
debt incurred to finance the acquisition of Fording Coal. This debt was
initially short-term and bore relatively low rates of interest. However, our
higher credit spread and the longer maturities of our refinancing have resulted
in higher interest rates. Offsetting this, the principal amount of the debt has
decreased due to asset sales and will decrease further as the proceeds of the
share issuance in July were used to retire the remaining bridge loan and reduce
the term loan, thereby reducing future interest charges. Debt and interest
charges are denominated in US dollars and fluctuations in the exchange rate also
affect interest expense. A strengthening Canadian dollar served to reduce these
amounts in the second quarter.
Other income, net of other expenses, was $323 million in the second quarter
compared with other income of $39 million last year. Significant items in the
second quarter included non-cash foreign exchange translation gains totalling
$489 million, a $47 million loss on our copper and other commodity derivative
positions and the write-off of $124 million of previously capitalized debt
financing fees resulting from the repayment of the majority of our bridge loan
in the quarter. The non-cash foreign exchange translation gain on our debt
totalled $999 million, of which $513 million was recorded in other income and
$486 million in other comprehensive income. The portion charged to other
comprehensive income relates to that portion of our US dollar debt that is
designated as a hedge against our investments in subsidiaries whose functional
currency is the US dollar.
Provision for Income and Resource Taxes
Income and resource taxes for the quarter were $175 million, or 24% of pre-tax
earnings, which is lower than the Canadian statutory tax rate. This is the
result of the significant foreign exchange gain in the quarter, which is subject
to the lower capital gains tax rate. This was partially offset by the effect of
resource taxes in Canada.
Income tax pools arising out of the Fording transaction shield us from cash
income taxes, but not resource taxes, in Canada. We remain subject to cash taxes
in foreign jurisdictions.
Non-controlling Interests
Non-controlling interest expense, which represents other parties' share of
earnings of our subsidiaries, was $13 million in the quarter compared with $32
million in the same period last year. The decrease was due to significantly
lower earnings from our Quebrada Blanca and Andacollo operations in which third
parties hold a 23.5% and 10% interest, respectively.
Equity Earnings
In the second quarter we recorded equity losses of $17 million primarily from
our Fort Hills oil sands investment as a result of the deferral of the project
and contract termination charges.
Discontinued Operations
Our earnings from discontinued operations relate to our Pogo and Hemlo gold
operations and to a price participation provision in the agreement from the sale
of our Cajamarquilla zinc refinery in 2004. Earnings in the second quarter from
Pogo and Hemlo were $11 million and $3 million, respectively. Mark-to-market
adjustments related to deferred payments on the sale of the Cajamarquilla
refinery resulted in a further gain of $2 million. The sale of Hemlo closed in
April, 2009 resulting in an after-tax gain of $33 million. The sale of Pogo
closed in July 2009 for proceeds of US$245 million and we expect to record a
gain of approximately C$80 million in the third quarter.
FINANCIAL POSITION AND LIQUIDITY
Since March 31, 2009, our financial position and liquidity have improved
significantly. With the completion of our recent equity financing, our debt due
within the next twelve months has been reduced from $8.4 billion to $770 million
and our debt due before the end of 2011 has been reduced from $11.6 billion to
$2.6 billion. In addition, we have seen a significant strengthening of our
balance sheet as our debt to debt plus equity will be reduced from 49% at June
30, to approximately 39% as a result of the share issuance and proceeds from the
sale of Pogo.
Our cash position decreased during the second quarter by $882 million to $750
million at June 30, 2009, with the reduction due mainly to payments made to
reduce our bridge and term loan balances.
Cash flow from operations, before changes in non-cash working capital items, was
$421 million in the second quarter compared with $733 million in the same period
last year. The decline in cash flow was mainly due to lower operating profits
from our copper division, partially offset by higher operating profits from our
coal division as a result of our increased ownership in Teck Coal. Changes in
non-cash working capital items were minimal in the second quarter compared with
a $232 million use of cash in the same period last year primarily as a result of
a reduction of accounts payable due to large tax payments related to significant
earnings from 2007.
Expenditures on property, plant and equipment were $148 million in the second
quarter and included $33 million on sustaining capital and $115 million on
development projects. The largest components of sustaining expenditures were at
Teck Coal for equipment upgrades. Development expenditures included $14 million
for preparatory stripping and capital equipment for Highland Valley Copper's
mine life extension project, $58 million on the development of the hypogene
deposit at Andacollo and $40 million as a final payment for a previously
acquired oil sands property. Investments in the second quarter totalled $72
million and included $51 million of funding for our share of the Fort Hills oil
sands project.
Our total debt balance was $11.2 billion at June 30, 2009 and $8.9 billion as of
July 22nd. Since we acquired the Fording assets in October, 2008, our total debt
has been reduced by $4.6 billion, of which $3.9 billion was repaid and
approximately $0.7 billion was from the translation to the Canadian dollar
equivalent as a result of the stronger Canadian dollar. We also have bank credit
facilities aggregating $1.3 billion, 97% of which mature in 2012 and beyond. Our
current unused credit lines under these facilities after drawn letters of credit
amount to $1.1 billion. Our senior debt was upgraded to Ba2, with a positive
outlook, by Moody's Investor Services in July. Our senior debt is currently
rated BB+ by Standard & Poor's (S&P) and BB (high) by Dominion Bond Rating
Service, both with negative outlooks.
In the second quarter of 2009 we amended our US$4 billion term loan and US$5.81
billion bridge loan. The lenders agreed, among other things, to:
- defer US$4.4 billion of payments previously scheduled for the balance of 2009,
- extend the maturity date of US$3.5 billion of the bridge loan from October 29,
2009 to October 30, 2011, and
- reschedule approximately US$3.3 billion of amortization payments under the
term loan.
The amended term loan contains covenants including restrictions on new
indebtedness, new liens, acquisitions and dispositions, capital expenditures and
distributions. In addition, there are two financial covenants, a maximum
leverage ratio and a minimum interest coverage ratio. Both tests will be
calculated on a rolling basis at the end of each calendar quarter based on
EBITDA and interest expense for the previous twelve months. At June 30, 2009 the
minimum interest coverage ratio covenant was 3.5 to 1.0 and the maximum leverage
ratio covenant was 4.75 to 1.0 and we were in compliance with both.
Since completion of the amendment, we have repaid the bridge loan in full with
proceeds from asset sales, tax refunds related to the Fording acquisition, the
issuance of senior secured notes and a portion of the US$1.5 billion in proceeds
received on July 15th from the sale of Class B subordinate voting shares to a
wholly-owned subsidiary of China Investment Corporation ("CIC"). The remaining
proceeds from the private placement to CIC were used to repay approximately
US$1.2 billion of the term loan. As of the date of this report, the term loan
balance is approximately US$2.74 billion, with US$106 million due in 2009,
US$1.066 billion due in each of 2010 and 2011 and US$506 million in 2012. The
term loan requires mandatory prepayment from net proceeds of asset sales and new
debt or equity issuances and a quarterly cash sweep.
In May 2009, we issued US$4.225 billion in aggregate principal amount of senior
secured notes, consisting of US$1.315 billion of 5-year notes due in May, 2014,
US$1.06 billion of 7-year notes due in May, 2016 and US$1.85 billion of 10-year
notes due in May, 2019. The 5-year notes bear interest at 9.75% per annum, were
issued at 95.27% of face value and are non-callable. The 7-year notes bear
interest at 10.25% per annum, were issued at 94.654% of face value and are
callable on or after May 15, 2013. The 10-year notes bear interest at 10.75% per
annum, were issued at 94.893% of face value and are callable on or after May 15,
2014. The net proceeds from these notes of US$3.875 billion were used to repay a
portion of the bridge loan.
On July 15th, we issued approximately 101.3 million Class B subordinate voting
shares to a wholly-owned subsidiary of CIC for proceeds of US$1.5 billion and
used the net proceeds to retire the outstanding balance of the bridge loan and
reduce the balance of the term loan. CIC indirectly holds approximately 17.5% of
our outstanding Class B subordinate voting shares, representing approximately
17.2% equity and 6.7% voting interests in Teck.
Our obligations under our amended lending agreements and the senior secured
notes are guaranteed by Teck Metals Ltd., Teck Coal Partnership, and all other
material subsidiaries of Teck, subject to certain exceptions, and are secured by
a first priority security interest in all of the material properties of Teck and
each guarantor, with provision for the release of the security interest in
connection with permitted asset sales. The security interest in favour of the
banks and noteholders will fall away upon Teck receiving an investment grade
credit rating with a stable outlook from each of Moody's and S&P. Teck's US$1.2
billion of senior notes due in 2012, 2015 and 2035 have the benefit of the same
security interest.
COMPREHENSIVE INCOME
We recorded comprehensive income of $476 million in the second quarter,
consisting of $570 million of regular net earnings and $94 million of other
comprehensive loss. The most significant components of other comprehensive loss
in the quarter were currency translation adjustments on self-sustaining foreign
subsidiaries, and reclassification of gains on marketable securities on
realization. These marketable securities consist primarily of investments in
publicly traded companies with whom we partner in exploration or development
projects. Currency translation gains and losses are held in accumulated other
comprehensive income, net of taxes, until they are realized, at which time they
are included in net earnings.
OUTLOOK
The information below is in addition to the disclosure concerning specific
operations included above in the Operations and Corporate Development sections
of this document.
General Economic Conditions
While governments have taken significant steps to address weak global economic
conditions, significant uncertainty concerning the short and medium term global
economic outlook persists. Despite this uncertainty, the markets in which we
sell our products have seen significant improvements. Base metal prices have
increased significantly, while demand for coal has resulted in tightening
markets. However, markets and prices remain volatile. There have also been
significant improvements in capital markets which are now more readily
accessible, as illustrated by our recent bond issue. We continue to closely
monitor these developments and their effect on our business.
Capital Expenditures
Our capital expenditures for the remainder of 2009, excluding the Fort Hills
project, are expected to be approximately $280 million, including $120 million
of sustaining capital expenditures and $160 million on development projects. Our
development expenditures estimate of $160 million includes $105 million for
Andacollo's hypogene project and $42 million for Highland Valley's mine
expansion. We also expect to spend approximately $45 million on our share of
costs for the Fort Hills oil sands project in the remainder of 2009.
We continue to review our discretionary capital spending in light of current
market conditions, our debt reduction targets and restrictions on capital
spending arising from the amendments to our bridge and term loans.
Debt Revaluation and Interest Expense
Our US dollar denominated debt is subject to revaluation based on changes in the
Canadian/US dollar exchange rate. We have designated approximately US$5 billion
of our US dollar denominated debt as a hedge against our US dollar denominated
foreign operations. As a result, any foreign exchange gains or losses arising on
that amount of our debt will be recorded in other comprehensive income with the
remainder being charged to net earnings. The earnings impact of these
revaluations will be reduced in future quarters as a result of our debt
repayments, although exchange rate fluctuations will continue to affect our debt
to equity ratio and our interest expense.
Earnings Per Share
Our earnings per share may be significantly affected by our issuance of
approximately 101 million Class B subordinate voting shares on July 15, 2009.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) CHANGEOVER PLAN
Effective January 1, 2011 Canadian publicly listed entities will be required to
prepare their financial statements in accordance with International Financial
Reporting Standards ("IFRS"), instead of current Canadian GAAP. This mandate is
first applicable to interim reporting periods in 2011 and includes the
requirement to present comparative financial information for the 2010 year also
based on IFRS. Accordingly, although we will first report our result under IFRS
in 2011, the underlying conversion will be based on an effective transition date
of January 1, 2010.
In 2008, we established an IFRS conversion team to lead the significant
undertaking of transition from Canadian GAAP to IFRS. We have prepared a
detailed IFRS conversion plan, which will continue to evolve to accommodate the
expected development of IFRS accounting standards past 2011.
We have identified four phases to our conversion: scoping and planning, detailed
assessment, implementation and post implementation. The scoping and planning
phase involves establishing a project team and organizational structure,
including oversight of the process; this includes a project charter, project
management plan, stakeholder analysis and communication strategy. This phase
also entails an initial assessment of the key areas where IFRS transition may
have a significant impact and present significant challenges. This scoping and
planning phase is substantially complete. The second phase, detailed assessment,
involves in-depth technical analysis that will result in understanding potential
impacts, decisions on accounting policy choices and the drafting of accounting
policies. In addition this will result in identifying resource and training
requirements, processes for preparing financial statements, establishing IT
system requirements and preparing detailed transition plans. We are currently
completing this phase and expect to complete this detailed technical analysis by
end of the third quarter of 2009. During the implementation phase, we will
identify and carry out the implementation requirements to effect management's
accounting choices, develop sample financial statements, implement business and
internal control requirements, calculate the opening balance sheet at January 1,
2010 and other transitional reconciliations and disclosure requirements. The
last phase of post implementation will involve continuous monitoring of changes
in IFRS throughout the implementation process (through to 2011) and later as the
Roadmap for US consideration for adopting IFRS is established.
We are developing and maintaining our IFRS competencies by addressing training
requirements at various levels of the organization. These sessions are ongoing
and are provided by external advisors. We will continually assess training and
resource requirements as the project progresses.
FINANCIAL INSTRUMENTS AND DERIVATIVES
We hold a number of financial instruments and derivatives, the most significant
of which are marketable securities, foreign exchange forward sales contracts,
fixed price forward metal sales contracts, settlements receivable and payable
and price participation payments on the sale of the Cajamarquilla zinc refinery.
The financial instruments and derivatives are all recorded at fair values on our
balance sheet with gains and losses in each period included in other
comprehensive income, net earnings from continuing operations and net earnings
from discontinued operations as appropriate. Some of our gains and losses on
metal-related financial instruments are affected by smelter price participation
and are taken into account in determining royalties and other expenses. All are
subject to varying rates of taxation depending on their nature and jurisdiction.
The after-tax effect of financial instruments on our net earnings for the
following periods is set out in the table below:
Three months Six months
ended June 30 ended June 30
2009 2008 2009 2008
--------------------------------------------------------------------------
Price adjustments
On prior quarter sales $ 21 $ (2) $ 35 $ 48
On current quarter sales 15 (5) 44 19
--------------------------------------------------------------------------
36 (7) 79 67
Other financial instruments
Derivatives gains (31) 12 (57) 10
Cajamarquilla sale price
participation (discontinued
operations) 2 (7) 4 (5)
--------------------------------------------------------------------------
(29) 5 (53) 5
--------------------------------------------------------------------------
Total $ 7 $ (2) $ 26 $ 72
--------------------------------------------------------------------------
QUARTERLY EARNINGS AND CASH FLOW
(in millions,
except for
share data) 2009 2008 2007
--------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Revenues $ 1,707 $ 1,669 $ 1,600 $ 1,740 $ 1,805 $ 1,510 $ 1,478 $ 1,886
Operating
profit 636 627 190 679 869 605 452 901
Net
earnings
(loss) 570 241 (607) 424 497 345 280 490
Earnings
(loss)
per
share $ 1.17 $ 0.50 $ (1.28) $ 0.95 $ 1.12 $ 0.78 $ 0.64 $ 1.15
Cash flow
from
operations 374 1,120 583 853 501 148 588 807
--------------------------------------------------------------------------
OUTSTANDING SHARE DATA
As at July 22, 2009 there were 579,106,040 Class B subordinate voting shares and
9,353,470 Class A common shares outstanding. In addition, there were 6,264,566
director and employee stock options outstanding with exercise prices ranging
between $4.15 and $49.17 per share. More information on these instruments and
the terms of their conversion is set out in Note 21 of our 2008 year end
financial statements.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Any system of internal control over financial
reporting, no matter how well designed, has inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
There have been no changes in our internal control over financial reporting
during the quarter ended June 30, 2009 that have materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting.
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
This news release contains certain forward-looking information and
forward-looking statements as defined in applicable securities laws. All
statements other than statements of historical fact are forward looking
statements. These forward-looking statements, principally under the heading
"Outlook," but also elsewhere in this document, include estimates, forecasts,
and statements as to management's expectations with respect to, among other
things, our future earnings and cash flow , our plans to reduce our outstanding
indebtedness and the expected impact of steps that we have taken to reduce
spending, potential sources of funds to repay indebtedness, our planned sales of
assets, proposed discussions with our lenders, the future availability of unused
credit lines, the possibility that we will breach our debt covenants, our
diversification strategy and our plans for our oil sands investments, forecast
recoveries and the resolution of geotechnical issues at Highland Valley Copper,
expected progress and costs of our Andacollo concentrate project, the financial
and accounting consequences of our acquisition of the assets of Fording Canadian
Coal Trust, the sensitivity of our earnings to changes in commodity prices and
exchange rates, the potential impact of transportation and other potential
production disruptions, the impact of currency exchange rates, future trends for
the company, progress in development of mineral properties, future production
and sales volumes, capital expenditures and mine production costs, demand and
market outlook for commodities, future commodity prices and treatment and
refining charges, the settlement of coal contracts with customers, the outcome
of mine permitting currently underway, our assessment of the quantum of
potential natural resource damages in connection with the Upper Columbia River
Basin and the outcome of legal proceedings involving the company. These
forward-looking statements involve numerous assumptions, risks and uncertainties
and actual results may vary materially.
These statements are based on a number of assumptions, including, but not
limited to, assumptions regarding general business and economic conditions,
interest rates, the supply and demand for, deliveries of, and the level and
volatility of prices of, zinc, copper and coal and other primary metals and
minerals as well as oil, and related products, the timing of the receipt of
regulatory and governmental approvals for our development projects and other
operations, our costs of production and production and productivity levels, as
well as those of our competitors, power prices, market competition, the accuracy
of our reserve estimates (including with respect to size, grade and
recoverability) and the geological, operational and price assumptions on which
these are based, conditions in financial markets and the future financial
performance of the company. The foregoing list of assumptions is not exhaustive.
Events or circumstances could cause actual results to vary materially.
Factors that may cause actual results to vary materially include, but are not
limited to, changes in commodity and power prices, changes in interest and
currency exchange rates, acts of foreign governments and the outcome of legal
proceedings, inaccurate geological and metallurgical assumptions (including with
respect to the size, grade and recoverability of mineral reserves and
resources), unanticipated operational difficulties (including failure of plant,
equipment or processes to operate in accordance with specifications or
expectations, cost escalation, unavailability of materials and equipment,
government action or delays in the receipt of government approvals, industrial
disturbances or other job action, adverse weather conditions and unanticipated
events related to health, safety and environmental matters), political risk,
social unrest, failure of customers or counterparties to perform their
contractual obligations, the outcome of our ongoing discussions with lenders
(including potential additional costs or covenants associated with the
refinancing of our existing indebtedness and the risk that we may not be able to
reach an appropriate accommodation with lenders), the results of our ongoing
efforts to sell assets, further changes in our credit ratings, and changes or
further deterioration in general economic conditions or continuation of current
severe disruptions in credit and financial markets.
Statements concerning future production costs or volumes, and the sensitivity of
the company's earnings to changes in commodity prices and exchange rates are
based on numerous assumptions of management regarding operating matters and on
assumptions that demand for products develops as anticipated, that customers and
other counterparties perform their contractual obligations, that operating and
capital plans will not be disrupted by issues such as mechanical failure,
unavailability of parts and supplies, labour disturbances, interruption in
transportation or utilities, adverse weather conditions, and that there are no
material unanticipated variations in the cost of energy or supplies.
We assume no obligation to update forward-looking statements except as required
under securities laws. Further information concerning risks and uncertainties
associated with these forward looking statements and our business can be found
in our Annual Information Form for the year ended December 31, 2008, filed on
SEDAR and on EDGAR under cover of Form 40F.
WEBCAST
Teck will host an Investor Conference Call to discuss its Q2/2009 financial
results at 11:00 AM Eastern time, 8:00 AM Pacific time, on Thursday, July 23,
2009. A live audio webcast of the conference call, together with supporting
presentation slides, will be available at our website at www.teck.com. The
webcast is also available at www.earnings.com. The webcast will be archived at
www.teck.com.
Teck Resources Limited
Consolidated Statements of Earnings
(Unaudited)
--------------------------------------------------------------------------
Three months Six months
(Cdn$ in millions, ended June 30 ended June 30
except for share data) 2009 2008 2009 2008
--------------------------------------------------------------------------
Revenues $1,707 $1,805 $3,376 $3,315
Operating expenses (866) (842) (1,718) (1,649)
--------------------------------------------------------------------------
841 963 1,658 1,666
Depreciation and amortization (205) (94) (395) (192)
--------------------------------------------------------------------------
Operating profit 636 869 1,263 1,474
Other expenses
General and administration (49) (41) (80) (71)
Interest and financing (Note 10) (172) (17) (309) (37)
Exploration (8) (26) (19) (45)
Research and development (4) (8) (10) (16)
Asset impairment - (12) - (12)
Other income (expense) (Note 11) 323 39 254 43
--------------------------------------------------------------------------
Earnings before the undernoted items 726 804 1,099 1,336
Provision for income and resource
taxes (175) (327) (312) (500)
Non-controlling interests (13) (32) (24) (59)
Equity earnings (loss) (17) 55 (18) 64
--------------------------------------------------------------------------
Net earnings from continuing
operations 521 500 745 841
Net earnings (loss) from
discontinued operations
(Note (3(b)) 49 (3) 66 1
--------------------------------------------------------------------------
Net earnings $ 570 $ 497 $ 811 $ 842
--------------------------------------------------------------------------
Earnings per share
Basic $ 1.17 $ 1.12 $ 1.67 $ 1.90
Basic from continuing operations $ 1.07 $ 1.13 $ 1.53 $ 1.90
Diluted $ 1.17 $ 1.12 $ 1.66 $ 1.90
Diluted from continuing
operations $ 1.07 $ 1.12 $ 1.53 $ 1.89
Weighted average shares
outstanding (millions) 487.1 443.0 487.0 442.9
Shares outstanding at end of
period (millions) 487.1 443.2 487.1 443.2
--------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Teck Resources Limited
Consolidated Statements of Cash Flows
(Unaudited)
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
(Cdn$ in millions) 2009 2008 2009 2008
--------------------------------------------------------------------------
Operating activities
Net earnings from continuing
operations $ 521 $ 500 $ 745 $ 841
Items not affecting cash
Depreciation and amortization 205 94 395 192
Provision for future income
and resource taxes 27 107 85 114
Equity (earnings) loss 17 (55) 18 (64)
Non-controlling interests 13 32 24 59
Asset impairment - 12 - 12
Gain on sale of investments
and assets (17) (4) (222) (5)
Unrealized foreign exchange
(gains) losses (489) (6) (245) 1
Amortization and write-off of debt
financing fees 124 - 124 -
Other 2 3 25 13
Distributions received from
equity accounted investments - 50 - 65
--------------------------------------------------------------------------
421 733 1,007 1,228
Net change in non-cash working
capital items (47) (232) 487 (579)
--------------------------------------------------------------------------
374 501 1,494 649
Investing activities
Property, plant and equipment (148) (214) (250) (344)
Investment in oil sands and
other assets (72) (115) (304) (318)
Proceeds from the sale of
investments and assets 132 4 227 6
Decrease in temporary investments 2 - - -
--------------------------------------------------------------------------
(86) (325) (327) (656)
Financing activities
Issuance of debt 4,462 2 4,462 2
Repayment of debt (5,672) (1) (5,794) (32)
Repayment of capital leases (6) (2) (15) (2)
Issuance of Class B subordinate
voting shares 2 3 2 5
Dividends paid - - - (221)
Distributions to
non-controlling interests (8) (68) (21) (68)
--------------------------------------------------------------------------
(1,222) (66) (1,366) (316)
Effect of exchange rate changes
on cash and cash equivalents held
in US dollars (28) (4) (13) 31
--------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents from continuing
operations (962) 106 (212) (292)
Cash received (paid to) from
discontinued operations
(Note 3(b)) 80 (4) 112 46
--------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (882) 102 (100) (246)
Cash and cash equivalents at
beginning of period 1,632 1,060 850 1,408
--------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 750 $1,162 $ 750 $1,162
--------------------------------------------------------------------------
Supplemental cash flow information (Note 13)
The accompanying notes are an integral part of these financial statements.
Teck Resources Limited
Consolidated Balance Sheets
(Unaudited)
---------------------------------------------------------------------------
June 30, December 31,
(Cdn$ in millions) 2009 2008
---------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 750 $ 850
Temporary and short term investments 12 11
Income taxes receivable 84 1,130
Accounts receivable and other assets 967 769
Inventories 1,451 1,339
---------------------------------------------------------------------------
3,264 4,099
Investments (Note 4) 1,272 948
Property, plant and equipment 23,236 23,909
Other assets (Note 5) 740 853
Goodwill 1,711 1,724
---------------------------------------------------------------------------
$ 30,223 $ 31,533
---------------------------------------------------------------------------
---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,061 $ 1,506
Short-term debt (Note 6) - 6,436
Current portion of long-term debt (Note 6) 770 1,336
---------------------------------------------------------------------------
1,831 9,278
Long-term debt (Note 6) 10,471 5,102
Other liabilities (Note 7) 1,168 1,184
Future income and resource taxes 4,923 4,965
Non-controlling interests 90 104
Shareholders' equity (Note 8) 11,740 10,900
---------------------------------------------------------------------------
$ 30,223 $ 31,533
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Subsequent events (Notes 3(b) and 8)
The accompanying notes are an integral part of these financial statements.
Teck Resources Limited
Consolidated Statements of Shareholders' Equity
(Unaudited)
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
(Cdn$ in millions) 2009 2008 2009 2008
--------------------------------------------------------------------------
Share capital
Class A common shares $ 7 $ 7 $ 7 $ 7
Class B subordinate voting shares 5,074 3,280 5,074 3,280
--------------------------------------------------------------------------
5,081 3,287 5,081 3,287
Contributed Surplus 85 76 85 76
Accumulated comprehensive income
Retained earnings at beginning
of period 5,717 5,383 5,476 5,038
Net earnings 570 497 811 842
Dividends declared - (221) - (221)
--------------------------------------------------------------------------
Retained earnings at end of period 6,287 5,659 6,287 5,659
Accumulated other comprehensive
income (loss) (Note 9) 287 (587) 287 (587)
--------------------------------------------------------------------------
6,574 5,072 6,574 5,072
--------------------------------------------------------------------------
$11,740 $ 8,435 $11,740 $ 8,435
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Teck Resources Limited
Consolidated Statements of Comprehensive Income
(Unaudited)
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
(Cdn$ in millions) 2009 2008 2009 2008
--------------------------------------------------------------------------
Net earnings $ 570 $ 497 $ 811 $ 842
Other comprehensive income
(loss) in the period
Currency translation
adjustments:
Exchange gains (losses) on
debt designated as hedge
of self-sustaining foreign
subsidiaries 418 11 232 (38)
Unrealized gains (losses) on
translation of self-sustaining
foreign subsidiaries (495) (43) (276) 142
--------------------------------------------------------------------------
(77) (32) (44) 104
Available-for-sale instruments:
Unrealized gains (losses) (net
of taxes of $nil, $3, $7 and
$(3)) (1) 18 60 (25)
Gains reclassified to net
earnings on realization
(net of taxes of $(2), $nil,
$(2) and $nil) (9) - (9) -
--------------------------------------------------------------------------
(10) 18 51 (25)
Derivatives designated as
cash flow hedges:
Unrealized losses (net of
taxes of $(7), $nil, $(12)
and $nil) (15) - (32) -
Losses reclassified to net
earnings on realization
(net of taxes of $3, $2,
$29 and $3) 8 2 49 5
--------------------------------------------------------------------------
(7) 2 17 5
--------------------------------------------------------------------------
Total other comprehensive
income (loss) (94) (12) 24 84
--------------------------------------------------------------------------
Comprehensive income $ 476 $ 485 $ 835 $ 926
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Teck Resources Limited
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Our interim consolidated financial statements have been prepared in accordance
with Canadian Generally Accepted Accounting Principles ("GAAP") using standards
for interim financial statements and do not contain all of the information
required for annual financial statements. Our statements follow the same
accounting policies and methods of application as our most recent annual
financial statements, except as described in Note 2. Accordingly, they should be
read in conjunction with our most recent annual financial statements. All dollar
amounts are disclosed in Canadian currency unless otherwise noted.
Certain comparative figures have been reclassified to conform to the
presentation adopted for the current period.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
Goodwill and Intangible Assets
In February 2008, the Canadian Institute of Chartered Accountants ("CICA")
issued Section 3064, "Goodwill and Intangible Assets," which replaces Section
3062, "Goodwill and Other Intangible Assets." This new standard provides
guidance on the recognition, measurement, presentation and disclosure of
goodwill and intangible assets. Concurrent with the adoption of this standard,
CICA Emerging Issues Committee Abstract 27, "Revenues and Expenditures in the
Pre-operating Period," ("EIC-27") was withdrawn.
The standard is effective for our fiscal year beginning January 1, 2009.
Adoption of this standard did not have any effect on our financial statements.
Credit Risk and Fair Value of Financial Assets and Liabilities
In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities." The EIC provides guidance on how to
take into account credit risk of an entity and counterparty when determining the
fair value of financial assets and financial liabilities, including derivative
instruments.
This standard is effective for our fiscal year beginning January 1, 2009.
Adoption of this EIC did not have a significant effect on the company's
financial statements.
Mining Exploration Costs
In March 2009, the CICA issued EIC-174, "Mining Exploration Costs." The EIC
provides guidance on the accounting and the impairment review of exploration
costs. This standard is effective for our fiscal year beginning January 1, 2009.
The application of this EIC did not have an effect on the company's financial
statements.
3. DISPOSITIONS AND DISCONTINUED OPERATIONS
a) Completed Dispositions
i. Lobo-Marte
In January 2009, we sold our 60% interest in the Lobo-Marte gold project in
Chile to Kinross Gold Corporation ("Kinross") for US$40 million in cash and
approximately 5.6 million Kinross common shares valued at US$97 million at the
date of the sale. We also received a 1.75% net smelter return royalty, which
shall not exceed US$40 million, in respect of 60% of the gold produced from
Lobo-Marte payable when gold prices on the London Metal Exchange exceed US$760
per ounce. A pre-tax gain of C$171 million was realized on the transaction and
sale of the Kinross shares.
ii. Hemlo mines
In April 2009, we completed the sale of our interest in the Williams and David
Bell ("Hemlo") mines for US$65 million to an affiliate of Barrick Gold
Corporation. A pre-tax gain of C$45 million was recognized on the sale. As a
result of the sale, the Hemlo operations have been classified as discontinued
operations and comparative periods have been restated on this basis.
b) Subsequent and Pending Transactions
i. Andacollo gold stream
On April 6, 2009, Compania Minera Carmen de Andacollo announced the sale of an
interest in the future gold production from the Andacollo mine to Royal Gold,
Inc. ("Royal Gold"). Based on Royal Gold's recent common stock offering,
proceeds to Andacollo are expected to be approximately US$218 million and 1.2
million common shares of Royal Gold.
Royal Gold will be entitled to payment based on 75% of the payable gold produced
until total cumulative production reaches 910,000 ounces of gold, and 50%
thereafter.
Closing is subject to customary conditions and is expected to occur in the third
quarter of 2009.
The proceeds received will be accounted for as deferred revenue and amortized to
revenue based on the gold sold over the life of the Andacollo concentrate
project. Accordingly, no gain or loss will be recorded for this transaction.
ii. Interest in Waneta Dam
In June 2009, we entered into a non-binding memorandum of understanding
regarding the sale of a one-third interest in the Waneta Dam to BC Hydro for
$825 million. This transaction is subject to certain third-party consents and
regulatory approvals and is expected to close in the fourth quarter of this
year.
iii. Pogo mine
On July 7, 2009, we completed the sale of our 40% interest in the Pogo mine for
US$245 million, and we expect to record a gain of $80 million in the third
quarter of 2009. As a result, the Pogo operation has been classified as a
discontinued operation in these financial statements.
Selected financial information of discontinued operations, including Hemlo, Pogo
and Cajamarquilla (Note 14(d)), in these consolidated financial statements
include:
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
(Cdn$ millions) 2009 2008 2009 2008
--------------------------------------------------------------------------
Earnings (loss) from discontinued
operations
Revenue $ 51 $ 65 $ 139 $ 126
Cost of sales (31) (55) (94) (107)
Other income (expense) 46 (11) 49 (15)
Provision for income and
resource taxes (17) (2) (28) (3)
--------------------------------------------------------------------------
Net earnings (loss) 49 (3) 66 1
Cash flows of discontinued
operations
Operating activities $ 30 $ (1) $ 64 $ 51
Investing activities 50 (3) 48 (5)
Financing activities - - - -
--------------------------------------------------------------------------
80 (4) 112 46
--------------------------------------------------------------------------
June 30, December 31,
2009 2008
--------------------------------------------------------------------------
Assets and liabilities held-for-sale
Current assets $ 21 $ 52
Property, plant and equipment 212 276
Accounts payable and accrued liabilities (11) (24)
Other liabilities (20) (40)
--------------------------------------------------------------------------
Net assets $ 202 $ 264
--------------------------------------------------------------------------
4. INVESTMENTS
---------------------------------------------------------------------------
June 30, December
(Cdn$ in millions) 2009 2008
---------------------------------------------------------------------------
Available-for-sale investments:
Marketable securities $ 164 $ 104
Investments accounted for under the equity method:
Galore Creek Partnership (50% interest) 305 299
Fort Hills Energy Limited Partnership (20% interest) 803 545
---------------------------------------------------------------------------
1,108 844
---------------------------------------------------------------------------
$ 1,272 $ 948
---------------------------------------------------------------------------
5. OTHER ASSETS
---------------------------------------------------------------------------
June 30, December 31,
(Cdn$ in millions) 2009 2008
---------------------------------------------------------------------------
Pension assets $ 244 $ 241
Future income and resource tax assets 221 357
Derivative assets, net of current portion of $nil 10 21
Long-term deposits 24 25
Long-term receivables 141 120
Other 100 89
---------------------------------------------------------------------------
$ 740 $ 853
---------------------------------------------------------------------------
6. DEBT
---------------------------------------------------------------------------
June 30, December 31,
(Cdn$ in millions) 2009 2008
---------------------------------------------------------------------------
Bridge facility (a) $ 573 $ 6,436
Term facility (a) 4,511 4,794
9.75% notes due May 2014 (US$1,315 million) (b) 1,412 -
10.25% notes due May 2016 (US$1,060 million) (b) 1,137 -
10.75% notes due May 2019 (US$1,850 million) (b) 1,993 -
6.125% notes due October 2035 (US$700 million) 797 835
5.375% notes due October 2015 (US$300 million) 346 363
7.0% debentures due September 2012 (US$200 million) 231 242
Antamina senior revolving credit facility due August
2012 108 113
Other 133 91
---------------------------------------------------------------------------
11,241 12,874
Less short term debt and current portion of long-term
debt (770) (7,772)
---------------------------------------------------------------------------
Total $ 10,471 $ 5,102
---------------------------------------------------------------------------
a) Bridge and Term Loan Facilities
In April the terms of our Bridge and Term Loan Facilities were amended. These
amendments deferred US$4.4 billion of payments previously scheduled in 2009 and
extended the maturity date of US$3.5 billion of the Bridge Facility from October
2009 to October 2011. We also rescheduled $3.3 billion of amortization payments
under the Term Facility. Lenders agreed to amend the terms of approximately 84%
of the Term Facility with the terms of the remaining 16% unchanged.
In July 2009, the Bridge Facility was retired and the Term Facility was reduced
to US$2.744 billion with proceeds from assets sales and the issuance of Class B
subordinate voting shares (Note 8).
The amended Term Facility bears interest at LIBOR plus 3.5% through 2011 and
LIBOR plus 5% thereafter.
Our obligations under the Term Facility are guaranteed by Teck Metals Ltd., Teck
Coal Partnership, and all other subsidiaries of Teck, subject to certain
exceptions, and are secured by a first priority security interest in all of the
material properties of Teck and each guarantor, with provision for the release
of the security interest in connection with permitted asset sales. The security
will fall away upon full repayment of the Bridge Facility and upon receiving
investment grade credit ratings with stable outlooks from both Moody's and S&P.
Our outstanding notes are secured pari passu.
Any proceeds from asset sales, capital market transactions and/or operating cash
flow must be applied to the Term Facility balance in reverse order of maturity,
subject to a minimum cash balance of C$500 million, deductions for certain
environmental and reclamation obligations and funds placed in escrow, if any, to
meet the next scheduled Term Facility amortization payment. The Term Facility is
also subject to prepayment requirements in respect of proceeds from asset sales,
new debt or equity and cash sweep provisions.
The amended Term Facility contains covenants, including restrictions on new
indebtedness, new liens, acquisitions and dispositions, capital expenditures and
distributions. Financial covenants include a minimum interest coverage covenant
and a maximum leverage covenant. Both of these covenants are calculated at the
end of each calendar quarter based on EBITDA and interest expense for the
previous twelve months.
b) Debt Issued
On May 15, 2009 we issued US$4.225 billion in aggregate principal amount of
senior secured notes, consisting of US$1.315 billion aggregate principal amount
of 5-year notes, US$1.06 billion aggregate principal amount of 7-year notes and
US$1.85 billion aggregate principal amount of 10-year notes. The 5-year notes
bear interest at the rate of 9.75% per annum, were issued at 95.27% of face
value and will be non-callable. The 7-year notes bear interest at the rate of
10.25% per annum, were issued at 94.654% of face value and are callable on or
after May 15, 2013. The 10-year notes bear interest at the rate of 10.75% per
annum, were issued at 94.893% of face value and are callable on or after May 15,
2014. Net proceeds from the issue were US$3.875 billion. Debt covenants restrict
our ability to incur additional indebtedness, pay dividends, and dispose of
certain assets. Upon full repayment of the Term Loan Facility and the receipt of
investment grade credit ratings from both Moody's and Standard & Poor's, these
covenants and security arrangements will be suspended.
7. OTHER LIABILITIES
---------------------------------------------------------------------------
June 30, December 31,
(Cdn$ in millions) 2009 2008
---------------------------------------------------------------------------
Asset retirement obligations $ 655 $ 653
Other environmental and post-closure costs 93 108
Pension and other employee future benefits 311 305
Long-term contract obligations 65 76
Derivative liabilities (net of current portion of
$46 million (2008 - $252 million)) 10 -
Other 34 42
---------------------------------------------------------------------------
$ 1,168 $ 1,184
---------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY
Private Placement of Class B Subordinate Voting Shares
Subsequent to June 30, 2009, we issued approximately 101.3 million Class B
subordinate voting shares ("Class B shares") through a private placement. The
net proceeds of US$1.488 billion were used to retire the remaining balance of
the Bridge Facility and to reduce the balance of the Term Facility (Note 6). If
we issue additional Class B shares prior to July 15, 2010 at a price less than
C$17.21 per share (or securities convertible into Class B shares with a
conversion price less than C$17.21), the investor would be entitled to a partial
make-whole payment, capped at approximately 8.4 per cent of the aggregate
subscription price, payable at our option in cash or, subject to regulatory
approval, in Class B shares.
Stock-based Compensation
During the first and second quarters of 2009, we granted 2,350,000 Class B
subordinate voting share options to employees. These options have a weighted
exercise price of $4.19, a term of 10 years and vest in equal amounts over 3
years. The weighted average fair value of Class B subordinate voting share
options issued was estimated at $2.32 per share option at the grant date using
the Black-Scholes option-pricing model. The option valuations were based on an
average expected option life of 4.25 years, a risk-free interest rate of 2.09%,
a dividend yield of 2.0% and an expected volatility of 74%.
During the first and second quarters of 2009, we issued 2,773,367 deferred and
restricted share units to employees and directors. Deferred and restricted share
units issued vest immediately for directors and vest in 3 years for employees.
The total number of deferred and restricted share units outstanding at June 30,
2009 was 3,853,884.
Stock-based compensation expense of $32 million (2008 - $27 million) was
recorded for the six months ended June 30, 2009 in respect of all outstanding
share options and units.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
(Cdn$ in millions) 2009 2008 2009 2008
--------------------------------------------------------------------------
Accumulated other comprehensive
income (loss) at beginning of
period $ 381 $ (575) $ 263 $ (671)
Other comprehensive income (loss)
for the period (94) (12) 24 84
--------------------------------------------------------------------------
Accumulated other comprehensive
income (loss) at end of period $ 287 $ (587) $ 287 $ (587)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The components of accumulated other comprehensive income are:
---------------------------------------------------------------------------
June 30, December 31,
(Cdn$ in millions) 2009 2008
---------------------------------------------------------------------------
Currency translation adjustment $ 264 $ 308
Unrealized gains (losses) on investments (net of tax
of $(6) and $(1)) 45 (6)
Unrealized losses on cash flow hedges (net of tax of
$11 and $28) (22) (39)
---------------------------------------------------------------------------
$ 287 $ 263
---------------------------------------------------------------------------
10. INTEREST AND FINANCING COSTS
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
(Cdn$ in millions) 2009 2008 2009 2008
--------------------------------------------------------------------------
Interest expense $ 164 $ 21 $ 271 $ 44
Amortization of discount and
financing fees 18 - 58 -
Less amounts capitalized (10) (4) (20) (7)
--------------------------------------------------------------------------
$ 172 $ 17 $ 309 $ 37
--------------------------------------------------------------------------
--------------------------------------------------------------------------
11. OTHER INCOME (EXPENSE)
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
(Cdn$ in millions) 2009 2008 2009 2008
--------------------------------------------------------------------------
Gain on sale of investments
and assets 17 4 222 5
Foreign exchange gain (loss) 489 6 245 (1)
Interest income 2 8 6 20
Debt financing fees (124) - (124) -
Derivative gain (loss) (47) 22 (88) 25
Reclamation for closed properties (1) (1) (3) (4)
Restructuring (2) - (27) -
Other (11) - 23 (2)
--------------------------------------------------------------------------
$ 323 $ 39 $ 254 $ 43
--------------------------------------------------------------------------
12. EMPLOYEE FUTURE BENEFITS EXPENSE
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
(Cdn$ in millions) 2009 2008 2009 2008
--------------------------------------------------------------------------
Pension plans $ 18 $ 12 $ 35 $ 20
Post-retirement benefit plans 7 7 13 15
--------------------------------------------------------------------------
$ 25 $ 19 $ 48 $ 35
--------------------------------------------------------------------------
13. SUPPLEMENTARY CASH FLOW INFORMATION
--------------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
(Cdn$ in millions) 2009 2008 2009 2008
--------------------------------------------------------------------------
Income and resource taxes
paid (received), net $ (22) $ 303 $ (826) $ 511
Interest paid $ 114 $ 34 $ 236 $ 47
--------------------------------------------------------------------------
14. ACCOUNTING FOR FINANCIAL INSTRUMENTS
Our derivative positions at June 30, 2009 are as follows:
a) Forward sales and purchase contracts
---------------------------------------------------------------------------
Fair Value
2009 2010 2011 Total gain (loss)
---------------------------------------------------------------------------
(Cdn$ in
millions)
Zinc (millions of lbs)
Fixed forward sales contracts 48 57 57 162
Average price (US$/lb) 0.70 0.67 0.63 0.68 $ (12)
Zinc (millions of lbs) (i)
Fixed forward purchase
contracts 9 1 - 10
Average price (US$/lb) 0.61 0.58 - 0.61 1
Gold (thousands of ozs)
Forward sales contracts 22 - - 22
Average price (US$/oz) 350 - - 350 (15)
US dollars (millions of $)
Forward sales contracts 568 272 - 840
Average rate (US$/C$) 1.13 1.13 - 1.13 (25)
Copper (millions of pounds)
Forward sales contracts 16 - - 16
Average price (US$/lb) 2.05 - - 2.05 (5)
------------
$ (56)
---------------------------------------------------------------------------
(i) From time-to-time, certain customers purchase refined metal products at
fixed forward prices from our smelter and refinery operations. The
forward purchase commitments for these metal products are matched to
these fixed price sales commitments to customers.
b) Interest Rate Swap
We have an interest rate swap on a portion of our long-term debt whereby we have
swapped a 7% interest rate on US$100 million to LIBOR plus 2.14%. The interest
rate swap matures in September 2012 and has a fair value gain of $10 million as
at June 30, 2009.
c) Pricing Adjustments
Sales of metals in concentrates are recognized in revenue on a provisional
pricing basis when title transfers and the rights and obligations of ownership
pass to the customer, which usually occurs on shipment. However, the final
pricing for the product sold is not determined at that time as it is
contractually linked to market prices at a subsequent date. These arrangements
have the characteristics of a derivative instrument as the value of our
receivable will vary as prices for the underlying commodities vary in the metal
markets. The net income impact of gains and losses on these financial
instruments is mitigated by smelter price participation, royalty interests,
taxes and non-controlling interests.
d) Cajamarquilla
As a result of the sale of our Cajamarquilla zinc refinery in 2004, we are
entitled to additional consideration linked to the price of zinc. This zinc
price participation expires in 2009 and is considered an embedded derivative.
This instrument is valued based on discounted cash flows using a zinc forward
price curve, US dollar forward price and our credit adjusted, risk-free interest
rate. A $5 million gain (2008 - $9 million loss) is included in our earnings for
the six months ended June 30, 2009 as discontinued operations.
15. CONTINGENCIES
We consider provisions for all our outstanding and pending legal claims to be
adequate. The final outcome with respect to actions outstanding or pending as at
June 30, 2009, or with respect to future claims, cannot be predicted with
certainty. Significant commitments and contingencies not disclosed elsewhere in
the notes to our financial statements are as follows:
Upper Columbia River Basin (Lake Roosevelt)
Motion proceedings continued on the Lake Roosevelt litigation in the Federal
District Court for Eastern Washington. On September 19, 2008, the Court
summarily dismissed all of the claims in first phase of the case, dealing with
claims for penalties while the EPA order (the "UAO") was outstanding. On March
9, 2009, the Court granted the plaintiffs' motions for an award of the costs of
litigating the UAO claims. The plaintiffs have appealed the dismissal of the UAO
claims and once the claims are quantified, Teck Metals intends to appeal the
cost award. The second phase of the case, dealing with liability under CERCLA
for cost recovery and natural resource damages ("NRD") is scheduled to be heard
on October 4, 2010. Hearings on the quantification of the claims for NRD and
assessment costs have been deferred until there has been substantial progress on
the remedial investigation and feasibility study ("RI/FS") of the Upper Columbia
River.
Teck American commissioned a study by recognized experts in NRD assessment in
2008. Based on the assessment performed, the estimated compensable value of such
damage would not be material. Until definitive studies and assessments have been
conducted, however, it is not possible to assess our potential liability for
remedial obligations and other costs.
Teck American continued work to fulfill its obligations under the settlement
agreement reached with the United States and the EPA in June 2006 to complete a
RI/FS of the Upper Columbia River. A comprehensive work plan for the site was
approved by the EPA late in 2008, and, subject to acquiring required permits.
Field work on the RI/FS, which was expected to commence in the second quarter of
2009, is now expected to commence in the third quarter.
There can be no assurance that Teck Metals will ultimately be successful in its
defense of the litigation or that Teck Metals or its affiliates will not be
faced with further liability in relation to this matter. Until the studies
contemplated by the Agreement and additional damage assessments are completed,
it is not possible to estimate the extent and cost, if any, of remediation or
restoration that may be required or assess the company's potential liability for
damages. The studies may conclude, on the basis of risk, cost, technical
feasibility or other grounds, that no remediation should be undertaken. If
remediation is required and substantial damage to resources found, the cost of
remediation and/or the damage assessment may be material.
16. SEGMENTED INFORMATION
We have five reportable segments: copper, coal, zinc, energy and corporate based
on the primary products we produce or are developing. Results for the gold
segment, which includes the Hemlo and Pogo operations, have been reclassified to
discontinued operations and are no longer included in the table below. Prior
year comparatives have been restated to conform to current year presentation.
The corporate segment includes all of our initiatives in other commodities, our
corporate growth activities and groups that provide administrative, technical,
financial and other support to all of our business units. Other corporate income
(expense) includes general and administrative costs, research and development
and other income (expense).
--------------------------------------------------------------------------
Three months ended June 30, 2009
Corpo-
(Cdn$ in millions) Copper Coal Zinc Energy rate Total
--------------------------------------------------------------------------
Segmented revenues $ 408 $ 954 $ 386 $ - $ - $ 1,748
Less inter-segment
revenues - - (41) - - (41)
--------------------------------------------------------------------------
Revenues 408 954 345 - - $ 1,707
Operating profit 183 394 59 - - 636
Interest and financing (1) (1) - - (170) (172)
Exploration (6) - (1) - (1) (8)
Other corporate
income (expense) (28) - (19) - 317 270
--------------------------------------------------------------------------
Earnings before taxes,
non-controlling
interests, equity
earnings and
discontinued
operations 148 393 39 - 146 726
Capital expenditures 88 12 7 42 (1) 148
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Six months ended June 30, 2009
Corpo-
(Cdn$ in millions) Copper Coal Zinc Energy rate Total
--------------------------------------------------------------------------
Segmented revenues $ 855 $1,828 $ 783 $ - $ - $ 3,466
Less inter-segment
revenues - - (90) - - (90)
--------------------------------------------------------------------------
Revenues 855 1,828 693 - - 3,376
Operating profit 341 823 99 - - 1,263
Interest and financing (4) (1) - - (304) (309)
Exploration (15) - (2) - (2) (19)
Other corporate
income (expense) (57) - (29) - 250 164
--------------------------------------------------------------------------
Earnings (loss)
before taxes,
non-controlling
interests, equity
earnings and
discontinued
operations 265 822 68 - (56) 1,099
Capital expenditures 164 20 15 49 2 250
Total assets 7,921 18,199 2,710 809 584 30,223
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended June 30, 2008
Corpo-
(Cdn$ in millions) Copper Coal Zinc Energy rate Total
--------------------------------------------------------------------------
Segmented revenues $ 773 $ 544 $ 534 $ - $ - $ 1,851
Less inter-segment
revenues - - (46) - - (46)
--------------------------------------------------------------------------
Revenues 773 544 488 - - 1,805
Operating profit 461 309 99 - - 869
Interest and financing (3) (1) - - (13) (17)
Exploration (10) - (3) - (13) (26)
Asset impairment - - (12) - - (12)
Other corporate
income (expense) 16 - - - (26) (10)
--------------------------------------------------------------------------
Earnings (loss)
before taxes,
non-controlling
interests, equity
earnings and
discontinued
operations 464 308 84 - (52) 804
Capital expenditures 117 23 33 31 10 214
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Six months ended June 30, 2008
Corpo-
(Cdn$ in millions) Copper Coal Zinc Energy rate Total
--------------------------------------------------------------------------
Segmented revenues $ 1,489 $ 765 $1,185 $ - $ - $ 3,439
Less inter-segment
revenues - - (124) - - (124)
--------------------------------------------------------------------------
Revenues 1,489 765 1,061 - - 3,315
Operating profit 896 324 254 - - 1,474
Interest and financing (8) (1) - - (28) (37)
Exploration (22) - (4) - (19) (45)
Asset impairment - - (12) - - (12)
Other corporate
income (expense) 17 - (1) - (60) (44)
--------------------------------------------------------------------------
Earnings (loss)
before taxes,
non-controlling
interests, equity
earnings and
discontinued
operations 883 323 237 - (107) 1,336
--------------------------------------------------------------------------
Capital expenditures 201 41 50 34 18 344
Total assets 6,929 1,525 2,980 732 2,020 14,186
--------------------------------------------------------------------------
--------------------------------------------------------------------------
17. SEASONALITY OF SALES
Due to ice conditions, the port serving our Red Dog mine is normally only able
to ship concentrates from July to October each year. As a result, zinc and lead
concentrate sales volumes are generally higher in the third and fourth quarter
of each year than in the first and second quarter.
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