Teck Reports Unaudited Fourth Quarter Results for 2016
Marketwired MarketwiredFebruary 15, 2017
VANCOUVER, BRITISH COLUMBIA--(Marketwired - Feb 15, 2017) -
All dollar amounts expressed in this news release are in Canadian dollars unless otherwise noted.
Teck Resources Limited (TSX: TECK.A and TECK.B, NYSE: TECK) ("Teck") reported unaudited record fourth quarter adjusted profit attributable to shareholders of $930 million, or $1.61 per share, compared with $16 million, or $0.03 per share, in the fourth quarter of 2015. Annual adjusted profit attributable to shareholders for 2016 was $1.1 billion, or $1.91 per share, compared with $188 million, or $0.33 per share in 2015.
"We had a very good year in 2016. We came through one of the longest and deepest down cycles our industry has faced and emerged as a stronger company," said Don Lindsay, President and CEO. "We set a number of production and sales records while continuing to reduce our costs. We used the significant increase in cash generated by the higher steelmaking coal and zinc prices to reduce our debt by over $1.0 billion in the last few months."
Highlights and Significant Items
Record adjusted profit attributable to shareholders in the fourth quarter of $930 million, or $1.61 per share, compared with $16 million in 2015, or $0.03 per share. Annual adjusted profit attributable to shareholders was $1.1 billion, or $1.91 per share, compared with $188 million in 2015, or $0.33 per share.
Record gross profit before depreciation and amortization of $2.0 billion in the fourth quarter compared with $614 million in the fourth quarter of 2015. Gross profit before depreciation and amortization in 2016 was $3.8 billion compared with $2.6 billion in 2015.
Record cash flow from operations of $1.5 billion in the fourth quarter of 2016 compared with $693 million a year ago. Cash flow from operations was $3.1 billion in 2016 compared with $2.0 billion last year.
Profit attributable to shareholders was $697 million in the fourth quarter compared with a loss of $459 million in the fourth quarter of 2015. Annual profit attributable to shareholders was $1.0 billion compared with a loss of $2.5 billion in 2015.
In late September and early October, we repurchased US$759 million (CAD$1.0 billion) principal amount of our outstanding notes in market transactions, recording a gain of CAD$76 million. At December 31, 2016, our outstanding notes totaled US$6.1 billion, down from US$7.2 billion at September 30, 2015. Our liquidity is strong at CAD$5.5 billion including approximately CAD$1.6 billion in cash at February 14, 2017 and US$3.0 billion of undrawn, committed credit facilities. We exceeded our original target to end the year with a cash balance of at least CAD$500 million even after retiring CAD$1.0 billion of debt not contemplated in our original guidance.
We set a number of quarterly and annual sales and production records while reducing total costs in each of our business units on an annual basis.
We have reached agreements with the majority of our steelmaking coal customers for the first quarter of 2017, based on a quarterly benchmark of US$285 per tonne for the highest quality product, and we expect total sales in the first quarter, including spot sales, to be approximately 6.0 million tonnes of steelmaking coal.
Construction of the Fort Hills oil sands project as of year end has surpassed 76% of completion, with two of the six major project areas (mining and infrastructure) turned over to operations. All major plant equipment and materials are on site, and all major vessels and process modules have been installed. Mobilization for operation has begun and the project remains on track to produce first oil in late 2017. The revised total project capital forecast is approximately 10% above the project sanction estimate, excluding foreign exchange impacts. Our share of project capital costs through to completion (including foreign exchange) is now expected to be $805 million, of which approximately $640 million will be spent in 2017. Due to the increase in capital cost, we recorded a pre-tax impairment charge of $222 million in our fourth quarter results.
Unionized employees at the Fording River and Elkview steelmaking coal mines each ratified new five-year collective agreements.
Our quarterly profit was reduced by impairment charges of $268 million ($198 million on an after-tax basis) including $222 million on the Fort Hills oil sands project and $46 million on non-core assets ($164 million and $34 million, respectively, on an after-tax basis). For 2016, total pre-tax asset impairment charges were $294 million and $217 million on an after-tax basis.
This news release is dated as at February 14, 2017. Unless the context otherwise dictates, a reference to "Teck," "the company," "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 31, 2015, 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.
Overview
We achieved record cash flow from operations of $1.5 billion, record gross profits of $2.0 billion, before depreciation and amortization, and record gross profits of $1.6 billion in the fourth quarter. This performance was a result of significantly higher realized steelmaking coal prices in the quarter and, to a lesser extent, higher zinc prices.
Steelmaking coal spot prices peaked in mid-November, exceeding US$300 per tonne for the third time in the last eight years. Our realized steelmaking coal price in the fourth quarter of US$207 per tonne exceeded the quarterly benchmark price of US$200 per tonne settled in early October, as the spot priced component of our sales reflected the market trend. Tight steelmaking coal supply and increased demand from steel mills during the fourth quarter drove prices up and the quarterly benchmark price for the first quarter of 2017 was settled at US$285 per tonne in mid-December. Steelmaking coal prices have since retreated. Prices on the spot market are more than 45% below the first quarter benchmark price and are currently trading at approximately US$155 per tonne. Despite increased supply from existing producers and a number of mine restarts, spot pricing levels remain nearly double what they were a year ago.
The improved prices provided additional profits and cash flow and we took the opportunity to strengthen our balance sheet by repurchasing US$759 million (CAD$1.0 billion) principal amount of our outstanding notes in September and October. Since the beginning of 2016 through to early 2017, we have reduced our debt by US$793 million. Our debt to debt-plus-equity ratio declined from 37% at the start of 2016 to 32% at December 31, 2016. We may purchase further debt from time to time on an opportunistic basis.
Construction of the Fort Hills oil sands project as of year end has surpassed 76% of completion, with two of the six major project areas (mining and infrastructure) turned over to operations. All major plant equipment and materials are on site, and all major vessels and process modules have been installed. Mobilization for operation has begun and the project remains on track to produce first oil in late 2017. The revised total project capital forecast is approximately 10% above the project sanction estimate, excluding foreign exchange impacts. Our share of project capital costs through to completion (including foreign exchange) is now expected to be $805 million, of which approximately $640 million will be spent in 2017. Due to the increase in capital cost, we recorded a pre-tax impairment charge of $222 million in our fourth quarter results.
Profit and Adjusted Profit(1)
Profit attributable to shareholders was $697 million, or $1.21 per share, in the fourth quarter compared with a loss of $459 million or $0.80 per share in the same period last year. In the fourth quarter of 2015, we recorded asset impairment charges on a number of our assets that totaled $536 million on an after-tax basis ($736 million on a pre-tax basis).
During the fourth quarter of 2016 we recorded asset impairment charges primarily relating to our investment in Fort Hills. These charges totalled approximately $268 million on a pre-tax basis (after-tax $198 million), of which $222 million related to Fort Hills, and also include the write-off of costs relating to the halted fuming furnace project at Trail.
Adjusted profit attributable to shareholders, after adjusting for the items identified in the table below, was a record $930 million, or $1.61 per share, in the fourth quarter compared with $16 million or $0.03 per share in the same period in 2015. The substantial rise in our adjusted profit was primarily due to significantly higher realized steelmaking coal prices in the quarter compared with a year ago and partly due to higher zinc prices.
Profit and Adjusted Profit
Three months
ended December 31, Year ended December 31,
(CAD$ in millions) 2016 2015 2016 2015
Profit (loss) attributable to Shareholders: $ 697 $ (459 ) $ 1,040 $ (2,474 )
Add (deduct):
Asset sales and provisions 10 (91 ) (53 ) (107 )
Foreign exchange (gains) losses 16 19 (45 ) 80
Debt repurchase gains (24 ) - (44 ) -
Debt prepayment options gain (12 ) - (84 ) -
Collective agreement charges 32 10 42 10
Impairments 198 536 217 2,691
Tax items and other items 13 1 30 (12 )
Adjusted profit (1) $ 930 $ 16 $ 1,103 $ 188
Adjusted earnings per share (1) $ 1.61 $ 0.03 $ 1.91 $ 0.33
Note:
(1) Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.
In addition to the items described above, our results include gains and losses due to changes in market prices and interest rates in respect of pricing adjustments, commodity derivatives, share based compensation and changes in the discounted value of decommissioning and restoration costs of closed mines. Taken together, these items resulted in a $27 million after-tax charge ($28 million before tax) in the fourth quarter, or $0.05 per share. We do not adjust our reported profit for these items as they occur on a regular basis.
FINANCIAL OVERVIEW Three months
ended December 31, Year ended December 31,
(CAD$ in millions, except per share data) 2016 2015 2016 2015
Revenues and profit
Revenues $ 3,557 $ 2,135 $ 9,300 $ 8,259
Gross profit before depreciation and amortization (1) $ 1,964 $ 614 $ 3,781 $ 2,645
Gross profit $ 1,577 $ 281 $ 2,396 $ 1,279
EBITDA (1) $ 1,561 $ (269 ) $ 3,350 $ (1,633 )
Profit (loss) attributable to shareholders $ 697 $ (459 ) $ 1,040 $ (2,474 )
Cash flow
Cash flow from operations $ 1,490 $ 693 $ 3,056 $ 1,962
Property, plant and equipment expenditures $ 417 $ 532 $ 1,416 $ 1,581
Capitalized stripping costs $ 108 $ 176 $ 477 $ 663
Investments $ 19 $ 13 $ 114 $ 82
Balance Sheet
Cash balances $ 1,407 $ 1,887
Total assets $ 35,629 $ 34,688
Debt, including current portion $ 8,343 $ 9,634
Per share amounts
Profit (loss) attributable to shareholders $ 1.21 $ (0.80 ) $ 1.80 $ (4.29 )
Dividends declared $ 0.05 $ 0.05 $ 0.10 $ 0.20
PRODUCTION, SALES AND PRICES
Production (000's tonnes, except steelmaking coal)
Steelmaking coal (millions of tonnes) 7.3 6.4 27.6 25.3
Copper (2) 72 96 324 358
Zinc in concentrate (3) 152 158 662 658
Zinc - refined 81 79 312 307
Sales (000's tonnes, except steelmaking coal)
Steelmaking coal (millions of tonnes) 6.9 6.5 27.0 26.0
Copper (2) 75 105 325 357
Zinc in concentrate (3) 240 238 677 706
Zinc - refined 84 79 312 308
Average prices and exchange rates
Steelmaking coal (realized US$/tonne) $ 207 $ 81 $ 115 $ 93
Steelmaking coal (realized CAD$/tonne) $ 277 $ 108 $ 153 $ 117
Copper (LME cash - US$/pound) $ 2.39 $ 2.22 $ 2.21 $ 2.49
Zinc (LME cash - US$/pound) $ 1.14 $ 0.73 $ 0.95 $ 0.87
Average exchange rate (CAD$ per US$1.00) $ 1.33 $ 1.34 $ 1.33 $ 1.28
Gross profit margins before depreciation (1)
Steelmaking coal 69 % 28 % 48 % 30 %
Copper 42 % 33 % 39 % 38 %
Zinc 36 % 26 % 31 % 29 %
Notes:
(1) Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.
(2) We include 100% of production and sales from our Quebrada Blanca and Carmen de Andacollo mines in our production and sales volumes, even though we own 76.5% and 90%, respectively, of these operations, because we fully consolidate their results in our financial statements. We include 22.5% of production and sales from Antamina, representing our proportionate equity interest in Antamina.
(3) Includes 6,000 tonnes of pre-commercial production and sales volumes for Pend Oreille in the first quarter of 2015.
BUSINESS UNIT RESULTS
Our revenues, gross profit before depreciation and amortization, and gross profit by business unit are summarized in the table below.
Three months
ended December 31, Year ended December 31,
(CAD$ in millions) 2016 2015 2016 2015
Revenues
Steelmaking coal $ 1,933 $ 701 $ 4,144 $ 3,049
Copper 540 619 2,007 2,422
Zinc 1,083 814 3,147 2,784
Energy 1 1 2 4
Total $ 3,557 $ 2,135 $ 9,300 $ 8,259
Gross profit, before depreciation and amortization (1)
Steelmaking coal $ 1,343 $ 197 $ 2,007 $ 906
Copper 226 203 788 931
Zinc 394 213 984 805
Energy 1 1 2 3
Total $ 1,964 $ 614 $ 3,781 $ 2,645
Gross profit (loss)
Steelmaking coal $ 1,178 $ 29 $ 1,379 $ 200
Copper 52 76 190 426
Zinc 348 176 830 655
Energy (1 ) - (3 ) (2 )
Total $ 1,577 $ 281 $ 2,396 $ 1,279
Note:
(1) Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.
STEELMAKING COAL BUSINESS UNIT
Three months
ended December 31, Year ended December 31,
(CAD$ in millions) 2016 2015 2016 2015
Steelmaking coal price (realized US$/tonne) $ 207 $ 81 $ 115 $ 93
Steelmaking coal price (realized CAD$/tonne) $ 277 $ 108 $ 153 $ 117
Production (million tonnes) 7.3 6.4 27.6 25.3
Sales (million tonnes) 6.9 6.5 27.0 26.0
Gross profit before depreciation and amortization $ 1,343 $ 197 $ 2,007 $ 906
Gross profit $ 1,178 $ 29 $ 1,379 $ 200
Property, plant and equipment expenditures $ 27 $ 28 $ 71 $ 97
Performance
Gross profit from our steelmaking coal business unit in the fourth quarter was $1.2 billion compared with $29 million a year ago. Gross profit before depreciation and amortization increased by $1.1 billion in the fourth quarter compared with the same period in 2015 (see table below) due to significantly higher realized steelmaking coal prices.
Fourth quarter production of 7.3 million tonnes was 14% higher than the same period a year ago and set a second consecutive quarterly production record. Annual production of 27.6 million tonnes also represents an all-time production record. This performance in the quarter and year was the result of record fourth quarter production from four of our six operations and record annual production from Elkview, Greenhills and Line Creek. We also settled five-year collective agreements at Fording River and Elkview during the quarter.
Sales volumes of 6.9 million tonnes in the fourth quarter was 6% higher than the same period in 2015 and represented the third highest quarterly sales in our history and best ever fourth quarter. Annual sales of 27.0 million tonnes also represents an all-time record high. This strong performance resulted from a combination of tightness in supply and robust demand in all market areas.
The table below summarizes the gross profit changes, before depreciation and amortization, in our steelmaking coal business unit for the quarter:
(CAD$ in millions) Three months
ended December 31,
As reported in fourth quarter of 2015 $ 197
Increase (decrease):
Steelmaking coal price realized 1,180
Sales volume 16
Operating costs (14 )
Inventory write-down recorded in prior year 13
Collective agreement charge (49 )
Net increase 1,146
As reported in current quarter $ 1,343
Property, plant and equipment expenditures totaled $27 million in the fourth quarter. Capitalized stripping costs were $63 million in the fourth quarter compared with $103 million in the same period in 2015. We are continuing to strip at all operations based on their respective mine plans, however, as a result of the sequencing in the fourth quarter of 2016, we mined in lower strip ratio areas at a number of sites and therefore capitalized a lower amount of costs.
Markets
Our realized price of US$207 per tonne in the fourth quarter was greater than the reported benchmark price of US$200 per tonne for the quarter. With spot prices briefly exceeding US$300 per tonne for our top quality products, the blended realized pricing across our products was higher than the benchmark in the fourth quarter. Our realized sales price for any quarter reflects a mix of quarterly contract sales and spot sales concluded in the current and previous quarter on carry over tonnage.
Steelmaking coal prices for the first quarter of 2017 have been agreed with the majority of our customers that price off of the quarterly benchmark based on US$285 per tonne for the highest quality products. This is consistent with prices reportedly achieved by our competitors.
Since the quarterly contract benchmark price of US$285 per tonne for the first quarter of 2017 was established in early December 2016, spot prices for coal have declined to current levels of approximately US$155 per tonne. We sell about 40% of our volume on the basis of the quarterly contract price and about 60% on shorter term pricing mechanisms. The average realized price for the first quarter is now expected to be in the range of 70-75% of the quarterly contract price, reflecting this business mix.
Sales volumes have also been lower than expected in the first half of the quarter reflecting the lower demand which is also influencing current spot prices. Customers apparently bought coal volumes in the fourth quarter in anticipation of ongoing global supply constraint issues into the first quarter which did not materialize and therefore, they are relatively well supplied in the short term. In addition, demand has been reduced during the Chinese lunar new year period.
Winter weather conditions in southern British Columbia and logistics performance have impacted port and mine inventories, production and sales. In particular, poor rail and terminal performance has reduced port inventories and has required production cutbacks as mine inventories reached critical levels. Mine inventories remain high and achieving our planned production and sales will depend upon the performance of the rail transportation network and port loading facilities.
We do expect coal sales volumes to increase in the latter half of the quarter, but not sufficiently to result in more than approximately 6.0 million tonnes of sales in the quarter.
Operations
Our Greenhills Operation set a new quarterly production record in the fourth quarter and, along with Elkview and Line Creek Operations, set new annual production records in 2016.
Unit cash production costs at the mines were 9% higher this quarter than in the fourth quarter of 2015. We experienced increased costs for labour at our largest mines because of settlements under collective agreements and utilized additional contractors to maximize production in order to capture the increased profit margin arising from the higher coal prices.
Our continuous improvement initiatives delivered significant results in our 2016 focus areas capturing cost efficiencies in maintenance and supply. In addition, throughout the year we made gains in equipment and labour productivity and will continue to concentrate effort there in 2017.
In the fourth quarter of 2016, we continued to experience the positive effects of lower diesel prices compared with 2015, although diesel prices have increased relative to the first nine months of 2016. Combined with reduced usage from a number of our cost reduction initiatives and slightly shorter haul distances, diesel costs per tonne produced decreased by 5% compared to the fourth quarter of 2015.
Our West Line Creek active water treatment facility is operating consistent with design parameters and in compliance with permit limits. We are continuing to investigate an issue regarding selenium compounds in effluent. Work is ongoing to assess the potential implications of this issue and, if associated environmental impacts are identified, modifications to operating parameters or facilities may be required. The cost of modifications may be material and permitting of future mine expansions may be delayed and design and construction of additional water treatment facilities will likely be delayed while we determine the significance of the issue and how to address it.
Cost of Sales
Site cost of sales in the fourth quarter of 2016, before transportation, depreciation and one-time collective agreement settlement costs at our largest mines, increased by $3 to $44 per tonne. Despite the higher costs this quarter, on an annual basis costs were $2 per tonne lower than in 2015. This was primarily the result of lower diesel prices, reduced consumption of maintenance parts and decreased contractor costs as we were successfully able to reduce spending and increase productivity in key areas throughout the year.
Three months
ended December 31, Year ended December 31,
(amounts reported in CAD$ per tonne) 2016 2015 2016 2015
Site cost of sales (1) (2) $ 44 $ 41 $ 43 $ 45
Transportation costs 34 35 34 36
Inventory write-down - 2 - 2
Collective agreement charge 7 - 2 -
Unit costs (1) (2) $ 85 $ 78 $ 79 $ 83
Three months
ended December 31, Year ended December 31,
(amounts reported in US$ per tonne) 2016 2015 2016 2015
Site cost of sales (1) (2) $ 33 $ 31 $ 32 $ 35
Transportation costs 26 26 26 28
Inventory write-down - 1 - 1
Collective agreement charge 5 - 2 -
Unit costs (1) (2) $ 64 $ 58 $ 60 $ 64
Notes:
(1) Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.
(2) Does not include capitalized stripping or capital expenditures.
Our total cost of sales for the quarter also included a $12 per tonne charge for the amortization of capitalized stripping costs and $12 per tonne for other depreciation.
Outlook
We are expecting sales volumes in the first quarter of 2017 to be approximately 6.0 million tonnes. As steel mills draw down on inventories built up in the fourth quarter, we are expecting sales to be weighted towards the back of the quarter, with the result that we expect our first quarter realized price to be approximately 75% of the benchmark price. Our sales volumes in the first quarter of each year are typically lower than other quarters in the year due to winter weather-related issues and Lunar New Year holidays in China.
Vessel nominations for quarterly contract shipments are determined by customers and final sales and average prices for the quarter will depend on product mix, market direction for spot priced sales and timely arrival of vessels as well as the performance of the rail transportation network and port loading facilities. Poor rail performance in the fourth quarter of 2016 and in 2017 to date has reduced port inventories and has required production cutbacks as mine inventories reached critical levels at some sites.
Steelmaking coal production in 2017 is expected to be between 27 and 28 million tonnes. As in prior years, annual volumes produced will be adjusted if necessary to reflect market demand for our products. Meeting this production target will require adequate rail and port service. Assuming that current market conditions persist, production from 2018 to 2020 is expected to remain similar to 2017, despite the closure of the Coal Mountain Operation in late 2017.
We intend to maintain total production at this level by increasing production at our other Elk Valley mines. We received permits in the latter half of 2016 to commence mining in new areas at the Fording River, Elkview and Greenhills mines which will extend the lives of these mines and allow us to increase production. This will require some investment in the processing plants and the transfer of mining assets from Coal Mountain in order to develop the recently permitted mining areas at each of the sites. The strip ratios in these new areas will be higher as they are developed and we may require some additional mining capacity to balance coal production targets.
With this additional mining activity, we expect our site costs in 2017 to be in the range of $46 to $50 per tonne (US$35 to US$39). This range is higher than in 2016, primarily as the result of the efforts described above to maintain total production after the closure of Coal Mountain, which will require use of additional equipment and labour. We also anticipate increased costs for inputs, including diesel. Additionally, as we did in the fourth quarter of 2016, we plan to spend funds as required to maximize production and sales in the current market environment, while maintaining appropriate cost discipline.
Transportation costs in 2017 are expected to be approximately $35 to $37 per tonne (US$27 to US$29).
Strip ratios vary as mining progresses, and with the accelerated mining activity as described above, we expect our overall mining costs to increase from 2016 levels and a higher proportion of mining costs are expected to relate to capitalized stripping as we enter into the new mining areas at Fording River, Elkview, Greenhills and Line Creek in preparation for the mine life extensions. As a result, we expect an increase in capitalized stripping from $277 million in 2016 to $430 million in 2017.
Capital spending planned for 2017 also includes $140 million for sustaining capital and $120 million for major enhancement projects, the latter of which largely relates to the initial development costs to enter into the new mining areas mentioned above at our Elk Valley operations.
COPPER BUSINESS UNIT
Three months
ended December 31, Year ended
December 31,
(CAD$ in millions) 2016 2015 2016 2015
Copper price (realized - US$/pound) $ 2.40 $ 2.21 $ 2.20 $ 2.50
Production (000's tonnes) 72 96 324 358
Sales (000's tonnes) 75 105 325 357
Gross profit before depreciation and amortization $ 226 $ 203 $ 788 $ 931
Gross profit $ 52 $ 76 $ 190 $ 426
Property, plant and equipment expenditures $ 65 $ 125 $ 183 $ 338
Performance
Gross profit in the fourth quarter from our copper business unit was $52 million compared with $76 million a year ago. Gross profit before depreciation and amortization from our copper business unit increased by $23 million in the fourth quarter compared with the same period in 2015 (see table below). This was primarily due to successful cost reduction efforts and higher realized copper and by-product prices, which more than offset significantly lower sales volumes. In addition, due to the improving copper price environment and reduced unit costs, we reversed $23 million of previously recorded inventory write-downs in the quarter compared with $20 million of write-downs a year ago. These inventory adjustments were primarily related to our Quebrada Blanca Operation.
Fourth quarter copper production decreased by 24% from a year ago primarily due to reduced production at Highland Valley Copper as a result of lower ore grades, as anticipated in the mine plan. Significant cost reduction efforts at our operations substantially reduced the effect of lower copper production on our cash unit costs, after by-product margins, which only increased by 6% to US$1.45 per pound compared with the same period in 2015.
The table below summarizes the changes in gross profit, before depreciation and amortization, in our copper business unit for the quarter:
(CAD$ in millions) Three months
ended December 31,
As reported in the fourth quarter of 2015 $ 203
Increase (decrease):
Copper price realized 39
Sales volume (60 )
Co-product and by-product revenues 31
Unit operating costs (43 )
Effect of copper inventory write-downs 43
Labour settlement 2015 13
Net increase 23
As reported in current quarter $ 226
Property, plant and equipment expenditures totaled $65 million, including $48 million for sustaining capital and $16 million for new mine development related to the Quebrada Blanca Phase 2 project. Capitalized stripping costs were $38 million in the fourth quarter, lower than $50 million in the same period in 2015, with the reduction primarily due to lower strip ratios in current mining areas and lower operating costs at Highland Valley Copper.
Markets
LME copper prices averaged US$2.39 per pound in the fourth quarter of 2016, up 10.5% from the third quarter, and up 8.0% compared with the fourth quarter of 2015. LME copper prices averaged US$2.21 per pound for 2016, down 13% over the previous year. In early November, copper prices rallied over US$0.50 per pound in two weeks after being on a downward trend since February 2011 when prices peaked above US$4.60 per pound.
Total reported exchange stocks remained essentially unchanged during the quarter at 0.5 million tonnes. Total reported global copper exchange stocks are now estimated to be eight days of global consumption, well below the estimated 25 year average of 12 days of global consumption. Copper stocks fell on the LME by 50,000 tonnes and copper stocks on the Shanghai Futures Exchange and the Nymex rose by 51,000 tonnes in aggregate.
Copper consumption continues to rise at better than projected rates, although still lower than in 2015. Chinese demand growth is now projected by Wood Mackenzie to reach 4% for 2016 and 2.5% in 2017. Stronger than expected construction and automotive growth have offset manufacturing declines. Demand growth in the fourth quarter in both the U.S. and Europe was above previous forecasts on record automotive sales, while the stronger U.S. dollar continues to impact U.S. manufacturing exports. Wood Mackenzie is forecasting slightly higher global demand growth in 2017 at 2.1% compared to 2% in 2016.
The large increases in global mine production growth over the past two years are now mostly complete and mine production growth is forecast by Wood Mackenzie to fall in 2017. Despite the recent rally in prices and stable metal stocks, the market remains cautious in the short to medium-term. Longer term, the lack of investments made during the past six year downward trend in prices is expected to constrain new production growth for some time.
Operations
Highland Valley Copper
As anticipated in the mine plan, copper production declined by 45% to 22,500 tonnes in the fourth quarter due to lower copper grades and lower recoveries. As the mix of the mill feed shifted from harder Valley pit ore to softer and lower grade Lornex pit ore, mill throughput increased by 4% from last year. The transition to more Lornex ores progressed during the final quarter of 2016 as the current high grade phase of the Valley pit was exhausted. Molybdenum production in the fourth quarter of 2.2 million pounds was more than twice the amount produced a year ago as a result of higher grades.
Operating costs in the fourth quarter declined by $9 million, or 7%, compared with the same period a year ago as a result of significant cost reduction efforts and lower diesel and consumable costs.
Our labour agreement at Highland Valley Copper expired at the end of the third quarter, and negotiations are ongoing.
As anticipated in the mine plan, production at Highland Valley Copper will vary considerably over the next few years due to significant fluctuations in ore grades and hardness in the three active pits. The production plan relies primarily on Lornex ore in 2017, supplemented by the similarly low grade Highmont pit and lower grade sources in the Valley pit, which is now in a heavier stripping phase over the next three to four years. Copper production in 2017 is anticipated to be between 95,000 and 100,000 tonnes, with lower production in the first half of the year, before gradually recovering in 2018 and 2019. Annual copper production from 2018 to 2020 is expected to be between 115,000 and 135,000 tonnes per year. Copper production is anticipated to return to above life of mine average levels of 140,000 tonnes per year after 2020 through to the end of the current mine plan in 2026. Molybdenum production in 2017 is expected to be approximately 9.0 to 9.5 million pounds contained in concentrate, before declining to approximately 7.0 million pounds contained in concentrate annually from 2018 to 2020.
Antamina
Copper production in the fourth quarter of 98,500 tonnes decreased by 14% compared with a year ago primarily as a result of lower ore grades and mill throughput. The mix of mill feed in the quarter was 67% copper-only ore and 33% copper-zinc ore, broadly similar to the same period a year ago. Zinc production of 79,200 tonnes in the fourth quarter increased by 21,200 tonnes, or 37%, compared with a year ago due to higher zinc grades and recoveries.
We continued to make very good progress on cost savings and productivity initiatives, with overall site production costs in the quarter lower than a year ago. During 2016, the site achieved a 13% increase in tonnes mined to a record 244 million tonnes.
Our 22.5% share of Antamina's 2017 production is expected to be in the range of 88,000 to 92,000 tonnes of copper, 75,000 to 80,000 tonnes of zinc and approximately 2.0 million pounds of molybdenum in concentrate. Our share of copper production is expected to be between 90,000 and 100,000 tonnes from 2018 to 2020. Zinc production is expected to remain strong as the mine enters a phase with higher zinc grades and a higher proportion of copper-zinc ore processed. Our share of zinc production is anticipated to average 80,000 tonnes per year during the same 2018 to 2020 period, although annual production will fluctuate due to feed grades and the amount of copper-zinc ore processed, as anticipated in the mine plan. Annual molybdenum production is expected to be between 2.5 and 3.0 million pounds between 2018 and 2020.
Carmen de Andacollo
Copper production in the fourth quarter was similar to the same period of 2015 with a slight increase in copper in concentrate produced, offset by a reduction in copper cathode.
Our continuing cost reduction efforts resulted in lower costs for operating supplies and reduced contractor costs. Operating costs, before a one-time labour settlement charge of US$10 million last year, declined by US$11 million in the fourth quarter compared with a year ago. On an annual basis, operating costs declined by 13% compared with a year ago despite additional tonnes mined and milled.
Consistent with the mine plan, copper grades are expected to continue to gradually decline in 2017 and in future years, which we expect to largely offset with planned throughput improvements in the mill. Carmen de Andacollo's production in 2017 is expected to be similar to 2016 and in the range of 68,000 to 72,000 tonnes of copper in concentrate and 3,000 to 4,000 tonnes of copper cathode. Copper in concentrate production is expected to be in the range of 65,000 to 70,000 tonnes for the subsequent three year period, with cathode production rates uncertain past 2017, although there is potential to extend.
Quebrada Blanca
Copper production in the fourth quarter was 8,900 tonnes, 4% lower than the same period in 2015.
Operating costs in the fourth quarter, before inventory adjustments, were US$4 million lower than the same period of 2015 as a result of lower supply costs, reduced material movement and our continued cost reduction efforts. Cost of sales in the current period included the reversal of US$15 million of previously recorded provisions on in-process inventories as a result of the improved copper price environment. This compares to the US$14 million of inventory write-down charges last year.
Depreciation and amortization charges increased by $40 million in the fourth quarter compared with the same period of 2015 as a result of uncertainty regarding the mine life of the supergene deposit. On a year-to-date basis, depreciation and amortization expenses are $113 million higher compared to 2015.
During the first quarter of 2017, the agglomeration circuit will be halted with all remaining supergene ore mined sent to the dump leach circuit, further reducing operating costs although with a longer leaching cycle. Work is continuing on optimizing the mine plan based on the lower operating cost profile and current copper price. Opportunities to recover additional copper from previously processed material continue to be evaluated.
We expect production of approximately 20,000 to 24,000 tonnes of copper cathode in 2017. Future production plans will depend on copper prices and further cost reduction efforts, although we currently anticipate cathode production to continue until mid-2019 at reduced cathode production rates as the supergene deposit is exhausted.
Cost of Sales
Unit cash costs of product sold in the fourth quarter of 2016 as reported in U.S. dollars, before cash margins for by-products, were US$1.72 per pound compared with US$1.46 per pound in the same period a year ago. Total operating costs have been reduced substantially at all sites, however, the favourable effects of our cost reduction efforts were offset by lower production at Highland Valley Copper in the quarter as a result of mining and processing substantially lower grade material.
Cash margins for by-products increased to US$0.27 per pound compared with US$0.09 per pound in the same period a year ago. This was primarily due to higher prices as well as significantly higher sales of zinc from Antamina and increased sales volumes of molybdenum at Antamina and Highland Valley Copper. Our cost reduction program and higher by-product credits offset significantly lower copper production in the fourth quarter, resulting in unit cash costs for copper, after cash margin for by-products, which were only 6% higher than the same period a year ago at US$1.45 per pound.
Three months
ended December 31, Year ended December 31,
(amounts reported in US$ per pound) 2016 2015 2016 2015
Adjusted cash cost of sales (1) $ 1.49 $ 1.23 $ 1.30 $ 1.40
Smelter processing charges 0.23 0.23 0.22 0.24
Total cash unit costs before by-product margins (1) $ 1.72 $ 1.46 $ 1.52 $ 1.64
Cash margin for by-products (1) (2) (0.27 ) (0.09 ) (0.17 ) (0.19 )
Total cash unit costs after by-product margins (1) $ 1.45 $ 1.37 $ 1.35 $ 1.45
Notes:
(1) Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.
(2) By-products includes both by-products and co-products.
Copper Development Projects
Quebrada Blanca Phase 2
At the end of the quarter we completed an updated feasibility study on our Quebrada Blanca concentrator project which incorporates recent project optimization and certain scope changes, including a different tailings facility located closer to the mine. This project has the potential to be a large-scale, long-life copper asset in the stable mining jurisdiction of Chile, with a large resource base with great potential to significantly extend the mine life beyond the feasibility case, and an ore body open in several directions, with further exploration potential. The project is expected to generate strong economic returns with all-in cash costs very well placed on the cost curve. Sustaining capital is expected to be quite low for this project due to the low strip ratio and shorter initial mine life of 25 years, hence a reduced need for replacement mobile equipment. Annual tailings construction costs are included as operating costs, with minimal sustaining capital requirements. Major process equipment as well as infrastructure such as the water supply pipeline from the coast have been designed to last the life of mine without significant capital investment. The project is currently undergoing environmental permitting, with permit approval anticipated in early 2018.
We own a 76.5% interest in Quebrada Blanca. The other shareholders are a Chilean private company which owns a 13.5% interest, and Empresa Nacional de Minera (ENAMI), a state-owned Chilean mining company, which has a 10% non-funding interest. The updated study estimates a capital cost for the development of the project on a 100% basis of US$4.7 billion (in constant first quarter of 2016 dollars, not including working capital or interest during construction), of which our funding share would be US$4.0 billion. This compares to the 2012 feasibility study estimate of US$5.6 billion on a 100% basis (in January 2012 dollars).
The study is based upon an initial mine life of 25 years, consistent with the capacity of the new tailings facility. The project scope includes the construction of a 140,000 tonne per day concentrator and related facilities connected to a new port facility and desalination plant by 165 kilometre long concentrate and desalinated water pipelines.
The project contemplates annual production of 275,000 tonnes of copper and over 7,700 tonnes of molybdenum in concentrate for the first full five years of mine life. On the basis of copper equivalent production of approximately 301,000 tonnes per year over the first full five years of mine life, this equates to a capital intensity of less than US$16,000 per annual tonne.
The mineral reserve and mineral resource estimates for the concentrator project on a 100% basis, as at December 31, 2016, are set out in the tables below. Mineral resources are reported separately from, and do not include, that portion of mineral resources classified as mineral reserves.
Mineral Reserve(1)(2)
Tonnes (000's) Copper Grade (%Cu) Molybdenum Grade (%Mo)
Proven 40,800 0.62 0.010
Probable 1,218,000 0.51 0.019
Total 1,258,800 0.51 0.019
Mineral Resource(2)(3)
Tonnes (000's) Copper Grade (%Cu) Molybdenum Grade (%Mo)
Measured 15,500 0.41 0.006
Indicated 1,308,900 0.39 0.015
Total M&I 1,324,400 0.38 0.016
Inferred 2,140,800 0.37 0.018
Notes:
(1) Mineral Reserves are constrained within an optimized pit shell and scheduled using a variable grade cut-off approach based on NSR values that averages US$15.07/t over the planned life of mine. The life-of-mine strip ratio is 0.52.
(2) Both Mineral Resource and Mineral Reserve estimates consider long-term commodity prices of US$3.00/lb Cu and US10.0/lb Mo and other assumptions that include: pit slope angles of 30-44º, variable metallurgical recoveries that average approximately 91% for Cu and 76% for Mo and operational costs supported by a Feasibility Study.
(3) Mineral Resources are reported using a NSR cut-off of US$10.36/t. Mineral Resources also include mineralization that is within the Mineral Reserves pit between NSR values of US$10.36/t and US$15.07/t which has been classified as Measured and Indicated, as well as material classified as Inferred that is within the Mineral Reserves pit. In addition Mineral Resources include 23.8 million tonnes of hypogene material grading 0.54% copper that has been mined and stockpiled during our existing supergene operations.
Estimated key project operating parameters are summarized in the following table.
First Full Five Years First Full Ten Years Life of Mine
Strip ratio (tonnes waste: tonnes ore) 0.40:1 0.54:1 0.52:1
Tonnes milled (tonnes per day) 140,000 140,000 140,000
Copper grade (%Cu) 0.60 % 0.56 % 0.51 %
Molybdenum grade (%Mo) 0.020 % 0.021 % 0.019 %
Contained copper production (tonnes per annum) 275,000 258,000 238,000
Contained molybdenum production (tonnes per annum) 7,700 8,200 7,300
Contained copper equivalent production (tonnes per annum) 301,000 286,000 262,000
C1 cash costs (US$)* 1.28 1.33 1.41
* C1 cash costs are presented after by-product credit assuming US$10 per pound of molybdenum. C1 cash costs are inclusive of all stripping costs during operations, which are estimated at approximately US$0.05 per pound of copper over the life of mine. Sustaining capital costs, excluded from C1 cash costs, are expected to average US$0.04 per pound of copper over the life of mine.
Estimated life of mine project economics across a range of copper prices are presented in the following table.
Copper price (US$ per pound) (1) $2.75 $3.00 $3.25 $3.50
Net present value at 8% (US$ millions) 565 1,253 1,932 2,604
Internal rate of return (%) 9.7 % 11.7 % 13.5 % 15.2 %
Payback from first production (years) 6.8 5.8 5.0 4.4
Mine life to payback ratio (x) 3.7 4.3 5.0 5.6
Annual EBITDA (2)
First Full Five Years (US$ million per annum) 856 1,002 1,148 1,294
First Full Ten Years (US$ million per annum) 781 918 1,055 1,192
Life of Mine (US$ million per annum) 685 811 937 1,063
Notes:
(1) Project economics are presented on an unlevered, after-tax basis for a Chilean-domiciled entity and assume US$10 per pound of molybdenum.
(2) Life of Mine annual average EBITDA figures exclude the first and last partial years of operations.
Power purchase agreements have been signed which will provide secure and reliable electric power supply for the Quebrada Blanca Phase 2 project.
As part of the regulatory process, we submitted the Social and Environmental Impact Assessment (SEIA) to the Region of Tarapacá Environmental Authority in the third quarter of 2016. A decision to proceed with development would be contingent upon regulatory approvals and market conditions, among other considerations. Given the timeline of the regulatory process, such a decision is not expected before mid-2018. Assuming a mid-2018 construction start, the project schedule anticipates first ore processed in the latter half of 2021.
The scientific and technical information regarding the hypogene project was approved by Mr. Rodrigo Alves Marinho, P.Geo and Mr. Mike Nelson FAusIMM, who are employees of Teck. Mr. Rodrigo Alves Marinho is a qualified person, as defined under National Instrument (NI) 43-101, and approved the geology, mineral resource, mine plans and mineral reserve estimates. Mr. Nelson is a qualified person, as defined under National Instrument 43-101, and approved the metallurgy and the financial models on which the mineral reserves were based.
NuevaUnión (formerly Project Corridor)
In October 2016, work began on a pre-feasibility study concurrently with early and ongoing engagement with indigenous and non-indigenous communities to gather feedback and help inform project design. In addition, the first environmental baseline campaign was completed in December 2016. Planned 2017 activities include 16,750 metres of technical drilling on the Relincho and La Fortuna deposits in support of the studies. We expect to complete the pre-feasibility study at the end of the third quarter of 2017.
Other Copper Projects
During the third quarter, we completed the pre-feasibility study at the Zafranal copper-gold project located in southern Peru. The project is held by Compañia Minera Zafranal S.A.C. In January 2017, we increased our ownership of Compañia Minera Zafranal S.A.C. to 80% through an acquisition of all of the outstanding shares of AQM Copper Inc., not already owned by us. The remaining 20% is held by Mitsubishi Materials Corporation. Additional drilling and a feasibility study are planned to start in 2017 along with additional community engagement activities, environmental studies and archaeological studies, and permitting work necessary to prepare and submit and Environmental Impact Assessment.
Outlook
We expect 2017 copper production to be in the range of 275,000 to 290,000 tonnes, a decline of approximately 13% from 2016 production levels. The lower production is primarily due to continued lower grades and recoveries at Highland Valley Copper and further planned production declines at our Quebrada Blanca Operation as it nears the end of its life for the supergene deposit.
In 2017, we expect our copper unit costs to be in the range of US$1.75 to US$1.85 per pound before margins from by-products and US$1.40 to US$1.50 per pound after by-products based on current production plans, by-product prices and exchange rates.
We expect copper production to be in the range of 280,000 to 300,000 tonnes from 2018 to 2020.
ZINC BUSINESS UNIT
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Three months
ended December 31, Year ended December 31,
(CAD$ in millions) 2016 2015 2016 2015
Zinc price (realized - US$/lb) $ 1.13 $ 0.75 $ 0.98 $ 0.87
Production (000's tonnes)
