Teck Resources Limited (TECK) Q3 2013 Earnings Report, Transcript and Summary

Gregory A. Waller - Vice President of Investor Relations & Strategic Analysis Donald R. Lindsay - Chief Executive Officer, President, Director and Member of Executive Committee Ronald A. Millos - Chief Financial Officer and Senior Vice President of Finance Ian C. Kilgour - Chief Operating Officer and Executive Vice President Réal Foley - Vice President of Coal Marketing Dale E. Andres - Senior Vice President of Copper Andrew A. Stonkus - Vice President of Base Metals Marketing Timothy C. Watson - Senior Vice President of Project Development

Meredith H. Bandy - BMO Capital Markets Canada Curtis Rogers Woodworth - Nomura Securities Co. Ltd., Research Division Ralph M. Profiti - Crédit Suisse AG, Research Division David Charles - Dundee Capital Markets Inc., Research Division Josh Golden Alex Terentiew - Raymond James Ltd., Research Division Mitesh Thakkar - FBR Capital Markets & Co., Research Division Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division Oscar Cabrera - BofA Merrill Lynch, Research Division Garrett S. Nelson - BB&T Capital Markets, Research Division Lucas Pipes - Brean Capital LLC, Research Division Cliff Hale-Sanders - Cormark Securities Inc., Research Division

Ladies and gentlemen, thank you for standing by. Welcome to Teck's Third Quarter 2013 Results Conference Call. [Operator Instructions] This conference call is being recorded on Thursday, October 24, 2013. I would now like to turn the conference call over to Greg Waller, Vice President, Investor Relations and Strategic Analysis. Please go ahead, sir.

Thanks so much, Audrey, and good morning, everybody. Thanks for joining us for our third quarter 2013 conference call. Before we start, I'd like to draw your attention to the forward-looking information on Slide 2. This presentation contains forward-looking statements regarding our business. However, various risks and uncertainties may cause actual results to vary, and Teck does not assume the obligation to update any forward-looking statement. At this point, I'd like to turn the call over to Don Lindsay.

Thanks, Greg, and good morning, everyone. We will be following our usual presentation format this morning. I'll begin with the highlights of our Q3 2013 operating and financial results, and then I'll turn it over to Ron Millos, our CFO, to provide additional color on the financial side. And we will conclude with a Q&A session, where Ron, myself and several additional members of our management team will be available to answer your questions. So starting with Slide 4, the highlights from our third quarter. We set a new sales record for Steelmaking Coal in the quarter at 7.6 million tonnes. Demand from customers in each of our market segments, including traditional contract customers, spot sales and development markets for new customers, has been strong. We had very strong operational results in the quarter as well. Steelmaking Coal production on an annualized basis was close to our current capacity of 27 million tonnes. In copper, production was 7% higher than Q2, but lower than the record production levels we achieved in Q3 and Q4 of 2012. We remain focused on shareholder value. As a result, given the current market conditions, our near-term attention is on cost reductions, deferring capital spending and reviewing the timing of our various development projects. As a reflection of our sharp focus on operating costs, unit costs were significantly lower in coal compared with the same period last year. We continue to make progress with our cost reduction program. To date, our existing operations have identified about $330 million of annual ongoing potential cost savings at constant production levels and have implemented $300 million of those initiatives. In addition, we have identified and implemented $130 million of onetime cost savings and deferrals. We announced last quarter that we had deferred capital expenditures in light of current market conditions, including delaying the Quintette mine restart and slowing development of Quebrada Blanca Phase 2. We are targeting substantial deferrals of both sustaining and development capital expenditures through 2013 and 2014. Reductions to sustaining capital will have a greater effect in 2014 due to the lead times and existing commitments. We will provide a more complete update with our 2014 guidance in our Q4 earnings release. Turning to an overview of our Q3 results on Slide 5. Revenues were $2.5 billion, which was similar to the same period last year despite lower prices for all of our principal products, partially offset by a stronger U.S. dollar and higher sales volume in coal and zinc. Gross profit before depreciation and amortization was $919 million compared with $1.1 billion in the same quarter last year. Our profit attributable to shareholders was $267 million. Adjusted profit, excluding one-time and unusual items, was $252 million, and EBITDA was $815 million. Looking at our adjusted profit in additional detail on Slide 6. As you can see, there are only a few adjustments for unusual items to calculate comparative earnings figures for the third quarter. Including these items, adjusted profit declined to $252 million in Q3, or $0.44 per share, compared with $425 million or $0.73 per share in the same period last year. This decline was primarily due to significantly lower coal prices, partially offset by record sales volume for Steelmaking Coal. I'll now review our Q3 and year-to-date results by business unit, starting with Steelmaking Coal on Slide 7. Production was up 6% over last year and 12% over the previous quarter. We have a strong sales outlook for Q4 and expect to be near the top end of our production guidance range at 24.5 million to 25.5 million tonnes for the full year. As I mentioned earlier, we set a new sales record for Steelmaking Coal in the quarter. In addition to the good demand from customers, all of our logistics partners continue to provide consistently strong performance, including Neptune Terminals with its newly-expanded capacity. However, the current price for Steelmaking Coal remains below what we believe is required to sustain adequate production in the industry in the long term. Revenue remained comparable to the same quarter last year, primarily due to substantially lower coal prices. We continue to drive down unit costs due to productivity improvements and reduction of input and overhead costs. The total combined costs of our sales of $88 per tonne represents a decline of 7% from Q3 last year. Site costs declined 14% to $50 per tonne, and this was partially offset by a $1 per tonne increase in distribution costs, driven by slightly higher rail transportation costs. We now expect our annual cost of products sold to be near the bottom of our guidance at $51 to $58 per tonne based on our current production plans. And as a reminder, this incorporates the new accounting rules around capitalized stripping. Gross profit before depreciation and amortization for our Steelmaking Coal business unit declined by $131 million to $417 million, reflecting lower coal prices. Turning to Slide 8. This chart shows our rolling 4-quarter coal production. This somewhat masks the recent increase in production in response to market demand. Since August 2012, we had been running about 10% under capacity. We were running much closer to capacity this quarter at an annualized rate of nearly 27 million tonnes. We expect to have the capacity to produce 28 million tonnes in 2014. Our production rate though will be a function of market demand. We also have the option to grow capacity by a further 3 million to 4 million tonnes by restarting our Quintette mine. We announced the deferral to restart last quarter, and we will review it again in the spring of 2014. In the meantime, we are continuing engineering work, so if market conditions are good and we decide to go ahead, Quintette could be in production in mid-2015. At Line Creek, we received our British Columbia Environmental Assessment Certificate for Phase 2 in Q3, which will maintain production and extend the mine life by 18 years. Looking forward to Q4, the benchmark price for premium products is USD 152 per tonne. We have reached agreements with our customers to sell 5.6 million tonnes at an average price of USD 145 per tonne, and we expect total sales to be at or above 6.3 million tonnes. Turning to Slide 9. Copper production was 7% higher than Q2 but lower than the record production levels that we achieved in the second half of 2012 when higher grades were mined at Highland Valley. Moly production also declined, primarily driven by the lower ore grades at Highland Valley. Total operating costs were unchanged compared with the same period last year. Higher costs at Highland Valley and Antamina were offset by substantially lower costs at Quebrada Blanca. Gross profit before depreciation and amortization for our copper business unit decreased by 19%, or $74 million, in Q3 compared with the same period last year, primarily as a result of lower copper prices, reduced sales volumes and low molybdenum revenues. The chart on Slide 10 shows the progress we have made in increasing copper production over the past 3 years. We are on track to meet our production guidance of 340,000 to 360,000 tonnes for the full year. So looking at highlights of our copper operations. As we discussed last quarter, Highland Valley throughput and production in Q3 was affected by a 1-month partial shutdown of the mill required to connect the new pebble crusher to the existing grinding lines. The shutdown also resulted in higher operating costs for the quarter. At Antamina, we set a new quarterly production record. Higher fee grades drove the higher production. The mine continues to run very well following the expansion completed last year. At QB, we continue to see the benefits of our initiatives to reduce operating costs since Q4 2012, with a 25% decline in unit cash costs since the restructuring. Given the permitting issues that we face and current market conditions, we delayed development of QB Phase 2. Some additional capital operating costs associated with infrastructure upgrades and permit activities are expected in Q4 and in 2014. At Relincho, the feasibility study is progressing towards completion at the end of this quarter, and we will review it in Q1 2014 before making any decisions on next steps to further optimize or advance the project. Slide 11 provides a further update on the Highland Valley mill optimization project. The project is on schedule for substantial mechanical completion by year end, with first feed expected to be introduced in January. The new pebble crushing facility and grinding line updates were commissioned in Q3 and are operating as designed, with some minor modifications required. The new flotation facility will be commissioned next quarter. We still expect to meet our Highland Valley copper production guidance of 100,000 to 110,000 tonnes for the full year, higher mill throughput rates are expected to start in Q4, with the full throughput benefit in 2014. Turning to our zinc business on Slide 12. Zinc in concentrate production was up, primarily due to an increase at Red Dog. As a reminder, we include Antamina's share of zinc production in these figures, and Antamina's financial results are reported in our copper business unit as zinc is considered to be a byproduct of this mine. We continue to expect to achieve our 2013 production guidance of 560,000 to 590,000 tonnes of zinc in concentrate and 280,000 to 290,000 tonnes of refined zinc. Red Dog sales of zinc and lead were approximately 25% higher this quarter than the same period last year as the shipping fees have got off to a much better start. The 2013 shipping season was completed yesterday, with higher volumes shipped this year than in the 2012 season. Trail's refined zinc and lead production grew 4% and 14%, respectively, as a result of higher throughput and improved operating efficiencies. Revenues rose by $57 million to $721 million, driven by significantly higher zinc and lead sales volumes from Red Dog. Gross profit before depreciation and amortization grew by $48 million to $183 million, and increased contributions from both Red Dog and Trail were driven by higher sales volumes and 6% higher lead prices. Turning to our energy business on Slide 13, and we know that you are all awaiting the sanction decision for Fort Hills, which is still expected before the end of the year. If it is approved, we will be able to release further details covering the scope and cost and schedule in conjunction with the sanction decision. We could tell you that a lot of time and effort has been put into the engineering studies to update the design basis for the project and to improve the accuracy of the cost estimates. Suncor, the project's operator, has indicated that they are developing a cost-driven construction schedule, which means they will be focused on doing the project cost effectively. I will now turn it over to Ron to provide additional color on the financial side.

Thanks, Don, and I'm moving on to Slide 15 here, and it shows our cash flow from operations was $647 million for the quarter. We did spend $486 million on capital projects and a further $160 million on capitalized production stripping costs. Expenditures and financial investments and other assets were $85 million, which was primarily our investment in Fort Hills, which we account for on an equity basis. We paid $156 million in debt principal and interest and $259 million for our semiannual dividend. And that payment went out in July. After these items, distributions to noncontrolling interests, foreign exchange translation and other changes in working capital, our cash and short-term investments declined by $540 million -- $549 million, I should say, and we ended the quarter with a strong cash balance of approximately $2.3 billion. And finally, we only have about USD 325 million of debt due between now and early 2017. Moving on to the next slide. Our pricing adjustments for the third quarter are summarized in the table on the chart. Pricing adjustments were $24 million on a pretax basis, compared with $54 million in the same period a year ago. And these adjustments are included in other income -- on our income statement under other income and operating expense. Pricing adjustments are driven by the change in the quarter and commodity prices. In Q3, copper prices increased by $0.24 and zinc increased by $0.03. The chart on the right-hand side simplifies the relationship between the change in copper and zinc prices, and the reported settlement adjustments. And as a reminder, refining and treatment charges and the Canadian-U.S. dollar exchange rate should be considered in your analysis of the impact of price changes in the adjustment, and you should also consider taxes and royalties when analyzing the impact on our net profit. And with that, I'll turn the call back to Don for some closing remarks.

Thanks, Ron. So in summary on Slide 18. We have a new record for quarterly Steelmaking Coal sales and demand from customers is strong, and we had solid operational performance in the quarter. We remain focused on shareholder value. As a result, we retained our sharp focus on operating costs, we continue to make progress with our cost reduction program, and we have deferred capital expenditures and are reviewing the timing of our various development projects. And with that, we'd be happy to answer any questions. And please note that some of our management team members are on the line in different locations so there may be a pause after you ask a question. Okay, over to you, operator, for questions.

[Operator Instructions] Our first question is from Meredith Bandy from BMO Capital Markets.

I guess my first question was just in terms of your cash costs for coal, if you are guiding to the low end of your guidance, that would seem to imply a pretty big step-up just for the fourth quarter. Is that the case, and if so, what's causing that? And is the low -- those low 50s, is that a sustainable long-term cost?

Thanks, Meredith. I'll turn that over to Ian Kilgour.

Thanks, Meredith. We expect to continue in the fourth quarter reasonably similar to what we have in previous 3 quarters. The fourth quarter does contain some of the remnant costs from the processing plant annual shutdowns, so that is a little bit of a bump there. However, we don't see a great change in the trends. And moving forward, we expect to see a continuity of costs rather than any step change over the next few years.

Okay. Ian, that was very helpful. And then in terms of Quintette, could you describe a little bit more about what a sustained upturn in met coal would look like that would encourage you to give the green light on Quintette?

I'll just make a brief comment and then Ian can as well. And I'd say that it's very subjective. And we looked at a lot of factors; general economic performance, the countries of our main customers first, the customers themselves, what competitors are doing in terms of supply coming on, all of the supply-demand factors that you would think. But in the end, it's a judgment. And we have 15 people in the room here we could probably get 15 different opinions. And so that's sort of a starting point. And Ian, what other factors would you [indiscernible]?

Well, as Don stated, I think, in the introductory remarks that we believe that the coal price right now is below the -- needs to be sustained for a sustainable future for the level of production that we have across the globe at the moment. And so that we see that we will get back to that point, that we will get to a point where cost prices are -- allow sustainable growth in production along with the sustainable demand in -- across the globe, including developing countries. So overall, our view is positive. The pause in Quintette was to allow us to look at that project in the light of our overall production. We've been increasing our production from our existing mines to move closer to our capacity. And we are looking at the project at Quintette to look at all ways of optimizing the capital on that project and then using this pause to make sure that when we develop Quintette, we develop it as capital efficient as we possibly can.

Our next question is from Curt Woodworth from Nomura.

I was wondering if you could just kind of follow up on the met coal comment you made where pricing appears to be at an unsustainably low level, yet from a demand side perspective, your volumes were, by far, the best quarterly result you've had in some time. And if you looked at a lot of the trade data out of Australia, it implies that C1 demand is actually running up pretty strongly year-to-date. So do you feel that the pricing is more a function of cost curve shifts as opposed to demand? Or what is your view on what would kind of, I guess, take met pricing up as you look out the next several years?

Thanks. So I'll turn that over to Réal Foley. Réal Foley: So Thanks, Curt. What we're seeing in the market, actually, is the market levels have recovered from the lows that we've seen in the summer. But pricing, as we said earlier, is still below a sustainable level in the, long terms. However, we are starting to see some slight improvement in demand and in fundamentals, in a number of market areas, as the world economic uncertainty appears to be easing. For instance, China GDP was at 7.8% in the last quarter. Steel production is running at very high level, record levels actually. We're also seeing increased hot metal production in India and in traditional Asian markets generally. The rest of the world is -- demand is kind of flat or slightly lower. So to put all that in perspective, overall demand is better, but the pricing environment is still below sustainable level. And as a result of that, there's been around 40 million tonnes of production cuts in met coal since the spring of 2012. So in our view, pricing needs to improve, and between now and the end of the year, there's a number of analysts that are expecting further production cuts on top of the 40 million. And that should bring better balance in the market in terms of pricing.

And maybe I could just add a bit more color, and it links to the previous question as well, directly related to Quintette. A fact of life in this business is that you make far more money on price than you do on volume. And even though we know that Quintette will be much more competitive as an operation than some of the coal operations that are currently still running, we don't want to contribute to the oversupply that's in the market, and thereby, hurt the other 6 operating mines that we have. And so we're very, very cognizant of that relationship between price and current production when we're looking at bringing on additional price -- additional production in an oversupplied market. So those are the kind of things that we're looking at.

Okay, great. And just as a follow-up in terms of the hedge book and the volume guide for coal in the fourth quarter, it does imply a fairly sharp deceleration from what you did in the third quarter, which I know is just a very strong quarter. Is there any particular reason for that? Are you seeing any slowdown in China? Or is it more just kind of a tough comp off the third quarter?

I'll let Ian answer that.

Thanks. So I think the thing to emphasize, really, is the combined outlook for the second half of the year. When you add the third quarter sales to our estimates for the fourth quarter, we're looking at a 28 million tonne annualized rate compared to the first half, which was around the 25.5 million annualized rate. So I think it's sometimes misleading to compare quarters to -- on a quarterly basis because there is some just inherent volatility in the market. But if you look at the overall trends from half 1 to half 2, it's extremely positive.

Our next question is from Ralph Profiti from Credit Suisse. Ralph M. Profiti - Crédit Suisse AG, Research Division: There's been a considerable implied inventory drawdown since Q4 of 2012 in the coal business. And I'm just wondering how are inventory levels looking currently? By my calculations, about 1.35 million tonnes. Is that a reasonable number within the chain? And if it's possible to get an approximate split between the mine and the port, that would also be helpful.

Good question. Ian?

Okay. Well, you are correct. There has been a drawdown and we had built up inventory levels significantly and a good thing that we did that. Right now, we're in a pretty healthy situation. We'd like to have somewhere around, I don't know, potentially 3 to 4 weeks inventory available. And we like to have around 2/3 of that at the port or at the various ports, and that gives us the most flexibility when it comes to managing the different sort of events that happened through the year in the supply chain. And so we're around those levels at the moment and we're pretty happy with the situation. Ralph M. Profiti - Crédit Suisse AG, Research Division: Great. That's helpful. I see now that QB1 has now been pushed into early 2019. But along with that is coming some increased permitting. And can we -- can you be a little bit more specific on what those permits are?

Okay. I'll turn it over to Dale Andres, Senior VP, Copper.

Sure. We've recently updated our life-of-mine plan. It does envision cathode production into 2019. With life extension, we do need to update our EIA. And our -- as we mentioned on the previous quarter, our original EIA was done back before the mine was built back in 1991, and regulations have changed since that time. And with the life extension, we do need to -- we'll revise that EIA and update that for the life extension. But that also comes with upgrading some of our facilities to comply with that new environmental legislation. So that's what we're currently working through and the team's preparing the data and the submission for that EIA update. And that EIA update needs to be completed and approved before we go forward with the QB Phase 2 EIA submission.

Our next question is from David Charles from Dundee Capital Markets.

Believe it or not, Ralph asked a question I was looking to ask on coal inventories. But I'm not sure if I heard the answer on what your current level of inventories are. Could you give us some insight into that, please?

Yes, sure. Just to repeat what I mentioned before, we're aiming for inventories between 3 and 4 weeks production. We'd like to have about 2/3 of that at the port. And that's the situation we're in at the moment, which is a very good situation for us, to be able to manage the different challenges that happen from time to time along the supply chain.

So that would suggest then or imply that your inventory levels will be around 2 million tonnes across the supply chain?

I'll leave that for you to calculate.

Okay. My follow-up question, I suppose, is sort of switching gears a little bit from coal. Could you maybe give us an overview of the zinc market as it stands? It appears that in the recent LME week, there was some positive, how should I say, comments made on zinc. And I see that Red Dog had an excellent quarter, and I'm just wondering how you see the zinc market develop over the next year or so?

Okay, I'm going to turn that over to Andrew Stonkus.

Yes. Thanks, David. The [indiscernible stats came out recently, and there's still a concentrate surplus being predicted or reported, but it's down from the surplus from last year. So the overhang on the cost stream market is being whittled down and moved downwards. The Chinese imports for concentrates are also still very strong. They're up about 14% year-to-date, so the Chinese are still very aggressive in the importing of concentrates. On the metals side, yes, we are starting to see a drawdown of inventories on the LME. We're down about 180,000 tonnes so far this year, and the demand side is shaping up very, very well. The North American galvanizing lines are running at strong rates. The automotive sector is up on an annualized rate around 15 to 16 million units. So the galvanizing sector in North America is very strong, and that's just supporting the premium side of the equation for zinc metals. So it's a strong market for concentrates, and in China and domestically, for our metal sales is also strong markets.

And what are you seeing on the supply side? Do you think we'll really get some of these large mines actually get taken out of production finally?

Well, what we had -- there's a number of reported, the exact timing -- I don't want to comment on but we had the first large mine closed earlier this year, the Brunswick mine in eastern Canada. So that's the first of a couple that are being predicted to be closed the next couple of years. So we're starting to see the stress or the exhaustion of some of these long-life large mines, and that's trying to impact the concentrate market as these mines start to come to the end of their lives. So we're in the early stages of those mine reductions or closures, and I expect going to work its way through the metal supply side as well. So if you don't have the concentrates, you won't produce the metal, and that's the signs that we see that are going to be supporting the underlying metal markets in the next upcoming just few months and years.

Our next question is from Josh Golden from JPMorgan.

I think there's some concern about M&A and ultimately what the balance sheet would look like. So I guess can you sort of talk a little bit about your one, a commitment to an investment grade rating, your overall approach to credit ratings, and then can you sort of talk a little bit about your approach to M&A and how you would handle the balance sheet on such a scenario?

Well, I think it's a pretty short answer. We're committed to investment grade full stop. Any M&A transactions that we might review, we review solely on that context, and we review it in advance with rating agencies to be sure that it would remain investment-grade, and as simple as that.

Let me ask you if I can get a little bit more granular. Is there sort of a commitment to a mid to a strong investment-grade rating, or are you willing to do some M&A and go down into a sort of the lower investment-grade rating?

It's probably getting too granular. You'd have to be looking at an actual M&A opportunity to be able to answer the question with any sort of clarity. But I'll repeat what I said that if we want to be committed to investment-grade, we wouldn't want to be getting too close to where if some event happened in the world and the rating agencies took a very negative view of our industry, which happens from time to time, that they would end up downgrading us. So we don't want to be close.

Our next question is from Alex Terentiew from Raymond James.

Just have one outstanding question on your coal business. In light of your comments on strong demand for your coal products and assuming demand stays around where it is today, should we expect your Q3 run rate at about 6.7 million tonnes or 27 million tonnes per year to be sustained in 2014?

Short answer is yes.

Yes, certainly.

Our next question is from Mitesh Thakkar from FBR Capital Markets. Mitesh Thakkar - FBR Capital Markets & Co., Research Division: Just a quick question on the copper side. How should we think about incremental volumes? I know the mill optimization process is kind of in the ramp-up in the fourth quarter here. But given the old decline and across a couple of other mines, how do you think about volume growth next year versus this year, if that is something you can comment on?

Go ahead, Dale.

Yes, thanks for the question. Yes, we're currently reviewing our budgets and plans going into next year. We are faced with some grade declines at some operations, and we'll be offsetting that with throughput and productivity improvements, and of course, our cost reduction initiatives. So we anticipate continuing to be stressed by gradually reducing grades, but we'll be offsetting that with increased throughput. Mitesh Thakkar - FBR Capital Markets & Co., Research Division: Great. And just on the coal side, can you update us on the selenium spending, how much you have done so far and how much more to go?

Ian?

Yes. Our guidance around the spend on selenium has been around the $600 million of capital over the next 5 years, and under our current plans are maintaining that outlook. The key progress that we made this year is that our first water treatment plant, which is located at the Line Creek operation, is substantially structurally complete and is on track for commissioning in the second quarter of next year. So that will be the first major impact that we will have on our selenium output. And we'll be following that with a sequence of plants. The next one will be at the Fording River mine and followed by 1 at the Elkview mine. And we're in the planning process of that program and basically moving along in a very orderly way to manage that program, again, making sure that we are applying good project management principles and that the capital that we spend there is well spent.

Our next question is from Orest Wowkodaw from Scotiabank.

My question revolves around costs as well. I mean, on the call, you previously guided that you expect costs to remain relatively similar going forward. Does that take into account any incremental operating costs related to the selenium management, like i.e., do you think you can maintain around $50 a tonne and offset any additional selenium costs with cost reductions from higher volumes on your cost reduction initiatives?

Yes. We'll be certainly attempting to do that. As were foreshadowed, the operating costs of selenium are going to grow gradually over the period from something around $1, $1.50 next year up to $5 or $6 5 years out. So we'll certainly be aiming to continue with the productivity improvements that we've being focusing on over the last period of time to do our best to offset those costs.

Okay. And just following that up a little bit more with, your $330 million target for annual cost savings, of which I think $300 million have been incremented already at the end of third quarter, is there a lag in terms of seeing the actual cost savings flow through your financials? So even though you've implemented it, does it take some time to actually realize those savings? And I'm just curious like if that was realized as of the end of the quarter or so that we're going to see additional benefits actually flowing through the fourth quarter, or have we essentially captured most of that on average during the third quarter?

There is a lag. The way we report the program is that our aim was increased from $250 million to $300 million, I think, in the last quarterly session, and we're working our way at that. And in fact, the identified savings have now increased to $330 million. When we say implemented, it means that we have actually taken the steps required to achieve that saving, and those steps will bear fruit over the following period of time. So there is a natural lag and a natural accumulation of the savings over time. But over a 1-year period, we expect to have the full benefit of those total savings realized and to continue with that level of saving in the following years.

Okay. So even though you have implemented $300 million to date, we've yet to see the full impact of that actually?

Yes, because depending on when it was implemented, the cumulative savings started either earlier or later according to their place in the program.

I just want to add my own take on this. That -- every week, at the meeting of my director reports, right after safety, we go through the cost cutting program. And it's a very thick binder site by site, and the classification of what's an ongoing, sustainable cost reduction versus something that might be just a deferral, there's a lot of scrutiny on that. The reporting of it is actually managed by our controller, and he's put a lot of detail into it. So on the principle, the people respect what you inspect or what gets measured gets done. There's a lot of focus on this one, and we want to make sure the numbers are real, and that's what Ian's team is delivering on.

Our next question is from Oscar Cabrera from Bank of America Merrill Lynch.

Just interested in your comment in your release where you talk about traditional customers that used to buy your coal or their coal requirements on a quality-of-pricing basis going to the spot market. Just was wondering if you can provide context around that. Is it large volumes? Is it a trend that you're seeing in all of the regions or is it just some of your customers?

Do you have a point?

Yes, I can do that, Oscar. The highest proportion of sales that are priced on a spot basis in the industry go to China and India. I think that's pretty common knowledge. For instance, in 2012, we sold around 30% of our spot-priced sales into the China market. But we also sell spot-priced tonnes to our traditional market, and this is something that started from the second quarter this year. So basically, that's in response to a lower steel pricing and lower margin environment where steelmakers are trying to control their cost.

Right. So the traditional buyers that you're talking about is Japan, Korea and Europe. Is that trend you think continue or going to continue?

Yes, we think that shorter-term pricing is most likely to remain because the market is quite volatile. The important point to make it that even though the pricing has changed in some instances, we still have long-term business relationships, contractual arrangements, and those give us a certain level of certainty on volume.

And then just a question on capital allocation. As you know a decision on Fort Hills is nearing, and you talked about deferred capital, you're doing a great job with cost savings. As these projects start to take effect, you have $2 billion in the balance sheet right now, another $2 billion in potential line of credit or loans. How do you envision or what amount of working capital would you require or you will be comfortable with as you move on with some of these projects?

Okay, Ron Millos, our CFO.

Well, you're right with the line of credit, Oscar, and we're sort of -- if we were to do something, we like to have $400 million, $500 million of cash on the balance sheet. And that's sort of high end to low end of that range will depend on where the cash is and how easily accessible it is without having to have dividends declared with subsidiary entities or having to bring it back up from a foreign country with some sort of withholding tax. But about $500 million is order of magnitude where we would like to see the cash balance at, at any point in time.

Our next question is from Garrett Nelson from BB&T Capital Markets. Garrett S. Nelson - BB&T Capital Markets, Research Division: Looking out to 2014, in light of the QB and Quintette delays and excluding any decision regarding Fort Hills, what are some of the other planned investments on the growth CapEx side? So looking at the major enhancements and new mine development columns, I realize you're probably in the budgeting process right now, but I'm just trying to get a better sense of how Teck's CapEx, like the total CapEx number, might trend next year relative to this year.

Well, maybe I'll start and Ian may add some color. We have said that we're very, very focused on capital reduction and capital deferral in this environment. The coal price benchmark is still only $1.52. We said the -- sustaining capital, a $500 million target for next year. And most of the things that we've been working on such as the higher-value modernization will be either finished or close to finished. So some of that, which I think you would think of as growth capital or development capital, should be finished. We will make a decision sometime in the spring on Quintette, as we've mentioned, so that could be something to add to the budget, but it wouldn't start until the second quarter of 2014. So -- and then of course, in coal, the expansion program that we've been on to get to 28 million tonnes, that will essentially be finished by then. So there isn't really very much on the list for next year. Ian, did you want to add anything on that?

Yes, Don. I think the Quintette project is obviously still a focus for us there. The decision on a go-ahead or how to go-ahead will be made, as we said, second quarter. Until that time, we're looking at all means of optimizing the capital required for that project. There are 1 or 2 smaller modifications, enhancements possible on our existing operations, which will, with relatively small amounts of capital, give us increased yield in our preparation plants and increased capacity, and we continued to look at those, but they're the key areas of focus for next year.

The next question is from Lucas Pipes from Brean Capital.

So my first question is on Quintette and QB2. I believe you spent roughly $55 million in Q3 in CapEx on QB2 and $79 million for Quintette. First, could you maybe give us a flavor on what that money exactly is spent on? And then secondly, if you were to go ahead with these 2 projects, how much more capital would be required at this point in time?

Okay, Ian is going to start with Quintette.

Yes, thanks. With Quintette, really in the first half of the year, we were moving essentially forward with Quintette on a path to first production in mid-2014. When we made the decision to defer Quintette by, or that decision by a year, we had already made some commitments on mining equipment, for which we were required to utilize or provide some progress payments. So they were a key element of the spending. And what we've done in the meantime is divert some of those pieces of mining equipment down to our current operations to get this value up from them while we progress Quintette. And the other part was for some other contracts which we were previously committed to. But spending did curtail drastically during the quarter and was much lower in the third -- in September than it was in July.

And on QB2, we have reduced substantially the spending from the original budget but there's still some commitments, just as Ian described. I'll turn it over to Tim Watson for details.

Thank you. With respect to QB2, you may reflect back a couple of quarters where we, in fact, did release major mechanical equipment and electrical equipment for purchase and fabrication. Since then, we have stopped the releasing of any further equipment into fabrication, and we have been working with the manufacturers of the various pieces of equipment to actually stop fabrication of what we can to minimize our obligations going forward. In conjunction of that, we are ramping down the engineering. So but on a going-forward basis, we will have some commitments in terms of the equipment that was released previously for fabrication to complete the fabrication of that particular pieces of equipment.

Great, that's a very good, extremely helpful. Do you have a sense now how much more capital would be required before completion? Or said -- yes, if you could maybe comment on what sense you have right now.

With respect -- I'm assuming you're talking about the areas...

Quintette and QB2, respectively.

Well, we're late in our budgeting right now and I'm not sure that it's appropriate to answer that with detail. But it's not very much order of magnitude.

Okay, that's helpful. And then maybe switching gears. Ian and Réal, I have a follow-up question. First, Ian, on the coal sustaining CapEx side, it keeps on coming down. Is this a sustainable rate now going forward? Are there more -- is there more potential to bring this down going forward? And then Réal, where do you see spot prices right now on the met coal side, and would you say that the benchmark price is generally accepted in the market?

Okay. On the sustaining capital, yes, we're -- I guess, going through a cycle where we had substantially rejuvenated our mining fleets, upgraded our processing plants. So the lower level of sustaining capital is expected to be maintained over the next few years.

Réal, the spot price? Réal Foley: Yes. On the spot pricing, Lucas, I guess through Q3, spot prices were below -- were quite low actually for 2/3 of the quarter, and then they recovered through the quarter. The market right now is pretty much flat. The quarterly settlement has been accepted by customers as we said in the release. The majority of our quarterly sales are already priced, so there is really not much of a difference right now in the market between quarterly pricing and spot pricing levels.

Our next question is from Cliff Hale-Sanders from Cormark Securities.

Most of my questions have been answered but I do have 1 shorter-term question for the copper space. Obviously, results for Q2 would benefit from the higher-grade we saw at Antamina. And from my perspective, a very modest impact from the tie-in with the Highland Valley, the mill. Just wondering what can we can look for in Q4 and into Q1. Do we expect the grades at Antamina to remain a little bit elevated relative to the past history? And do we expect a greater impact in Q4 at Highland Valley than we saw in Q3, or do we expect it again to be relatively minimal? Réal Foley: Yes, thanks for the question. On -- to start with for Antamina, Antamina did have a 30-day shutdown in the third quarter of their SAG mill #1 for stator a change, which is a major drive component of the motor. And as a result, we were purposely feeding high grade during the quarter. So we don't anticipate those kind of grades going forward, but throughput should increase. So, again, for sites like Antamina, throughput will go up from the third quarter but grades will come down. From a Highland Valley perspective, the pebble crushers are operating. We're targeting a 10% throughput increase through those pebble crushers. There's still some minor modifications that we need to make, and those are very minor that the pebble crushers are operating as designed. So we will start to see some of that throughput increase in the fourth quarter and the full benefit of that going into 2014. So in this statement in the fourth quarter, similar production to the third quarter overall.

Okay, so you're not expecting any really lost time as the -- from the tie-in of the new mill? Réal Foley: No. Most of the major tie-ins have already been done. There'll be some very minor tie-ins as we plug in the new floatation plant heading into the first quarter, but we don't anticipate any slowdown in the fourth quarter at HVC due to the mill optimization project.

Thanks, operator. We're coming up to our limit for the call. I just want to turn it over to Don for a moment to make a concluding comment, and then he'll turn it back to me just to talk about our Investor Day for a moment.

Okay. Thanks, Greg. I just want to go back to the question on investment grade versus M&A opportunity, because I think it's an important one and people do speculate from time to time on what we might or might not do. We do review M&A opportunities as you would expect us to, and we look at pretty much everything that's out there. Some of them we look at for a couple of hours, some of it for a couple of days and others we could spend weeks on them. Obviously, we've chosen not to do anything at this point. Within that, if we do pursue something in detail, we do screen it with the rating agencies. And as most of you know who've been in the markets for some time, rating agencies tend to be lagging indicators. And while we believe that the market has sort of passed, the bottom prices are up, our volumes are very strong as you've seen, the rating agencies would take much longer before they have comfort that markets were on a very firm footing. And so we review them in that context. And that means, quite frankly, that the size of the check that we could write for an M&A deal is much smaller today than it would've been a year or 2 ago, and we're very cognizant of that. So some of the things that you see that are out there that are a bit larger, we're not interested in because we know that, that might take us closer to non investment grade and we're just not doing that. And just to give you a little more color for flavor, I'm going to return to what I said in May of 2009 just to make the point. And at that stage, we did have to go to the high-yield market. And I met with something like 65 institutions in a week, and I closed every meeting with the following summary. I said there were 3 reasons why you should buy our bonds. The first was that we were much closer to the bottom than the top, and that was certainly true. Secondly, all of our operations were cash positive. That means we have very good, quality assets that are underpinning any bonds. And third, I said I met a lot of really nice people in the high-yield market this week and I never wanted to meet them again. And we are going back to investment grade as fast as we could, and that's exactly what we did. Well, I'll say this. I think that there's probably still a lot of really nice people working in the high-yield market but I still don't want to meet them. So that really summarizes my position on this. Been through that, not going there again. And with that, I want to say thank you very much for joining us in this meeting, and we look forward to seeing a lot of you, I think, on November 7, I think it is, Greg with our...

Yes, November 5, yes. Thanks very much. And of course, for those of you who weren't able to get your question in today, Ron Millos and myself are certainly available to take your call off-line over the course of the day and we can talk. But I look forward to seeing you on November 5 at our Investor Day.

Thanks so much.

Thank you. The conference call has now ended. Please disconnect your lines at this time, and we thank you for your participation.