That focus on always striving to do better and to be safer is the reason for the theme of this edition of Connect: ‘A Safer Teck’.
We know that achieving our ultimate vision for safety means working continuously to strengthen our safeguards, training and practices. This issue highlights some examples of that work taking place across our company, such as how employees at Coal Mountain worked together to improve conveyor safety (page 8), and how Trail Operations is leading in addressing mental health (page 20).
We also recently launched our new Courageous Safety Leadership principles, which reflect our safety journey and speak to the responsibilities held by every employee and contractor. All six of the principles can be found in more detail on page 7, but there is one in particular I want to emphasize, because I think it is important to keep top of mind as we continue to work to control costs and improve productivity; and that is: “A safe operation is a productive operation.”
The fact is, safety and productivity are absolutely integral to each other. Effectively assessing and mitigating risk is a critical part of being able to execute our work efficiently. So in every job we undertake, safety can never be an afterthought—it is always our first thought.
Encouragingly, we have continued to see improvements in Teck’s safety performance to date in 2016, including a reduction in Total Reportable Injury Frequency when compared with 2015. However, we have seen an increase in High-Potential Incidents, which tells us that we still have more work to do.
Thanks to the hard work and continued focus on safety, productivity and sustainability of employees across Teck, our operational performance was very strong in the third quarter, with 11 of our 13 operations increasing production while also decreasing unit costs compared with a year ago. We also saw quarterly production records set at our Elkview, Line Creek and Trail operations.
Our sustainability performance was recognized in the past quarter with Teck being named to the Dow Jones Sustainability World Index for the seventh consecutive year, which reflects the excellent work being done across our company to ensure our operations are environmentally and socially responsible.
As many of you are aware, the major change in this past quarter has been the recent and rapid increase in steelmaking coal prices.
The price spike is due primarily to a number of supply-side factors that have depleted global production capacity and inventories. This has included a reduction in coal mine operating days in China; production disruptions in Australia; and a number of production curtailments since 2014 due to low prices.
As a result of these factors, we have seen a significant increase in prices. However, we do not believe these pricing levels are sustainable and we are likely to see a supply-side response.
In zinc, we have seen positive movement in prices, with a 21% increase in the third quarter compared to the same period a year ago. Stocks of zinc concentrates continue to decline, and we believe are close to critical levels due to the effects of zinc mine closures.
The positive news in coal and zinc, however, is tempered by the challenging conditions that remain for copper. Supply continues to outstrip demand and, as a result, despite recent increases, prices remain at low levels, and there is no expectation for significant improvement in the near term.
On the energy side of our business, we are getting closer to the completion of Fort Hills, planned for the end of 2017. While we have experienced lower prices over the past two years for oil, this has also resulted in low investment in new oil supply, so there will come a point when demand once again exceeds supply, and Fort Hills is well-positioned to benefit from this when it comes online late next year.
Responding to Volatility
So while we are encouraged by improvements in the steelmaking coal and zinc markets, we are also cautious. This caution stems from the fact that markets have become increasingly volatile—meaning commodity prices are shifting abruptly over shorter periods of time.
As quickly as prices have come back up, they could move downwards again. For example, just as China reduced mine operating days in coal, they could very quickly decide to increase them again. Or mines that shuttered over the last year may reopen faster than expected. Those kinds of shifts could bring significant new supply online, which would have a dramatic impact on the price of steelmaking coal.
This kind of increased volatility in commodity markets is becoming the new normal for our industry and requires us to remain disciplined in how we manage our business so that we are well-positioned regardless of which way that volatility swings. This will mean building resilience into our business to weather the dramatic shifts.
It was with building resilience in mind that we made use of the recent increase in free cash flow to further reduce our debt by CAD$1 billion in September and October. Reducing debt strengthens our balance sheet overall, helping us get back towards an investment grade credit rating while also positioning us to weather future volatility.
The new reality of greater price volatility is also why we must continue to focus on controlling the controllable: productivity and costs across our business. Our success in controlling these two critical areas will ensure we remain well-positioned and competitive, whichever way the markets may move.
Thanks to the hard work and focus of employees, we have achieved dramatic improvements in costs and productivity over the past few years that ensured our operations remained strong through the downturn. But we are not out of the woods yet.
In copper, the market remains challenging. Further, our production is expected to decline as Highland Valley Copper (HVC) transitions to lower grade areas of the mine. As a result, we will need to work hard to manage our costs through this challenging period for the operation. We have a great team at HVC, and I know they are up to meeting this challenge.
In zinc, in response to production challenges at Pend Oreille, earlier this year we began extensive geological studies that have resulted in significant changes to the mine plan. As a result, we have developed a new mine plan through to early 2018. While this represents a shorter mine life than previously expected, it is a much better informed and executable mine plan with significant potential to further extend mine life to at least 2020.
At Quebrada Blanca (QB), as part of the regulatory process, we submitted the Social Environmental Impact Assessment for QB Phase 2 in the quarter, which is a major step forward for the project. We also received our updated environmental permits for QB’s existing operation.
Looking ahead to the end of 2016 and the new year, we see encouraging signs, but we also know that challenges remain ahead of us. We have made very good progress in reducing costs and strengthening our business, but we continue to face a very difficult operating environment in copper, and volatility remains a key risk across our commodities.
Which brings me back to the tenet that has guided us through this difficult period: controlling the controllable through our focus on responsible mining, our efforts to control cost and improve productivity and, most importantly, our commitment to safety. By working to continually improve in these fundamental areas, we will ensure that our people and our company remain strong for the future.
President and CEO
Certain statements in this issue of Connect are forward-looking, including statements about our future growth and production, supply and demand of commodities, prospects for our business and operations, statements that Fort Hills is well positioned for an increase in demand for oil, the statement that we will remain well-positioned and competitive, whichever way the markets move, potential for mine life extension at Pend Oreille.
Forward-looking statements are inherently subject to many factors that will cause actual results to differ materially from the results suggested by the forward-looking statements.
In addition, forward-looking statements are based on various assumptions which, if incorrect or inaccurate, could also cause the results suggested by the forward-looking statements to be materially incorrect.
Additional important information regarding risks, assumptions and uncertainties that could affect forward-looking information is contained in our most recent annual information form and management’s discussion and analysis available through SEDAR at www.sedar.com.