Welcome to Teck Resources Q2 Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. This conference call is being recorded on Thursday, July 23, 2015. I would like to turn the conference over to Mr. Greg Waller, Vice President, Investor Relations and Strategic Analysis. Please go ahead, sir.

Thanks so much, operator and good morning, everyone and thanks for joining us this morning for Teck’s second quarter 2015 results conference call. Before we begin, I would like to draw your attention to the forward-looking information on Slide 2. This presentation does contain forward-looking statements regarding our business. However, various risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward-looking statement. With that, I would like to turn the call over to Don Lindsay, our President and CEO.

Thanks, Greg and good morning, everyone. I will begin with a brief overview of our second quarter results and then Ron Millos, our CFO, will provide additional color from a financial perspective. We will then close with a Q&A session, when Ron and myself and several other additional members of our senior management team will be happy to answer any questions. Our industry continues to face difficult conditions. In Q2, prices for all of our major commodities were lower than the same quarter last year. Steelmaking coal spot prices have fallen by around $25 per ton from the start of the year as the market continues to be oversupplied. We are responding to these conditions with our ongoing focus on cost management and operational performance. We continue to lower unit cost helped significantly by lower oil prices and the U.S. dollar remaining at favorable levels in the quarter and in fact strengthening in July. We will continue to have a disciplined approach to managing our mine production and inventory and began rotating temporary shutdowns at each of our six coal operations in June. Improved gross profit before depreciation and amortization in each of our business units this quarter reflects our close attention to cost. In addition, we have taken steps to significantly enhance our liquidity. In Q2, we extended our existing revolving line of credit by one year and we added a new 2-year $1.2 billion facility. Also, subsequent to quarter end, we announced changes to our gold streaming arrangement at Andacollo, which generated an additional $152 million in cash. In total, we currently have over CAD6.5 billion in liquidity, including our undrawn credit facilities. Finally, we are honored to be recognized again as one of the top corporations in Canada for both corporate citizenship and social responsibility. Teck is…

Thanks Don. I have summarized our changes in cash for the quarter on Slide 10. Our cash flow from operations was $332 million. We spent $329 million on capital projects including Fort Hills. Capitalized stripping costs were $175 million. We paid $39 million in our interest on our debt and $42 million of principal. And Antamina refinanced the loan of which our portion was $28 million. After these items, distribution to non-controlling interest, foreign exchange translation and other changes in working capital, we ended the quarter with cash and short-term investments of around $1.3 billion. And this was in line with our expectations for this point in the year. And with the changes to the Andacollo gold stream that Don spoke to earlier, our current cash balance is approximately $1.5 billion as of July 22. Moving onto the next slide, our pricing adjustments for the first quarter, lower prices resulted in $32 million of negative pricing adjustments in Q2 compared with positive pricing adjustments of $19 million in the same period last year. Copper was down $0.13 from the end of Q1 2015 and zinc was down $0.04. These adjustments are included in our income statement under other operating income and expense. And the chart on the right represents simplified relationships between the change in copper and zinc prices and the reported settlement adjustments and usually provides a good estimate of our pricing adjustments each quarter. And as always, as a reminder, we refining and treatment charges in 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 profits. Looking at our credit ratings on Slide 12, our credit ratings are recently put on negative outlooks…

Thanks Ron. And before I wrap up, I would like to reinforce what Ron said about some of the speculation and comments we have heard in the market. And this is related to the investment grade rating and actions we may or may not take. As Ron said, we believe that with our diversification strategy and with the quality and long lives of our assets and our positioning on the cost curves were key commodities that should be considered an investment-grade company over the long-term. However, commodity prices moved in such a fashion against this that our debt to EBITDA metric is stressed for the short-term and the rating agencies decide, which is their right to move a third of investment grade for some time, then there isn’t much more we can do to defend that. We will not issue equity to buyback debt to defend the rating. And that’s one of the comments that we have heard in the market. We want to make sure that people understand that we will not issue equity to buyback debt to defend the rating. We will continue to invest in our business and to restore the EBITDA side of that metric. To wrap up with a summary of our near-term priorities on Slide 14, we remain focused on cost reductions and operating performance. At the same time, we are maintaining a strong financial position and we expect to finish the year with at least $1 billion in cash without any material change in our overall U.S. dollar debt level. With that, we will be happy to answer your questions and I want you to say please note that some of our management team members are on the line in different locations and so there may be a brief pause after you ask your question as we sort out who is going to run. Thanks very much. And over to you operator.

Thank you, sir. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Sasha Bukacheva from BMO Capital Markets. Please go ahead.

Thank you, operator. Don thank you very much for an update. Are you able at this time to give us an idea of the magnitude or at least a range of those additional ongoing coal production cuts and also the cost profile associated with that volume?

No, we are not, as we said in the comments, we are going to make that decision in September. Ian you are on the line, maybe I will ask you to comment related to the cost side.

Yes, sure Don. We are continuing to maintain our operations cash positive over Q3. We will be looking at Q4 to see what the market expectation or the market trends are and we will be maintaining the production that we have that’s cash positive. And at this point, we expect that to be all of our mines. However, we can’t predict what’s going to happen in the market in the next four months we will be making decisions as to production levels around September.

Okay. And then a follow-up question on that, I guess, well your stripping costs in the gold division are still quite high versus operating income at $100 million, that was about half of the gross profit, so is there any chance that those additional production cuts would help with the stripping cost reductions or maybe some deferrals?

Of course, our ongoing cost cutting is important. We have been reducing costs for several years now and all of our people are still working very hard at that. So we will be looking to continue to reduce costs right across a range of costs when we look at how we perform in the first half of the year compared to our budget and compared to costs in previous year, we reduced costs in every category. That is in LIBOR, in contractors, in operating supplies, repair parts, diesel and other costs. So, we are confident that we can maintain that momentum.

Right. So, but I mean you wouldn’t really want to speak to any of the ranges right now we would have to wait till September to kind of get the better sense of the numbers?

Yes, that’s correct.

Okay, thank you very much. I will jump back in the queue.

I would point out that with the degree of volatility we have seen in the last 2 weeks, let alone the last 2 months or 6 months, it’s very hard to make decisions in this volatile environment, so we are going to wait till the end of the quarter.

The following question is from Harry Mateer from Barclays. Please go ahead.

Hi, good morning. A couple of questions. I guess first, Don, in the past you had indicated that you might be willing to issue equity to buy assets. Can you just talk about what you are seeing in that market? Are there any opportunities or is that just not viable with your equity at this level?

Yes. I just sort of add some clarity to the comment. The nature of the questioning at the time, this is on the last quarterly caller, probably anytime you want to ask me a question, you always have to get to a situation where you say never say never, but our bias is strongly against issuing equity at all and you are near these price levels. And if it were for an acquisition, it would have to be quite an extraordinary acquisition for us to think that it was so accretive that we would issue equity. So, that’s the one point on issuing equity. On what we are seeing in the acquisitions market, not much, you can read in the papers about different activities that are ongoing, but the odds of us being sort of involved at a point where we would actually make an acquisition are quite slim at the best of times. And I don’t think anything has changed. The fact is when the industry went through its consolidation phase from about 10 years ago to 5 years ago, a lot of the good opportunities were taken then and that are held in the strong hands and they are unlikely to free up. We saw opportunities we will be interested in. An exploration worldwide generally hasn’t been that successful. And where there are discoveries, one thing we have learned as an industry is that at least 10, 12 years, probably 15 before there would be any production from those discoveries – to those discoveries. And so if you are looking to grow near the medium-term production and cash flow, there is very, very little out there.

Thanks. And then just a follow-up, as a management team, I don’t know if this is only you managed to, but what do you think the right debt or net debt to EBITDA metric is for the company?

Our CFO will give you our thoughts on that.

Yes. Our target is geared to maintain the mid BBB credit rating and a 30% number is what we have targeted in the past. Certainly, at these commodity prices, it’s challenging to maintain that, but the 30% in a more normal pricing environment is a reasonable target for us.

And that’s a debt-to-cap target?

That’s debt to debt plus equity. Of course, the rating agencies look at EBITDA coverage and interest coverage. They have a number of different metrics that they look at, but our financial policies are tied into trying to maintain that mid BBB level. And we like the mid BBB, because when you get into an environment like this, you end up getting sort of drawn down with the entire industry and this leads us that sort of notch of cushion to avoid the non-investment grade categories.

Yes. Let me just add to that, that the issue with the debt-to-EBITDA ratio is really with the denominator. If you look at our debt maturity schedule, we only have $300 million due this year and nothing due next year and then the maturity ladder is well staggered throughout with very, very manageable maturities. So, it’s really about EBITDA and in the extremely low price environment, low coal price in particular, it’s tough to do much about that EBITDA. It doesn’t take much change in the coal price for that fraction for the denominator to increase such that fraction is right back onsite. However, we will have to wait and see if and more likely when that happens.

I guess, at that point, where do you think we are in the macro cost curve at this point?

Well, that’s I think is an excellent question, but one of the most difficult to answer in the industry right now, I am looking at the Real Foley as I speak, but the whole industry has been able to lower cost certainly more than I think anyone anticipated. We have done a pretty good job ourselves and we are trying to make sure we maintain our position of that cost curve. But I think it will be just a guess to know where we are right now but Real, do you have anything better to say there?

I mean just more generally, Don, with access a couple of months ago, we are showing that around half of the seaborne hard coking coal industry was operating at negative margin and that was based on the price of $89. So, since then, the price – spot price has come down further. So, you can expect that at least half of the industry is still operating cash negative and in our case we are cash positive at all of our markets.

I mean, the currency effect, of course, is very powerful. It’s helped us in Canada. It certainly helped Australia. It doesn’t help the U.S. We have seen an acceleration in the U.S. of what I call corporate activity I guess. I think there have been six bankruptcies so far, including Walter recently. There has been delisting Alpha, Arch’s, I think consolidating everyone to avoid delisting. These are serious indications of how stressed the industry is. There was a report out from one of the major banks few days ago saying 100% of the central operation coal business is losing cash. So, we know that there is a lot of pressure out there, but at this point, the market still oversupplied.

Yes.

Good, thank you.

Thank you. The following question is from Greg Barnes from TD Securities. Please go ahead.

So Don, how oversupplied is the coal industry right now given there have been cuts in production, including your own?

Well, good question, Greg. And as you all know, we keep a running chart on that and we have the number. I don’t think we shared the number, because we are not sure how accurate it is, but I want to be helpful. So, I’d say, I think we have set a range before, so I’d say we are still in the 10 million ton to 15 million ton oversupply range.

Okay. And I know this is an equally difficult question, but…

And you know what I want to say though, because I see Real starring at me, there is a Part B to that and that depends on your assumption on what the imports into China are. And when I talked about volatility earlier and this would be a good case in point. In May, the total net coal imports in China were 1.8 million tons and then we just saw June’s number and it was 5.08 million tons. So, if you annualize the 5.08 million tons that’s over 60 million tons a year. That would be fantastic, right? Of course, we know that it’s just shipping schedules and various other things. So, to answer your first question on how we oversupplied are we? You have to make an estimate or a guess on what the numbers are going to be going to China, what the end demands are. I saw another comment out saying that one of the factors that might bring the coal market back – oil price back is that we are all underestimating what China will buy from the seaborne market. We don’t know we will just have to see that on polls month-by-month. You asked the right question, Greg, but jeez, it’s tough to answer.

Yes, it’s an equally difficult question than what is the right long-term price for coking coal now. And I know you use 185 in your replacement or carrying value test, but clearly, that’s not right. What is right?

And what we said, there is a long paragraph in our disclosure about that as we spend a lot of time on it and thanks for the opportunity to maybe elaborate on that. First of all, again, we don’t know the long-term price. And the other factor going into that assumption is what is the long-term cost structure and that hasn’t stabilized it. And so it hasn’t stabilized for us either, because as price gets lower, people change their mine plans and in some cases that can change cost structure quite significantly as you well know. So, for example, we have our impairment testing. The last time it was done it was in October, which is the same time we do annually for the goodwill testing and at that time, I think the Canadian dollar was closer to par or something. So if you then use current exchange rates, actually use 1.25 exchange rate versus that it takes it down to about 1.40. And if you use current exchange rates it takes down to about 1.24. And then if you were able to use a model with our current cost and what we think our costs are likely to be in the new 5-year mine plans going forward, then that might be the equivalent –that might get us below 1.30 in terms of where we think there might be any impairment. So does that – and that’s your one part of the discussion, does that mean that the long-term price is 1.30 or below, we don’t know, because if we look at other operations and where the top 10% to 20% of the costs per bid, we think it’s going to be above that. We have seen some disclosure lately that reinforces that. So we are doing a lot of work on it. And it’s very important for people modeling and doing dilutions and so on. I don’t think we will find that the cost reductions that kind present cost reductions that we have seen in the last 2 years will continue much longer. I think people are going to hit the wall on that. And in fact, you will see some snap back and costs will come back up because of the things that people did to survive these extreme lows will run out. And if they want to stay in business, they will have to mine higher cost material. So, it’s just another form of volatility in trying to assess this business. So again, I don’t know if that’s a helpful answer or not, we are trying to be helpful, but the answers are not easy to your questions, which is something you knew.

That’s helpful, Don. That gets us someway down the road on this. Thanks a lot.

Thank you. The following question is from Orest Wowkodaw from Scotiabank. Please go ahead.

Hi, just wanted to get a little bit more color on the coal business, you have done a pretty good job taking down costs over the last year or so, do you think we have kind of reached the bottom on where costs can go, given that you are taking volumes down starting in the third quarter, I am curious if you still think there is more room to bring down costs from current levels. And then secondary in terms of volumes, if the spot price stays around $80 a ton, which would signal that we will see lower benchmark moving forward, do you think it’s reasonable to assume that your volumes could be – would stay around that 5.7 million ton to 6 million ton per quarter mark moving forward until we saw an improvement?

Okay. I am going to make some comments and then turn it over to Ian in a minute. And working backwards on your question, it’s still too early to tell on that. Directionally, I think that if prices stay that low, we probably stay in the range we are now, but we are looking at a number of different alternatives that could change that decision. So I apologize but there again isn’t – there isn’t just one option for us on that and we have made the decision, so I don’t want to be definitive. On the costs and if you ask me about four months or five months ago, I would have thought, yes we are getting close to having done just all that we can do. But imagination prevails and mine plan is a big, big part of it. If you assume that we are in a environment of lower prices for a longer and you could make some significant decisions on mine plan that structurally lower your costs. And so we know the whole industry is looking at that, so we are too, plus there is different technology applications, one of the things that we are excited about is converting our haul trucks from diesel to LNG and not only that very important move from a sustainability point of view in terms of lowering your carbon footprint, but it’s also lowered our costs, our fuel costs significantly. So there is a bunch of things that could make a difference. So Ian, why don’t I turn over to you on that point on the cost side?

Thanks, Don. Yes, I guess we just continue to look for cost reduction opportunities. Basically, all our employees in the coal business unit are engaged in this in one form and another end way working at the harsh priority and harsh impact that cost reduction initiatives. We are talking to all our suppliers. We are talking to all of our contractors. We are examining the services that we have provided to us look for opportunities. We are looking to consolidate our purchasing efforts, looking for increased leverage. And we are looking at mine plans, where it’s been able to reduce haul distances this year below budget, basically questioning the various assumptions under which we have been formulating our mind plan. So I wouldn’t say we are at the finish of our cost reduction capability, we are certainly a fair way through, we have achieved a lot, but we are going to keep on moving.

Okay, thank you for that. And just as a follow-up, you spent about $1 billion year-to-date on CapEx all-in including cap stripping in Fort Hills, so you seem to be tracking below your budget for the year of 2.3, do you expect that to pick up in the second half or is there a possibility you might come in below budget on that spending?

Ron Millos?

Yes. We think we might come in a bit lower. The one significant item that Ian mentioned earlier, Don mentioned earlier was reduced stripping costs at the coal operations. Of course, our U.S. based operations they are being hit by the exchange rate, but I wouldn’t say it’s going to come in at hundreds of millions of dollars below by any means, but it could come in $100 million or so below.

Okay, thanks for that color.

Thank you. The following question is from Jeffrey McKinney from Bank of America Merrill Lynch. Please go ahead.

Hi, good morning guys. And thank you for the question. I guess, first on the – just some further clarity on the additional liquidity that was put in place, curious why the decision for a 2-year facility, was there nothing available from a longer-term standpoint and generally I don’t think of liquidity is a near-term concern, so just kind of want to get your thoughts there?

Scott Wilson, our Vice President and Treasurer.

Thanks, Jeffrey. Yes, the decision on $1.2 billion tenure of 2 years was really a balance between a longer term there, but also extending our existing $3 billion facility. So we extended that from a 4-year term to a 5-year term. And in conjunction with that self and took advice from our banking relationships that a 2-year term in terms of capital that the banks would need to hold against these things was about the right sweet spot. So it was really to find that optimal balance.

And was there a longer term facility available or is this kind of as far as kind of lending banks were willing to go out?

We might have been able to do something longer, I am not sure if we would have been able to get $1.2 billion, had we done that. So again, we are just trying to find the right balance between size and tenure.

Okay, thank you. That’s helpful. And then just kind of revisiting the comments on some of the other coal producers, you mentioned Walter and Alpha as you think about kind of your intermediate term strategy, what are you guys thinking about in terms of that capacity potentially being permanently shut versus continuing to operate post the potential reorganization?

It’s hard to know. Historically, if you went back to around 2005 time period and before the exports out of the U.S. were in the kind of 23 million ton to 25 million ton range kind of consistently. Then as prices rose and they rose quite significantly, we saw those exports go up to as high, I think, 55 million tons. And it’s kind of within that range for a few years. If prices today are below – well, hard to pick a year, but certainly, they are below 10 years ago, we would go back to that level, if they did go back to that level, that would mean still significant shutdowns to come, permanent shutdowns to come out of a number of those companies. So, that’s probably the only kind of factual guideline that we can point to, but each of those will be case-specific and they will make their own decisions.

Okay, thank you. That’s helpful.

Thank you. The following question was from Oscar Cabrera from Bank of America Merrill Lynch. Please go ahead.

Thank you, operator. Good morning, everyone. Don, just staying with the coal markets, wondering if you would be willing to share your estimates in those 10 million, 15 million tons in oversupply, what’s the assumption for imports into China?

You came through quite frankly, sorry, Oscar, but your question was what your assumption was for imports into China. And I think in our chart and coming that 10 to 15, there is the number of factors and we have probably that would be best not to go into those details, but I can say that for 6 months, like at the half year, it was 21 million tons into China. If you annualize that, that’s 42, monthly was much higher, but May was really not much. So, I mean it’s very volatile. It’s hard to tell.

Yes, but I mean, I am assuming that you are – you were using the first six months of the year, but now that’s fine, that’s helpful. Then on the – you talked about the issues that you have in Quebrada Blanca as well as one of your coal mines with some slides. Do you have an estimate for the amount of CapEx that will be required to get these operations back to normal?

Dale Andres, our Senior VP of Copper.

I will comment on briefly on QB. It’s still early days as far as our cost assessments. We do have remediation funds that we are putting into place and that includes funds to put a stabilization buttress against the pit wall that’s the primary cause of the ground movement in and around our SX-EW plant. I think, again, it’s too early to comment on the cost estimate, but as we stated in our release, we have restarted production at about 80% of planned production for the year. And we will go with that rate until we finalize those plans.

Right. And then on the coal operation?

Yes, Ian here, Oscar. It’s probably in the order of a couple of million dollars. Basically, there was a fall of rock in the area between the mine and the plant, but has been cleaned up already to a significant degree and now we are just going to get the conveyor running through carrying the raw coal, meanwhile, we are doing it by trucking. So, it’s going to be back to normal fairly soon.

Right, so marginal. And then the last thing if I may, when you decided to shutdown your operations for three weeks, what exchange were you using in your assumptions when that happened, Canadian exchange?

So, the question was related to our 3-week shutdown, what exchange rate were we using?

Yes, I guess if I remember correctly back in the first quarter, the operations were free cash flow positive. And then a few weeks since, there was a decision to shutdown the operations. So, I am assuming that part of the reason for that was the different Canadian exchange?

Okay. Let me back up a bit on that and give some more color. So, when we made the statement that would have been in our Q1 results. So, as of March 31, all cash – all operations were cash positive. And then the coal price from about the middle of April to the middle of May declined substantially like I think $20 in a very short space of time. And so for a phase there, depending upon whether you had made maintenance shutdowns going or what, we would not have been able to make that comment. So, Ian and I then got together and the rest of the management team and we implemented what we called our coal reset that we really want to reset the business and we worked backwards from the market from customer demand and different quality of demand in different markets. China was one thing, but our percentage sales to China had declined quite a bit and so it wasn’t as big an impact as some people might believe, but that is we are kind of pricing discussions take place, but in elsewhere and we decided to deliberately not put additional tons into an already oversupplied market. And that was my quote in the release and that’s something that we strongly believe in. So, exchange rate didn’t really have that much of an impact in the decision to cut our production. It was really working back from customer demand, looking at our inventories at the ports and the mines, looking at just how we could be most efficient. And we did that very specifically, so it would have no effect on our key long-term customers, so we would have the coal blends available that we wanted. And that’s why we spread it throughout all six mines. And if we continue with that in the next quarter and I repeat we will not know that until the end of September, but we probably do it on the same basis more or less. So, that just gives more color on it. We were basically taking spot tons off the market that we are going to weaker hands that were kind of helping weaken the price. And you will have seen that when we did that and we saw another producer, Peabody cut back a few days later, there was a 10% move in the spot price. So we kind of think that justifies the move. Ian, did you want to make any additional comments or you kind of...

No, thanks. Don, I think you covered it.

Okay, thank you.

Thank you, Don. That’s great color. Thanks.

Thank you. The following question is from Jorge Bernstein from Deutsche Bank. Please go ahead.

Hey, good morning guys. I guess my question is for Ron Millos, but sorry I joined the call late, so I am not sure if he is on.

He is, yes.

Okay. I just – just again addressing and just from taking a page from the gold stocks, I mean, they typically use sort of 3-year trailing average gold prices to sort of mark-to-market their reserves. And I was wondering if Ron could comment on what is the mechanism for making that determination as for when you do a mark-to-market on your reserves and given where the spot is relative to your reserve or your carrying price of 185 per ton? And then the other question is sort of, Ron, like how solid do you think textbook is right now, because with the stock trading at about 25% of book value, I mean, the market is trying to tell you that there is probably some write-downs coming. So, I am just sort of looking for where we could be expecting those write-downs to originate? Thanks.

Yes, I might get John Gingell to help out with the pricing. But generally speaking, it’s what the market views the prices to be. So, we look at the various – what analysts do what the various WoodMacs those people look at and what other companies are using tight things, so plus our own views go into those calculations. So, it’s a number of things. The write-down also factors in the exchange rates, the mine plans, all of that information. So, that’s basically how we go about the impairment process. Market value is really just an indicator. It’s something that – if the market value of our shares are less than the book value, it’s an indicator that something is wrong, but the thing I might point out is we looked at that in detail sometime in the last year, can’t remember the details though. I went back in history and looked at our market value and at that time, about two-thirds of the time, our market value was well in excess of our book value and a third of the time it was less. And when we were above, we were above by – on average about $7 billion. And when we were below, we were below by about $2 billion type thing. So in a cyclical industry, the market value of your shares against the book value is not that relevant in the overall scheme of things. So John, you want to comment?

Yes. Just a couple of comments, one is that the reserve testing prices are determined a little bit differently through a formula than the impairment testing numbers. So you can’t make a direct correlation between them. As I said, it’s a specific formula that’s required there. The other thing just on the determination of prices, we use spot prices and forward markets where there are forward markets to determine those. But those forward markets for all our commodities run out after about 2 years or 3 years. So after that period, we blend in our long-term prices. Our long-term prices, we look a lot of sources for that. There is a management judgment involved in that. We do – when there are transactions in the market, we try to test our assumptions by back calculating the transaction price compared to the assumptions that we are using. And we are generally pretty good at that they tend to tie in, but there have been a lot of transactions lately, so it gets a little bit more difficult.

Yes. And I want to try to provide even more clarity and it sounds like you may have missed my earlier answer earlier on the call. But we have some disclosure in the quarterly release as well on this. Important to note that the 1.85 number is not a number that is used in 2015 or 2016, it’s several years out. And the numbers actually for these years are quite low, reflective of the market. That’s how we do our models. Secondly, when that number was done, it was October 2014. And since that time, the combination of both exchange rates, which are $1.30 or so now and the reduction in costs would make as much as a $50 or more swing in that equivalent price. So we are looking at very closely – we looked at it very closely for this quarter. We will look at it closely for next quarter as well. And so there could be a write-down at some stage. But one of the most important factors will be to get a handle on our own long-term cost structure, which comes down to decisions on mine plan and hauls distances and strip ratios which can structurally effect the cost structure. You have to pick exchange rates and as you know that’s quite difficult these days with the volatility. It also have to take a view on the long-term cost structure for the industry and how that might affect the long-term price. So we are very comfortable with this quarter because we know there is a least a $50 swing from what we published before. But we haven’t come to a definitive view on those key factors that I just listed because in this market, that’s kind of difficult. And we are still working on those mine plans to see what decision we might make that could materially affect the cost structure. So I hope that gives you some more color on your question.

And Jorge if you missed the earlier part of the call, some – there has been concern that the offside are lending covenants with the potential write-down. And our equity is $10 billion higher than our debt, so you have got basically $10 billion of potential reduction in equity before we would be offside the debt covenant as well.

And just to add to that, that’s an after-tax impairment. So you would have to have $15 billion impairment or something like that taken offside.

I perfectly understand but just taking a page from how I have seen some other industries functions like gold, we have seen $50 billion, that’s 50, write-downs in the past 3 years. So large numbers are possible given the magnitude of the pullback we have seen in commodities and that’s why I am trying to understand what is the triggering mechanism and ultimately is this a company decision or is this your auditors decision to then year end December 31, say, hey guys, we need to do a mark to market here, that’s what I am just trying understand at what point does it become necessary to take that write-down?

Well, it’s our decision. It’s not the auditor’s decision.

Okay, thank you.

Thank you. The following question is from Brian MacArthur from UBS. Please go ahead.

Good morning. Sorry, not to go back to this impairment again, but how – you made a statement obviously a lot of assumptions including taxes, how are the tax pools from the forwarding transaction or what sort of tax rates do you use going forward for that impairment testing given the pools out there or do you just take a normalized statutory rate?

Yes. We take a normal statutory rate for that and there are minimal taxes that are triggered into that calculation as well.

Right. So you would be using like we did impairment would be a cash tax rate is somewhere at 30 as opposed to like lower than what the pools, is that how it works?

The pools are factored into the calculation Brian, because it’s basically a net present value analysis. And we have these pools that are available to us. So until they run out, they would be factored into the calculations.

And are they specifically allocated to certain assets or no on the book value?

They are allocated to the core business unit as a whole as they apply to them. The mineral taxes are a mine-by-mine allocation because that’s the way mineral taxes work.

Right. So you would use the tax pools from that basically for the impairment testing in the coal then I guess, is that sort of the way it works?

Yes.

Okay, great. Thank you very much.

Thank you. The following question is from David Charles from Dundee Capital Markets. Please go ahead.

Good morning, I just have one quick question. Most of mine have been answered. I was just wondering where we are on the collective bargaining agreements on your copper assets, I mean if I am correct, you are still negotiating or will begin negotiating for Antamina, Andacollo and QB and I am wondering whether this might cause strikes or other curtailments in production?

Sure. It’s Dale, I can provide some color on that. Actually, our Antamina agreement expires today, but we are in the middle of active negotiations. It’s not unusual for those negotiations to go past the expiry date of the agreement, similar to last time around. And as far as CDA and QB in Chile, we are also in early negotiations with all the unions there. And because of – because we are in the middle of negotiations, I really don’t want to comment any further than that.

Do you think that given the current copper price environment, the negotiations will be more difficult or less difficult?

I think negotiations are always difficult. And I wouldn’t anticipate it any more or less. And again, there is nothing to indicate that it would be any different than last time around as far as a risk.

And maybe just in the same vein, has there been any disclosure as to the situation both at Line Creek and one of your I think – I am not sure, it’s Coal Mountain where we are on negotiations there as well?

Yes, Ian here. We are carrying on negotiations on those – with both of those mines and it’s an ongoing process and we will be continuing over time.

Thank you. The following question is from Alex Terentiew from Raymond James. Please go ahead.

Hi guys, just one quick question, one more question on your coal business costs. Obviously, you have done a good job keeping costs down there so far this year, well below the $89 to $93 per ton guidance. And you know in your presentation, you maintained your cost guidance for the year, is there any reason why we should think costs will go back up to that range, I mean to even hit the low end, $89 I mean you would have to be kind of in the $94 per ton range for the rest of this year I am just trying to get an idea of if you guys are being extra conservative there or not?

I guess we certainly hope and expect that we can keep the costs that are under control but – that are under our control. But there is always external factors including diesel price and we still have to make decisions about our final quarter four production. So, we just thought it was prudent to leave the current range intact for the time being.

But given your current production plans where costs are and so forth, I mean, you don’t really see the reason why cost at the second half of this year should be much higher than they have in been the first half?

Well, I guess we will be obviously endeavoring to keep cash positive and as prices aren’t going to be any higher than we are in the first half, then you can see where our costs have to be.

Okay, great. Thank you.

Thank you. The following question is from Jeremy Sussman from Clarkson. Please go ahead.

Yes, thank you very much. Can you just remind us how much of your coal is sold quarterly versus spot and the mix of Chinese versus non-Chinese sales, which obviously is related to that?

So, we have got about half of our coal that remains priced on a quarterly contract basis. Actually, what we have said for 2014 is that we had above 55% of our coal that was sold on shorter than quarterly basis and that’s up from around 40% in 2013. It was above 30% in 2012 and it was 15% to 25% prior to 2012. And the sales splits in 2014, you asked about China, China was somewhere around 25% or so of our sales in 2014. And we started reducing our sales to China from about Q4 of 2013.

Thank you. And then just following up real quick on, one more question on costs, regardless, I guess of unit costs and keeping it very, very high level and acknowledging that you are still in the decision-making process. Do you see overall costs trending higher or lower over the next 12 months kind of outside of currency swings?

Sorry, could you rephrase the question, please or repeat the question?

Yes, sir. So, basically, just I understand that you are still in the decision-making process on the operational side. But just generally speaking, outside of currency, do you see coal costs trending higher or lower over the next 12 months from where they sat in Q2?

Okay. So, unfortunately, it is related to some of those key decisions, but Ian, well, I turn that over to you?

Thanks, Don. Really, I think we have probably covered this and I am not sure we can give too much more color than we have previously. Our endeavor will be to maintain all of our operations cash positive and so we are going to be doing everything we can to keep cost down.

Thank you very much.

Thank you. The following question is from Kerry Smith from Haywood Securities. Please go ahead.

Thanks operator. Ian, are the mine plans for the coal operation is just generally sufficiently flexible that you could rework the mine plans for the next 1 to 3 years and significantly reduce your stripping requirements and still not jeopardize the long-term mine plan. Could you take $100 million out of capitalized stripping for the next couple of years annually and still not screw up your mine plan?

I guess, we have been reviewing our mine plans on an ongoing basis over the last couple of years and we are still in that process. We are looking at every avenue we have to reduce costs in the short-term, but of course, we are keeping an eye on the long-term and we certainly aren’t going to be doing anything, which prejudices our ability to maintain production levels when the price recovery comes.

Okay, I will take that as a maybe. And just on Antamina, you had a good quarter there in terms of throughput. Is that throughput level sustainable or was that a function of maybe it was softer ore in the quarter? I am just wondering whether you could run at that rate on a go forward basis?

Yes, thanks. Yes, it was an unusual quarter and the fact that it was a record throughput, it does depend on the mix of ore feeds and where we are in our various phases of our mine plan. The original design rate through the expanded facility was 130,000 tons per day. I would expect a more normal rate for production would be in that 145,000 tons per day. So, still well above design, but probably not as high as in the second quarter on a continuous ongoing basis although we are trying to continue to optimize throughput as we go forward. Countering that I guess we do anticipate grades to recover on the copper side going forward in the second half of the year.

Okay. Okay, thank you Dale.

Thank you. The next question is from David Wang from Morningstar. Please go ahead.

Thanks. I just had a couple of questions. First, if net coal prices remained where you signed the latest contract, would you be able to maintain the current level guidance of $25 million, $26 million production after this year from the tonnage that you are not producing. Are those still profitable or are you mainly taking them off to help the supply demand balance in the market?

Good question, but again, not sure we could answer until we get to – closer to next year and make an assessment on market conditions. I know you have prefaced your question by saying if the prices stay there, I would repeat that all of our operations are cash positive now. So, that would suggest that we keep going at the rate we are now or more. But our general philosophy is that you shouldn’t put incremental tons into an oversupplied market. So, those are two factors that we would look at. That’s how what we think about it and we make the decision then.

Great. And for the decline in what you guys expect for capital costs in Fort Hills, can you guys give us some color on what you think your portion of capital still left will come down to? Has it changed from your previous guidance?

I am not sure we talked about this. Go ahead. Ray Reipas?

Sorry, I missed the question Don a little bit.

Could you repeat the question, please?

Yes, you mentioned that you expect decline in capital costs for Fort Hills. I was wondering if that’s changed from what you previously expected or is that about the same?

No, you may have misinterpreted our comments. We have not said that we expect declining capital cost. What we have said is that this is a terrific environment to be building Fort Hills, because elsewhere there have been significant cutbacks in capital devoted to the industry. So, that makes the environment for building much better in terms of access to key skills in labor and deliveries and the rest of it. And we have been benefiting from that. So, the project is right on track and meeting all its major milestones. That’s kind of the state of play. I am actually going there tomorrow and looking forward to it, but it will be good.

Alright. The costs are about the same as what you have been projecting. I am also wondering about copper. Copper’s price has come down quite a bit, too. But on the cost side across the industry, are you seeing the same sort of cost cuts as you have with net poll or do you see it to a different degree?

Yes, I think in copper from a cost perspective we are making good progress on how we manage contractors, how we manage labor, how we manage supplies, exchange rates in our favor and our Canadian operations in Chile and Antamina. A good portion of our costs are exposed in U.S. dollars. So, I guess to a lesser degree, we are benefiting from the exchange rate there. But yes, we are no different than coal, we are going to continue to try and drive our costs lower and that’s across the board at all operations.

Alright, great. Thanks guys.

Operator, we have gone well through our hour, so we are going to cut off the Q&A now. If anybody is left in the queue with a question, we will be happy to talk to you separately over the course of the day. I am just going to turn it back to Don Lindsay for a moment to make some closing comments.

Yes, the first thing I would say is that there are couple of questions there on deferred stripping that suggests that at least a few individuals out there might benefit from a conversation to clarify your understanding how the [indiscernible] works. So, I strongly encourage you to call Greg Waller directly on that issue. And I would say the same on things related to debt covenants and ratings and those kind of things had number of issues that I think are based on – we know stories are circling the market and sometimes it’s stories related to what people hope might happen based on their own investment position, but we have some pretty clear answers to those. We tried to give them today, but for those who are still wondering, don’t hesitate to call Greg Waller directly. So then in closing, I just want to say that we are very, very proud of this quarter, because the operating team has really delivered. The finance team has really delivered as well in terms of our balance sheet and liquidity strength. And I would point out that notwithstanding the fact that commodity prices are significantly down, our results are up. So, we look forward to speaking to you again at the end of Q3. Thanks very much.

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