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Teck Reports Unaudited Second Quarter Results for 2014

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Jul 24, 2014) - Teck Resources Limited (TSX: TCK.A and TCK.B, NYSE: TCK) ("Teck") reported second quarter adjusted profit attributable to shareholders of $72 million, or $0.13 per share, compared with $197 million or $0.34 per share in 2013. Profit attributable to shareholders was $80 million, or $0.14 per share, compared with $143 million, or $0.25 per share, a year ago.

"We are pleased with the performance of our operations this quarter and with our efforts to reduce our costs and capital spending to ensure we emerge stronger from the current challenging price environment, particularly the substantially lower steelmaking coal price that was prevalent in the second quarter of 2014 compared with last year," said Don Lindsay, President and CEO.

Highlights and Significant Items

  • Profit attributable to shareholders was $80 million and EBITDA was $558 million in the second quarter.
  • Gross profit before depreciation and amortization was $633 million in the second quarter compared with $871 million in the second quarter of 2013.
  • Cash flow from operations, before working capital changes, was $520 million in the second quarter of 2014 compared with $584 million a year ago.
  • Our cash balance was $2.1 billion at June 30, 2014. We also extended the term of our committed revolving credit facility to July 2019, increasing the amount available by US$1 billion to US$3 billion and providing a total of Cdn$5.3 billion of liquidity.
  • Our cost reduction program has exceeded our initial goals, with $150 million of annualized reductions realized to date. We are targeting a further $50 million of annualized cost reductions. We are also on target to achieve $150 million of capital expenditure reductions.
  • We have reached agreements with our quarterly contract customers to sell 5.5 million tonnes of coal in the third quarter of 2014 based on US$120 per tonne for the highest quality product and we expect total sales in the third quarter, including spot sales, to be at or above 6.0 million tonnes.
  • Throughput increased at 10 of our 13 operations in the second quarter compared with a year ago.
  • Construction of Trail's new acid plant was completed in May and by June the plant was operating at design rates.
  • The Pend Oreille zinc mine is being prepared for a restart with first ore expected by December 2014.
  • We have now completed the mill optimization project at Highland Valley Copper with daily throughput averaging 140,000 tonnes in the second quarter, 10,000 tonnes per day above design capacity.
  • The Red Dog 2014 shipping season commenced on June 29, 2014 with planned shipments of approximately 1.0 million tonnes of zinc concentrate and 184,000 tonnes of lead concentrate.
  • We paid a $0.45 per share dividend on our Class A common shares and Class B subordinate voting shares on July 2, 2014.

All dollar amounts expressed in this news release are in Canadian dollars unless otherwise noted.

This management's discussion and analysis is dated as at July 24, 2014 and should be read in conjunction with the unaudited consolidated financial statements of Teck Resources Limited ("Teck") and the notes thereto for the three months ended June 30, 2014 and with the audited consolidated financial statements of Teck and the notes thereto for the year ended December 31, 2013. In this news release, unless the context otherwise dictates, a reference to "the company" or "us," "we" or "our" refers to Teck and its subsidiaries. Additional information, including our annual information form and management's discussion and analysis for the year ended December 31, 2013, is available on SEDAR at www.sedar.com.

This document contains forward-looking statements. Please refer to the cautionary language under the heading "CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION."

Overview

Throughput increased at 10 of our 13 operations in the second quarter compared with a year ago. However, profits are lower than last year as a result of significantly lower coal prices, which are currently at their lowest level since 2007. Coal prices in U.S. dollar terms were lower by 29% in the second quarter of 2014 compared with a year ago and 15% lower than the first quarter of 2014. In base metal markets, LME copper prices softened by 5% compared with a year ago, while zinc prices rose 13%, reflecting improving zinc market fundamentals. Sales of our products are denominated in U.S. dollars and strengthening of the U.S. dollar had a favourable effect on our operating margins.

Our cost reduction program, which began in the second half of 2012, has exceeded our initial goals. In order to maintain our competitiveness and emerge stronger from the current price cycle, we have taken the following steps:

  • Identified $180 million of ongoing annual operating cost savings across the company and to date have implemented $170 million and realized $150 million on an annualized basis. These amounts are in addition to the savings of $360 million achieved last year, which are now being embedded in our operating procedures.
  • Achieved 535 of our target of a reduction of 600 positions across all operating sites and corporate groups. We will continue our efforts to achieve personnel reductions through attrition where possible.
  • Identified reductions in sustaining and development capital, and are on target to achieve our goal of a $150 million reduction.
  • All sites and corporate groups have made significant cost reductions towards the target of reducing spending by at least 5% from budgeted levels.
  • The Quintette site has been successfully transitioned to care and maintenance, and haul trucks and other equipment are scheduled to transfer to other operations.

While we continue to assess growth opportunities that present themselves, our primary development focus is on securing a significant interest in the oil sands business with the development of the Fort Hills Oil Sands project. The construction phase of Fort Hills will require substantial investment of capital through 2017, but is expected to provide significant cash flows, diversify our commodity mix and provide a long-life asset located in a stable jurisdiction. We are in the process of restarting our Pend Oreille zinc mine by December 2014 to benefit from improving zinc market fundamentals and the synergy it provides to our Trail Operation. In addition, we are continuing to plan and design the Quebrada Blanca Phase 2 copper project with a disciplined approach to creating shareholder value.

Profit and Adjusted Profit(1)

Profit attributable to shareholders was $80 million, or $0.14 per share, in the second quarter of 2014 compared with $143 million or $0.25 per share in the same period last year.

Adjusted profit was $72 million, or $0.13 per share, in the second quarter of 2014 compared with $197 million, or $0.34 per share, a year ago. The decline in adjusted profit was primarily due to significantly lower coal prices. Partly offsetting the lower coal prices was the positive effect of the stronger U.S. dollar, reduced corporate overhead expenses and changes in pricing adjustments year-over-year. We realized positive after-tax pricing adjustments of $19 million in the second quarter of 2014, compared with negative after-tax pricing adjustments of $43 million last year. Pricing adjustments in both periods were primarily due to the volatility of copper prices.

Profit and Adjusted Profit

Three months
ended June 30,
Six months
ended June 30,
($ in millions) 2014 2013 2014 2013
Profit attributable to shareholders as reported $ 80 $ 143 $ 149 $ 462
Add (deduct):
Asset sales and provisions - 15 8 22
Foreign exchange (gains) losses (12 ) 18 (3 ) 22
Derivative (gains) losses 4 1 2 (1 )
Tax items - 20 21 20
Adjusted profit $ 72 $ 197 $ 177 $ 525
Adjusted earnings per share $ 0.13 $ 0.34 $ 0.31 $ 0.90
Notes:
1. Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.
FINANCIAL OVERVIEW Three months
ended June 30,
Six months
ended June 30,
($ in millions, except per share data) 2014 2013 2014 2013
Revenue and profit
Revenue $ 2,009 $ 2,152 $ 4,093 $ 4,482
Gross profit $ 295 $ 582 $ 700 $ 1,283
Gross profit before depreciation and amortization (1) $ 633 $ 871 $ 1,365 $ 1,865
EBITDA (1) $ 558 $ 670 $ 1,115 $ 1,572
Profit attributable to shareholders $ 80 $ 143 $ 149 $ 462
Cash flow
Cash flow from operations $ 436 $ 690 $ 981 $ 1,453
Property, plant and equipment expenditures $ 335 $ 443 $ 735 $ 831
Capitalized stripping costs $ 199 $ 189 $ 403 $ 399
Investments $ 18 $ 111 $ 26 $ 193
Balance Sheet (2)
Cash balances $ 2,131 $ 2,772
Total assets $ 36,263 $ 36,183
Debt, including current portion $ 7,748 $ 7,723
Per share amounts
Profit attributable to shareholders $ 0.14 $ 0.25 $ 0.26 $ 0.80
Dividends declared $ 0.45 $ 0.45 $ 0.45 $ 0.45
PRODUCTION, SALES AND PRICES
Production (000's tonnes, except coal)
Coal (millions tonnes) 6.4 6.0 13.1 12.2
Copper (3) 87 85 172 168
Zinc in concentrate 157 161 320 308
Zinc - refined 72 70 134 144
Sales (000's tonnes, except coal)
Coal (millions tonnes) 6.8 6.3 13.0 12.9
Copper (3) 87 87 170 169
Zinc in concentrate 111 97 259 221
Zinc - refined 72 70 134 143
Average prices and exchange rates
Coal (realized US$/tonne) $ 111 $ 156 $ 121 $ 159
Copper (LME cash - US$/pound) $ 3.08 $ 3.24 $ 3.14 $ 3.42
Zinc (LME cash - US$/ pound) $ 0.94 $ 0.83 $ 0.93 $ 0.88
Average exchange rate (C$ per US$1.00) $ 1.09 $ 1.02 $ 1.10 $ 1.02
Gross profit margins
Coal 3 % 28 % 8 % 30 %
Copper 25 % 35 % 28 % 36 %
Zinc 21 % 14 % 19 % 16 %
Notes:
1. Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.
2. Balance sheet figures for prior year are as at December 31, 2013.
3. We include 100% of production and sales from our Highland Valley Copper, Quebrada Blanca and Carmen de Andacollo mines in our production and sales volumes, even though we own 97.5%, 76.5% and 90%, respectively, of these operations, because we fully consolidate their results in our financial statements. We include 22.5% of production and sales from Antamina, representing our proportionate equity interest in Antamina.

BUSINESS UNIT RESULTS

Our revenue, gross profit before depreciation and amortization, and gross profit by business unit are summarized in the table below.

Three months
ended June 30,
Six months
ended June 30,
($ in millions) 2014 2013 2014 2013
Revenue
Coal $ 833 $ 1,002 $ 1,713 $ 2,062
Copper 650 693 1,302 1,377
Zinc 526 455 1,077 1,040
Energy - 2 1 3
Total $ 2,009 $ 2,152 $ 4,093 $ 4,482
Gross profit, before depreciation and amortization (1)
Coal $ 200 $ 444 $ 492 $ 960
Copper 293 338 611 689
Zinc 140 87 261 213
Energy - 2 1 3
Total $ 633 $ 871 $ 1,365 $ 1,865
Gross profit
Coal $ 23 $ 277 $ 137 $ 623
Copper 160 240 360 493
Zinc 112 63 203 165
Energy - 2 - 2
Total $ 295 $ 582 $ 700 $ 1,283
Note:
1. Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.

COAL BUSINESS UNIT

Three months
ended June 30,
Six months
ended June 30,
($ in millions) 2014 2013 2014 2013
Coal price (US$/tonne) $ 111 $ 156 $ 121 $ 159
Coal price (realized Cdn$/tonne) $ 122 $ 159 $ 132 $ 160
Production (million tonnes) 6.4 6.0 13.1 12.2
Sales (million tonnes) 6.8 6.3 13.0 12.9
Gross profit, before depreciation and amortization $ 200 $ 444 $ 492 $ 960
Gross profit $ 23 $ 277 $ 137 $ 623
Property, plant and equipment expenditures $ 51 $ 101 $ 130 $ 202

Performance

Gross profit before depreciation and amortization from our coal business unit declined by $244 million in the second quarter (see table below) compared with a year ago primarily due to substantially lower coal prices and higher unit costs. These items were partly offset by the favourable effect of a stronger U.S. dollar and higher sales volumes.

Production in the second quarter of 6.4 million tonnes rose by 7% compared with the same period a year ago largely as a result of higher capacity utilization within the business unit and record first half production in 2014 at both the Elkview and Greenhills mines. After a challenging first few months of 2014, rail performance improved significantly in the second quarter.

Coal sales of 6.8 million tonnes in the second quarter were 8% higher than the same period last year. The average coal price of US$111 per tonne was 29% lower than the same period a year ago and reflects the oversupplied steelmaking coal market conditions.

The table below summarizes the gross profit changes, before depreciation and amortization, in our coal business unit for the quarter:

($ in millions) Three months
ended June 30
As reported in previous period $ 444
Changes:
Coal price realized:
US$ price (317 )
Foreign exchange 59
Sales volume 40
Operating costs (12 )
Coal inventory write-down (14 )
Increase (decrease) (244 )
As reported in current period $ 200

Property, plant and equipment expenditures totaled $51 million in the second quarter and included $39 million for sustaining capital, $8 million for major enhancement projects and $4 million for new mine development. Capitalized stripping costs were $137 million in the second quarter compared with $121 million a year ago.

Markets

Although production cuts continued to be announced, increased production and exports from Australia combined with lower imports into China maintained the seaborne market in an oversupplied position, resulting in downward pricing pressure in the second quarter.

Coal prices for the third quarter of 2014 have been agreed with the majority of our quarterly contract customers based on US$120 per tonne for the highest quality products, which is consistent with prices reportedly achieved by our competitors. Additional sales priced on a spot basis will reflect market conditions when sales are concluded.

Operations

Mining and coal processing performance in the second quarter was very strong, with record production rates achieved in the first half of the year at both our Elkview and Greenhills mines.

Our cost reduction initiatives continued, focused on improvement in equipment and labour productivities, reduced use of contractors, reduction of consumable usage and limiting the use of higher cost equipment, and these are producing significant results. Despite this, a number of factors have contributed to higher unit production costs this quarter compared to a year ago. These included price increases for key inputs such as diesel and natural gas, partially as a result of the strengthening of the U.S. dollar against the Canadian dollar, and a higher level of maintenance activities, including preparation for plant annual shutdowns at five of the six operations.

Unit Costs

Site cost of sales in the second quarter of 2014, before depreciation and transportation, were $53 per tonne, or $3 per tonne higher than the same period a year ago. As described above, unit production costs at the mines increased as a result of higher diesel and natural gas prices, partially as a result of the strengthening of the U.S. dollar against the Canadian dollar, combined with additional maintenance costs.

Transportation costs in the second quarter were $37 per tonne, $2 per tonne lower than they were in the same quarter a year ago. Costs in the second quarter of 2013 were negatively impacted by higher loading costs at alternate terminals while the stacker reclaimer at Neptune was installed and the port was unavailable for use.

Three months
ended June 30,
Six months
ended June 30,
(amounts reported in Cdn$ per tonne) 2014 2013 2014 2013
Site cost of sales $ 53 $ 50 $ 53 $ 48
Transportation costs 37 39 38 38
Inventory write-down 2 - 3 -
Unit costs (1) $ 92 $ 89 $ 94 $ 86
Note:
1. Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.

Elk Valley Water Management

Our Elk Valley water management program to date has focused on two main areas: development of the Elk Valley Water Quality Plan under an Area Based Management Plan Order from the Government of British Columbia, and construction of the West Line Creek water treatment plant at our Line Creek operations.

The Elk Valley Water Quality Plan is intended to address the management of selenium as well as other substances released by mining activities throughout the watershed in the short, medium and long term. The plan establishes water quality targets which are protective of the environment and human health, while considering social and economic factors. The plan was informed by scientific advice received from a Technical Advisory Committee chaired by the B.C. Ministry of Environment, and included representatives from Teck, the U.S. Environmental Protection Agency, State of Montana, Ktunaxa Nation, other provincial and federal agencies and an independent scientist. Input from the public, which was received through three phases of consultation, was also included in the development of the plan. The plan has been completed and submitted to the B.C. Ministry of Environment. The ministry is expected to review the plan and to approve it, with or without amendments, in the second half of 2014.

A previous draft action plan for valley-wide selenium management contemplated total capital spending of up to $600 million over a five year period. This $600 million included the $120 million spent on the West Line Creek Treatment Facility which, in addition to the treatment facility itself, consists of water intake, outtake and residuals management structures. The estimated capital and operating costs of implementing the new Elk Valley Water Quality Plan will depend on the terms of the B.C. Government's approval of the plan, but are expected to vary from those outlined in the previous draft. The final costs will depend on the water quality targets approved by the government, as well as the technologies applied to manage selenium and other substances. The initial cost estimate in the previous plan assumed the application of biological treatment technology, which is currently being installed in the West Line Creek Treatment Facility. This facility is expected to be fully operational before the end of 2014.

Our work on the new Elk Valley Water Quality Plan is expected to result in revised cost estimates by the end of 2014. We expect that, in order to maintain water quality, water treatment will need to continue for an indefinite period after mining operations end. Our ongoing work could reveal technical issues or advances associated with potential treatment technologies which could substantially increase or decrease both capital and operating costs associated with water quality management. Delays in obtaining approval of the plan could result in consequential delays in permitting new mining areas, which would limit our ability to maintain or increase coal production in accordance with our long term plans. If this were to occur, the potential shortfall in future production could be material.

Outlook

We are expecting coal sales in the third quarter of 2014 to be at, or above, 6.0 million tonnes. Vessel nominations for quarterly contract shipments are determined by customers and final sales and average prices for the quarter will depend on product mix, market direction for spot priced sales, timely arrival of vessels, as well as the performance of the rail transportation network and coal-loading facilities.

We continue to expect our 2014 coal production to be in the range of 26 to 27 million tonnes.

As a result of our continued cost reduction initiatives, we now expect our 2014 annual cost of product sold, before transportation and depreciation charges, to be in the range of $52 to $57 per tonne (US$48 to US$53) based on current exchange rates and production plans. This is lower than our previous guidance of $55 to $60 per tonne. Our 2014 annual transportation costs are now expected to be in the range of $37 to $41 per tonne, down from our previous guidance of $38 to $42 per tonne.

COPPER BUSINESS UNIT

Three months
ended June 30,
Six months
ended June 30,
($ in millions) 2014 2013 2014 2013
Copper price (realized - US$/pound) $ 3.07 $ 3.37 $ 3.16 $ 3.46
Production (000's tonnes) 87 85 172 168
Sales (000's tonnes) 87 87 170 169
Gross profit, before depreciation and amortization $ 293 $ 338 $ 611 $ 689
Gross profit $ 160 $ 240 $ 360 $ 493
Property, plant and equipment expenditures $ 86 $ 289 $ 198 $ 489

Performance

Gross profit before depreciation and amortization from our copper business unit decreased by $45 million in the second quarter (see table below) compared with a year ago. This was primarily the result of lower copper prices, reduced by-product revenues from silver and gold and increased smelter processing charges. These items were partially offset by the positive effect of the stronger U.S. dollar and reduced unit costs at Highland Valley Copper.

Copper production in the second quarter rose slightly compared with a year ago. Highland Valley Copper's production increased substantially as a result of higher grades and increased mill throughput, reflecting the increased capacity from commissioning the mill optimization project. This was partially offset by lower production at Antamina due to expected lower ore grades and reduced production from Quebrada Blanca as anticipated in the mine plan. Zinc by-product production from Antamina and Duck Pond decreased by a total of 33% compared with a year ago primarily due to the mix of ore types processed and lower zinc grades at Antamina.

The table below summarizes the changes in gross profit, before depreciation and amortization, in our copper business unit for the quarter:

($ in millions) Three months
ended June 30
As reported in previous period $ 338
Changes:
Copper price realized:
US$ price (57 )
Foreign exchange 38
Sales volume 2
By-product revenues (14 )
Smelter processing charges (10 )
Operating costs 6
Royalties (10 )
Increase (decrease) (45 )
As reported in current period $ 293

Capital expenditures consisted of $39 million for sustaining capital and $24 million for major enhancement projects and $23 million for new mine development, primarily at the Quebrada Blanca Phase 2 project. Capitalized stripping costs were $54 million in the second quarter compared with $59 million a year ago.

Markets

LME copper prices averaged US$3.08 per pound in the second quarter of 2014 down 5% compared with US$3.24 per pound in the same period a year ago. Copper prices rose steadily in the early part of the quarter as physical demand in Asia and falling LME stocks drove prices higher. LME, Comex & SHFE stocks were down approximately 225,000 tonnes in the second quarter and both LME & SHFE stocks are at their lowest levels since 2008.

Consumption in China continues to grow based on infrastructure investment plans. In Europe and the U.S., consumption continues to grow with spot metal premiums remaining above annual contract levels. A continued ban on exports of copper concentrates from Indonesia and lower than projected production from several new mines has reduced global mine production growth to only 4.5% year-to-date to March according to the International Copper Study Group, lower than their initial 7.0% growth forecast.

Operations

Highland Valley Copper

Copper production was 35,400 tonnes in the second quarter, or 39% higher than a year ago, due to higher grades and significant increases in mill throughput resulting from the mill optimization project and continued focus on mine-to-mill efforts. Grades are expected to drop slightly for the remainder of the year as a result of mine sequencing, returning to more normal reserve grades. Molybdenum production declined by 13% to 1.3 million pounds compared with the same period a year ago primarily due to lower recoveries associated with commissioning and ramp-up of the flotation plant.

Operating costs in the second quarter were similar to a year ago, but as a result of the significantly higher production, unit costs declined substantially.

Commissioning of the flotation plant is complete with throughput exceeding the design capacity of 130,000 tonnes per day during the second quarter, averaging 140,000 tonnes per day. Further process optimization is planned during the second half of 2014 to maximize both throughput and recovery with the newly installed equipment and process control technology.

Antamina

Copper production in the second quarter of 2014 decreased as planned by 25% as a result of significantly lower copper grades. The mix of mill feed in the second quarter was 73% copper-only ore and 27% copper-zinc ore, compared with 59% and 41%, respectively, in the same period a year ago. Grades are expected to remain similar in the third quarter and for the remainder of the year due to mine sequencing and processing of lower grade stockpiles. Zinc production declined to 47,400 tonnes from 90,200 tonnes in the same period a year ago primarily due to lower zinc grades and a lower amount of copper-zinc ore processed in the period. A gradual return to higher production is expected after 2014 as grades improve.

Operating costs in the second quarter, before changes in inventory, were lower compared to a year ago as a result of focused cost reduction efforts. Mill throughput averaged 140,000 tonnes per day during the quarter, 8% higher than the first quarter of 2014.

Quebrada Blanca

Copper production in the second quarter declined by 25% compared with the same period a year ago. As anticipated in the mine plan, the amount of dump leach ore placed declined significantly during the quarter compared to the same period a year ago and dump leach ore placement is expected to continue at lower rates as the heap leach circuit is maximized from the remaining ore sources available through to mine closure.

Operating costs, before changes in inventories, decreased by US$15 million compared with the same period a year ago as a result of reduced material movement in the mine and continued cost reduction efforts focused on maintenance improvements. Depreciation and amortization costs increased by US$14 million compared with a year ago as a result of depreciation of accumulated capitalized stripping costs.

We continued to progress updating the permits for the existing facilities and life extension of the supergene operation. The social and environmental impact assessment to extend cathode production to 2020 was submitted on July 21, 2014. The review, response, consultation and approval process is assumed to take 12 months.

Carmen de Andacollo

Copper production in the second quarter declined by 4% compared with a year ago as lower ore grades, consistent with the mine plan, were partially offset by a 7% increase in mill throughput in the period.

Production costs, before changes in inventories, decreased by US$11 million compared with a year ago primarily due to lower costs for operating supplies and consumables as well as a reduction in contractors.

Duck Pond

Copper and zinc production in the second quarter was 4,000 tonnes and 4,500 tonnes, respectively, compared with 3,200 tonnes and 2,300 tonnes, respectively, last year. A substantial increase in mill throughput due to ore availability and improved maintenance practices resulted in the increased production levels.

As announced previously, the Duck Pond operation is expected to close in the second quarter of 2015.

Cost of Sales

Unit costs of product sold as reported in U.S. dollars, before cash margins for by-products, in the second quarter of 2014 decreased primarily due to substantially higher copper production from Highland Valley Copper, the favourable effects of a stronger US dollar at our Canadian operations and cost reduction efforts across all of our operations. Cash unit costs after by-product margins increased as a result of lower silver and gold by-product prices and volumes.

Three months
ended June 30,
Six months
ended June 30,
(amounts reported in US$ per pound) 2014 2013 2014 2013
Adjusted cash cost of sales (1) $ 1.71 $ 1.81 $ 1.69 $ 1.81
Smelter processing charges 0.22 0.18 0.21 0.17
Total cash unit costs before by-product margins (1) $ 1.93 $ 1.99 $ 1.90 $ 1.98
Cash margin for by-products (1)(2) (0.29 ) (0.39 ) (0.27 ) (0.40 )
Total cash unit costs after by-product margins (1) $ 1.64 $ 1.60 $ 1.63 $ 1.58
Note:
1. Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.
2. By-products includes both by-products and co-products.

Copper Development Projects

Quebrada Blanca Phase 2

During the second quarter of 2014, we continued optimization and detailed design activities for the Quebrada Blanca Phase 2 project, but at a slower pace aligned with permitting activities. Optimization activities are focused on capital reduction opportunities in addition to updating the mine plan with the latest resource model, including all definition drilling completed on the project to date.

As previously noted, the permits for our existing facilities need to be updated before resubmission of the Phase 2 SEIA. Timing for resubmission of the Phase 2 SEIA will depend to some extent on progress on updating permits for the existing facilities and project optimization activities.

Other Copper Projects

At Relincho, work continued in the quarter on optimization studies that are focused on capital and operating reductions and other value enhancing initiatives.

Focused engineering studies also continued in the quarter for our Galore Creek, Schaft Creek and Mesaba projects as we further explore ways to enhance the value of these projects.

A $30 million pre-feasibility program at our 50% owned Zafranal copper-gold project located in Southern Peru was approved. The study is expected to be completed over the next 18 months. Our share of expenditures will be $15 million.

Outlook

We continue to expect our 2014 copper production to be in the range of 320,000 to 340,000 tonnes.

We now expect our copper unit costs in 2014 to be in the range of US$1.95 to US$2.05 per pound before margins from by-products and US$1.65 to US$1.75 per pound after by-product margins. This is lower than our original guidance of US$2.00 to US$2.20 and US$1.70 to US$1.90 per pound, respectively.

ZINC BUSINESS UNIT

Three months
ended June 30,
Six months
ended June 30,
($ in millions) 2014 2013 2014 2013
Zinc price (realized - US$/lb) $ 0.96 $ 0.85 $ 0.93 $ 0.90
Production (000's tonnes)
Refined zinc 72 70 134 144
Zinc in concentrate (1) 141 139 293 267
Sales (000's tonnes)
Refined zinc 72 70 134 143
Zinc in concentrate (1) 93 75 232 182
Gross profit before depreciation and amortization $ 140 $ 87 $ 261 $ 213
Gross profit $ 112 $ 63 $ 203 $ 165
Property, plant and equipment expenditures $ 44 $ 46 $ 80 $ 81
Note:
1. Represents production from Red Dog only and excludes co-product zinc production from our Copper Business Unit.

Performance

Gross profit before depreciation and amortization from our zinc business unit increased by $53 million (see table below) compared with a year ago. Higher zinc prices, the favourable effect of the stronger U.S. dollar and increased sales volumes, partly offset by higher royalty expense, contributed to the favourable results.

Production of zinc in concentrate from Red Dog rose slightly compared with a year ago as the processing of softer ore has allowed for an increase in mill throughput. Refined zinc production from Trail rose by 2%, reflecting the benefits of commissioning the new acid plant, which was operating at full rates in June.

The table below summarizes the gross profit change, before depreciation and amortization, in our zinc business unit for the quarter.

($ in millions) Three months
ended June 30
As reported in previous period $ 87
Changes
Zinc price realized:
US$ price 26
Foreign exchange 22
Sales volume 19
By-product revenues 5
Operating costs (9 )
Royalties (10 )
Increase (decrease) 53
As reported in current period $ 140

Capital expenditures totaled $44 million, including $18 million on the Trail acid plant that is now complete and $8 million on the re-start of Pend Oreille.

Markets

LME zinc prices increased by 13% from a year ago and averaged US$0.94 per pound in the second quarter of 2014. Lead prices increased by 2% from a year ago and averaged US$0.95 per pound in the second quarter. Combined LME & SHFE zinc metal inventories fell by approximately 171,000 tonnes, or 16% in the second quarter.

Zinc metal demand in the U.S. continues to be strong, driven by good auto production and construction, which grew by 9% year-over-year to May 2014. Auto production is also strong in China and Japan, which has translated into strong demand growth. Zinc consumption to April 2014 in Europe was down modestly by 1%. Mine closures that started to occur in 2013 will continue through this year and into 2015, which is expected to move the global zinc market from surplus in prior years to deficit in 2015. The global lead metal market is expected to move into deficit from 2014 onwards. Combined LME & SHFE lead inventories have fallen 19,562 tonnes or 7% in the second quarter.

Operations

Red Dog

Zinc and lead production in the second quarter increased 2% and 7%, respectively, due to the processing of softer ores, which substantially increased tonnes milled in the period. These items were partially offset by lower zinc ore grades and recoveries.

Zinc sales volumes were 24% higher than a year ago due to higher opening market inventories in 2014, as certain customers that drew from consignment inventories deferred delivery of zinc from the fourth quarter of 2013 to the first half of 2014.

Operating costs in the second quarter rose primarily in relation to increased sales volumes in the period.

The 2014 shipping season commenced on June 29, 2014 with planned shipments of 996,000 tonnes of zinc concentrate and 184,000 tonnes of lead concentrate compared with 1,016,600 tonnes and 184,500 tonnes, respectively, for the 2013 season. Sales volumes of contained zinc metal are estimated at approximately 175,000 tonnes in the third quarter.

We made a filing with the U.S. District Court for Alaska outlining the findings of extensive study into a proposed 52-mile pipeline which would direct effluent from Red Dog Creek to the Chukchi Sea. Based on that study, we informed the court we are exercising our option not to build the pipeline and will pay a penalty of $8 million as a result.

Trail

Refined zinc production was 2% higher in the second quarter compared with a year ago reflecting the benefits of the start-up of the new acid plant. Construction of the new acid plant was completed in May and by June was operating at full rates. The new plant replaces two of three older plants and will improve operational and environmental performance. Production in the second quarter of 2013 was affected by the annual maintenance shutdown of the zinc feed roasters, which is planned for the third quarter of this year.

Lead production in the second quarter was 8% higher than a year ago when the KIVCET maintenance shutdown in the second quarter of 2013 affected production. The more extensive cold shutdown and inspection is scheduled for the fourth quarter of this year. Silver production improved by 1.1 million ounces due to higher silver in feed material and a draw-down of in-process material at the start of the current quarter.

Operating costs in the second quarter were lower than a year ago as a result of cost reduction initiatives and timing of maintenance work. Labour costs remained unchanged from a year ago as work force reductions through attrition offset the impact of higher wages. Consumable supplies were lower due to reduction programs, but were partly offset by higher natural gas prices. Cost of concentrates increased compared to a year ago reflecting higher production levels and higher zinc prices, partially offset by lower silver prices.

Pend Oreille

The Pend Oreille re-start project is on schedule for December 2014 and on budget. Recruiting is progressing as planned with 121 of the planned 236 positions committed and all critical underground and surface equipment orders placed with vendors. Rehabilitation of ground control and services in drifts is 79% complete.

Outlook

We now expect zinc in concentrate production to be in the range of 600,000 to 615,000 tonnes as a result of stronger performance from Red Dog in 2014. This is higher than our original guidance of 555,000 to 585,000 tonnes.

ENERGY BUSINESS UNIT

Fort Hills Project

Construction of the Fort Hills Project is progressing substantially in accordance with the project schedule and spending to date is consistent with the project budget. Our share of Fort Hills cash spend in the first half of 2014 was $249 million, including our earn-in commitments. Suncor has indicated 2014 planned incurred project spending of $3.16 billion, of which our share would be $850 million, including our earn-in commitment.

Since sanction, the project has achieved and continues to track to key milestones. Engineering and procurement activity is progressing well, nearing 50% completion and will continue through 2015. A number of the major engineering, procurement and construction contracts are in place or are in the process of final negotiations and contracted pricing to date has substantially been within expectations. Contractors are mobilized in all project areas with a mixture of site development, deep undergrounds, foundations, site infrastructure and some process facility construction underway. Site construction manpower is currently approximately 2,000 and will continue to ramp-up to peak in 2016. Construction of mining, primary extraction and site infrastructure areas remains significantly staggered ahead of the secondary extraction and utilities areas to date, the availability of engineering and construction resourcing is meeting project demand. The capital and schedule outlook has not changed since we announced project sanction last October 30. First oil is still expected as early as the fourth quarter of 2017, with 90 per cent of our planned production capacity of 180,000 barrels per day within 12 months.

Frontier Energy Project

The Frontier project regulatory application review continues with the provincial and federal regulators. We are now responding to the third round of information requests from the regulators which we expect to complete before the end of 2014. The regulatory review period is expected to continue into 2015, making late 2015 or 2016 the earliest an approval decision and receipt of required permits is expected.

An exploration program was completed at Frontier in the winter of 2014 to provide additional data to support the regulatory review process and ongoing engineering work.

Wintering Hills Wind Power Facility

During the first half of 2014, our share of the power generation from Wintering Hills was 42 GWhs. Expected power generation in 2014 is dependent on weather conditions and the anticipated 85 GWhs of power generated will result in approximately 55,000 tonnes of CO2 equivalent offsets.

OTHER OPERATING COST AND EXPENSES

Other operating expenses, net of other income, were $35 million in the second quarter compared with $82 million a year ago. Positive price adjustments, primarily from copper, were $31 million in the second quarter of 2014. This was more than offset by a number of other operating expenses which included $12 million for share based compensation that reflects our rising share price and $27 million for environmental costs and care and maintenance of closed properties. Other operating expense in 2013 primarily included $74 million of negative pricing adjustments due to declining copper prices in the period.

The table below outlines our outstanding receivable positions, provisionally valued at June 30, 2014 and March 31, 2014.

Outstanding at Outstanding at
June 30, 2014 March 31, 2014
(pounds in millions) Pounds US$/lb Pounds US$/lb
Copper 225 3.15 158 3.01
Zinc 75 1.00 133 0.90

Financing expense was $75 million in the second quarter compared with $87 million a year ago. Changes in the Fort Hills project agreements in the fourth quarter of 2013 changed the basis of accounting for the project and as a result we now capitalize interest relating to our investment in the Fort Hills project.

We recorded $14 million of other non-operating income, which consisted solely of foreign exchange gains. In 2013, we incurred $37 million in non-operating losses, which included a $17 million loss on marketable securities and $19 million of foreign exchange losses.

Income and resource taxes for the second quarter were $66 million, or 44% of pre-tax profits, as compared to the Canadian statutory corporate income tax rate of 26%. The higher effective rate is due mainly to higher tax rates in foreign jurisdictions and the effect of resource taxes. The effect of resource taxes tends to be magnified in periods when our operating earnings are lower relative to our administrative and finance charges. This occurs because resource taxes are based on gross profits before these costs. Due to available tax pools, we are currently shielded from cash income taxes, but not resource taxes in Canada. We remain subject to cash taxes in foreign jurisdictions.

On April 1, the Chilean Government introduced a comprehensive tax reform bill that proposed an increase to the first stage corporate tax rate in steps from 20% to 25% in 2017 and from 2017, the elimination of the deferral of the second stage corporate tax such that the corporate tax rate would effectively become 35% on income as earned. On July 8, the Chilean Government announced a proposal for a revised tax reform providing taxpayers a choice between two corporate tax regimes. A technical paper and bill have not yet been released and we will evaluate the revised reform when these are available and once the tax reform is enacted will determine the effect on our financial results.

FINANCIAL POSITION AND LIQUIDITY

Our financial position and liquidity remains strong. Our debt positions and credit ratios are summarized in the table below:

June 30, December 31,
($ in millions) 2014 2013
Fixed-rate term notes $ 7,129 $ 7,124
Other 133 137
Total debt (US$ in millions) $ 7,262 $ 7,261
Canadian $ equivalent (1) 7,748 7,723
Less cash balances (2,131 ) (2,772 )
Net debt $ 5,617 $ 4,951
Debt to debt-plus-equity ratio (2) 29 % 29 %
Net-debt to net-debt-plus-equity ratio (2) 23 % 21 %
Average interest rate 4.8 % 4.8 %
Note:
1. Translated at period end exchange rates.
2. Non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" section for further information.

Operating Cash Flow

Cash flow from operations, before changes in non-cash working capital items, was $520 million in the second quarter compared with $584 million a year ago with the reduction primarily due to significantly lower coal prices in the quarter.

Changes in non-cash working capital items resulted in a use of cash of $84 million in the second quarter as receivable balances rose due to higher closing-period copper prices and the timing of sales. Changes to non-cash working capital in the second quarter of 2013 provided a source of funds of $106 million.

Investing Activities

Expenditures on property, plant and equipment were $335 million in the second quarter and included $115 million on sustaining capital, $41 million on major enhancement projects and $179 million on new mine development. The largest components of sustaining expenditures were $39 million at our coal operations and $18 million for the completion of the new acid plant at Trail. Major enhancement expenditures included $21 million at Highland Valley Copper, $8 million at our coal operations and $8 million at Pend Oreille. New mine development expenditures included $135 million for our share of Fort Hills spending and $17 million for Quebrada Blanca Phase 2.

Capitalized stripping expenditures were $199 million in the second quarter of 2014 compared with $189 million a year ago. The majority of this item constitutes the preparation of pits for future production at our coal mines.

Financing Activities

Financing activities in the second quarter totalled $66 million and were primarily comprised of debt interest and principal repayments. Financing activities in the same period a year ago totalled $194 million and included share repurchases of $141 million.

During the quarter we increased our committed revolving credit facility by US$1 billion to US$3 billion and extended its term to July 2019. There were no changes to the facility's principal terms.

OUTLOOK

We continue to experience volatile markets for our products and prices for some of our products have declined significantly. Commodity markets have historically been volatile, prices can change rapidly and customers can alter shipment plans. This can have a substantial effect on our business. Demand for our products, particularly coal, remains strong. However, increased production from Australian mines has put downward pressure on coal prices. While we believe that the longer term fundamentals for steelmaking coal, copper and zinc are favorable, the recent weakness in some of these markets may persist for some time. We are also significantly affected by foreign exchange rates. For the first half of 2014 the U.S. dollar has strengthened by approximately 8% against the Canadian dollar, which has had a positive effect on the profitability of our Canadian operations. It will, to a lesser extent, put upward pressure on a portion of our operating costs and capital spending to the extent that a portion of our costs and capital spending is denominated in U.S. dollars.

We have committed to spending an estimated $2.94 billion over the next four years on the development of the Fort Hills oil sands project, which will consume a significant portion of our cash resources. We have access to credit lines which are expected to be sufficient to meet our capital commitments and working capital needs over this period. We are taking further steps to manage our capital spending profile and we continuously monitor all aspects of our cost reduction program, our capital spending and key markets as conditions evolve.

Capital Expenditures

As mentioned on the preceding pages, we are reducing our sustaining and development capital expenditures by approximately $150 million from the deferral of equipment purchases and reduced spending on certain development projects and are planning to restart the Pend Oreille zinc mine at a cost of approximately $45 million. As a result, our previously disclosed 2014 capital expenditure forecast has been reduced by approximately $105 million from $1.9 billion to $1.8 billion. We also expect to spend $700 million on capitalized stripping preparing mining areas for future production, which is unchanged from our previous guidance. In addition, we are deferring the potential restart of the Quintette steelmaking coal mine until coal market conditions improve.

The amount and timing of actual capital expenditures is also dependent upon being able to secure permits, equipment, supplies, materials and labour on a timely basis and at expected costs to enable the projects to be completed as currently anticipated. We may change capital spending plans for the balance of this year and next, depending on commodity markets, our financial position, results of feasibility studies and other factors.

Foreign Exchange, Debt Revaluation and Interest Expense

The sales of our products are denominated in U.S. dollars, while a significant portion of our expenses are incurred in local currencies, particularly the Canadian dollar. Foreign exchange fluctuations can have a significant effect on our operating margins, unless such fluctuations are offset by related changes to commodity prices.

Our U.S. dollar denominated debt is subject to revaluation based on changes in the Canadian/U.S. dollar exchange rate. As at June 30, 2014, $6.4 billion of our U.S. dollar denominated debt is designated as a hedge against our U.S. dollar denominated foreign operations. As a result, any foreign exchange gains or losses arising on that amount of our U.S. dollar debt are recorded in other comprehensive income, with the remainder being charged to profit.

FINANCIAL INSTRUMENTS AND DERIVATIVES

We hold a number of financial instruments and derivatives, which are recorded on our balance sheet at fair value with gains and losses in each period included in other comprehensive income and profit for the period as appropriate. The most significant of these instruments are marketable securities, foreign exchange forward sales contracts, metal-related forward contracts and settlements receivable and payable. Some of our gains and losses on metal-related financial instruments are affected by smelter price participation and are taken into account in determining royalties and other expenses. All are subject to varying rates of taxation depending on their nature and jurisdiction.

QUARTERLY PROFIT AND CASH FLOW

(in millions, except for share data) 2014 2013 2012
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
Revenues $ 2,009 $ 2,084 $ 2,376 $ 2,524 $ 2,152 $ 2,330 $ 2,730 $ 2,505 $ 2,561
Gross profit 295 405 546 597 582 701 825 827 880
EBITDA 558 557 766 815 670 902 653 861 933
Profit attributable to shareholders 80 69 232 267 143 319 200 256 354
Earnings per share $ 0.14 $ 0.12 $ 0.40 $ 0.46 $ 0.25 $ 0.55 $ 0.34 $ 0.44 $ 0.60
Cash flow from operations 436 545 769 656 690 763 911 729 965

OUTSTANDING SHARE DATA

As at July 23, 2014 there were 566.8 million Class B subordinate voting shares and 9.4 million Class A common shares outstanding. In addition, there were 10.8 million director and employee stock options outstanding with exercise prices ranging between $4.15 and $58.80 per share. More information on these instruments and the terms of their conversion is set out in Note 20 of our 2013 year end financial statements.

The Toronto Stock Exchange ("TSX") has accepted our notice of intention to make a normal course issuer bid to purchase our Class B subordinate voting shares. Under the normal course issuer bid, we may purchase up to 20 million Class B subordinate voting shares during the period starting July 2, 2014 and ending on July 1, 2015, representing approximately 3.53% of the outstanding Class B subordinate voting shares, or 4.39% of the public float, as of June 19, 2014.

We will make any purchases through the facilities of the TSX, the New York Stock Exchange or any other exchanges or alternative trading systems in both Canada and the United States, if eligible, or by such other means as may be permitted under the TSX's regulations, including private agreements under an issuer bid exemption order or block purchases in accordance with the applicable regulations. Purchases made by way of private agreements under an issuer bid exemption order issued by a securities regulatory authority will be at a discount to the prevailing market price as provided in any applicable exemption order. Daily purchases will be limited to 449,574 Class B subordinate voting shares in accordance with the TSX's rules, except pursuant to permitted exceptions. The actual number of Class B subordinate voting shares to be purchased and the timing of any such purchases will be determined by us from time to time as market conditions warrant. All repurchased shares will be cancelled. Security holders may obtain a copy of the notice of intention, without charge, by request directed to the attention of our Corporate Secretary, at our offices located at Suite 3300-550 Burrard Street, Vancouver, British Columbia, V6C 0B3.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. There have been no significant changes in our internal control over financial reporting during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

REVENUE AND GROSS PROFIT

Our revenue and gross profit by business unit are summarized in the tables below:

...
Three months
ended June 30,
Six months
ended June 30,
(Teck's share in Cdn$ millions) 2014 2013 2014 2013
REVENUE
Coal $ 833 $ 1,002 $ 1,713 $ 2,062
Copper
Highland Valley Copper 266 205 490 456
Antamina 149 189 327 346
Quebrada Blanca 92 127 190 209
Carmen de Andacollo 109 140 247 313
Duck Pond 29 26