Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to stick with source. This Q4 2019 earnings call. This fine all participants I know listen only mode. Later, we'll conduct a question and answer session. This conference call is being recorded on Friday February 21st 2020, I would now like to turn the conference.
Oh virtual friends of Southern Senior Vice President Investor Relations and strategic analysis. Please go ahead Sir.
Thanks, very much road and good morning, everyone. Thank you for joyous vertex fourth quarter 2019 results conference call before we begin I would like to draw your attention to the caution regarding forward looking statements on slide two.
Presentation contains forward looking statements regarding our business.
Slide described assumptions underlying those statements.
Various risks and uncertainties may cause actual results to very text does not assume the obligation to update any forward looking statement, but also like to point out we use various non-GAAP measures. In this presentation you can find explanations and reconciliations regarding these measures in the appendix.
I will turn the call over to Dawn Lindsay, our president and CEO. Thank.
Thank you Fraser and good morning, everyone I will begin on slide three with Harleys from our fourth quarter and a year on results followed by Ron Millos, Our CFO will provide additional color on financial results and will conclude with acuity session.
Right and I am additional members of our senior management team would be happy to answer any questions.
So commodity prices were negatively impacted by global economic uncertainty and 29 team. This is continued into 2020.
For some signs of improvement in December in early January within agreement on the U.S. trying to piece one trade deal, but then the krona virus emerged and the full impact to the virus is still unknown.
We are monitoring developments in order to be in a position to take appropriate action.
There's been a difficult start to the year. In addition to the krona virus or steelmaking coal operations in British Columbia have also been impacted by logistics constraints caused by severe winter weather in January in early February and then more recently by railway interruptions across the country and as many of you know we are Canada's largest railway customer.
Given this backdrop, our focus remains on those aspects of her business that are within our control.
With that I'll turn to highlight for fourth quarter 2019.
And that respect.
Made significant progress on our four key priorities first construction continues a QB two with over 7500 people actively working on site across the six major construction areas.
We close to 2.5 billion dollar U.S. project financing in the fourth quarter and on February Threerd, We announced an agreement with the yes Corporation to source approximately half of QB. Two total are pretty power needs from renewable sources.
QB two is a world class copper project in a key component of text future growth.
Second our innovation driven business transformation program known as raised 21 continues to advance we exceeded our initial target and 29 team having implemented projects aimed at achieving 160 million annualized EBITDA improvements as of December 31st.
[noise] commodity prices that were in place on December 31st and those prices were substantially lower than the prices that were in effect. When we set the initial target back in may of 29 team.
Reached 21 is transforming our business through implementation of existing proven technology across the mining value chain to improve productivity and lower costs. We have set a target for cumulative total other billion in ongoing annualized EBITDA improvements by the end of 2021.
Put in perspective raised 21 has the potential to have as big an impact on our financial results as QB, two yet with less than 25% of the capital and then just two years instead of 10.
Come back to curious 21 in a few minutes.
Third the execution of our priority project at Neptune terminals continues to advance in order to match port capacity with the reduced production and improved productivity is safety as we advance construction, we intend to suspend terminal operations for five months the made to September.
The upgrade project will significantly increase terminal loading capacity and improve our capability to meet our delivery commitments to our customers while lowering our overall logistics costs project completion is expected in Q1 at 2021, and we are evaluating opportunities to gradually increase port capacity earlier than that.
And fourth we are starting to see the benefits as a company wide cost reduction program that we announced in Q3 at 29 team.
We've achieved 210 million of capital and operating cost reductions in the fourth quarter exceeding our target of 170 million and Ron Mills will speak to our cost reduction program in further detail a little later.
We are pleased with the progress we've made on our four key priorities at the same time, we reduced total shares outstanding to 547 million.
Our financial position remained strong with current liquidity of around 5.8 billion and we continue to focus on health and safety and sustainability leadership.
We're pleased to recently received further recognition of our sustainability leadership by being named as one of the Canada's top 100 employers.
Named to the 2020, Bloomberg gender equality index and is one of the global 100, most sustainable corporations.
We've been working on an updated sustainability strategy and goals, which will be released with our sustainability report in March.
As a preview of what has to come we have announced an objection to be carbon neutral across all operations activities by 2050.
Turning to our financial results on slide four.
In the fourth quarter revenues were 2.7 billion gross profit before depreciation and amortization was 875 million.
The decline in steelmaking coal prices had a significant negative impact on fourth quarter profitability.
Benchmark steelmaking coal prices declined from $210 U.S. per ton in the first quarter 2019 $242 per ton in the fourth quarter.
Current spot market prices are actually back up to $159 U.S.
In addition, we recorded total non cash after tax impairment charges of 999 million and 910 million was for our interest in Fort Hills 75 million for Cardinal River Steelmaking coal operation at 14 million for the remaining assets or cathode operations at QB.
Bottom line adjusted profit attributable to shareholders was 122 million for 22 cents per share on both a basic and fully diluted basis, which was below consensus EPS of 39 cents per share.
There were three items that were not known or estimated by the market.
Reduced our adjusted <unk>.
First a decommissioning reclamation provision second inventory write downs and third other environmental expenses. These totaled 17 cents per share, which accounts for the whole difference between the consensus Cps at 39 cents per share and our reported adjusted EPS of 22 cents.
For the full year, we generated 11.9 billion in revenue and 5 billion in gross profit before depreciation amortization bottom line adjusted profit attributable to shareholders was 1.6 billion, which is to 77 per share or to 75 for sure on a diluted basis.
Details of the quarter in the years earnings adjustments are on slide five.
999 million and total non cash after tax impairment charges was the only significant adjustment in the fourth quarter all of the additional charges in the fourth quarter that we do not adjust for are detailed on the slide and they totaled 105 million on an after tax basis or 19 cents per share on a diluted basis.
I will now run through the highlights by business unit, starting with steelmaking coal on slide six.
In the fourth quarter sales of 6.3 million tons were at the midpoint of our guidance range. Despite some logistics challenges.
2019 production was in line with revised guidance fourth quarter production was impacted by mining challenges are supporting river operations, which were partially offset by record production at El Cubo operations and strong processing throughput it other operations.
Our mine site clean coal inventory storage areas were at full capacity at times in the fourth quarter due to logistical constraints, which reduces our operational flexibility into 2020.
2019 site cost of sales and transportation costs were in line with guidance and at the upper end of the range.
On December 2019, we entered into a long term agreements lucianne for shipping steelmaking coal between Kamloops, and Neptune and between Kamloops and really from April 2021 to December 2026, which will enable us to significantly increase shipment volumes through Neptune.
We also announced an expanded commercial agreement with really terminals in January 2020, increasing our contracted capacity from 3 million tons per annum to 6 million tons with an option to extend up to 9 million tons.
Sensing January Onest 2020.
Looking forward, we expect sales of approximately 4.8 to 5.2 million tons in the first quarter 2020 down from our previous estimate of 5.1 to 5.4 million tons as I mentioned earlier her steelmaking coal operations in British Columbia had been impacted by severe winter weather in January.
Larry and more recently by railway interruptions across the country.
This caused rail and port terminal performance issues with an estimated impact of over 1 million tons on our Q1 sales.
Given the potential for weaker demand in the short term due to the effects of krona virus and the high inventory levels due to rail and port constraints, we're choosing to temporarily reduced production and implemented a shutdown of Neptune both terminals in order to progress the facility upgrade.
This reduction combined with extreme winter weather agenda in early February which was then followed by rail blockades means that we're now expecting or steelmaking coal production in 2020 to be between 23 and 25 million tons.
As we had previously disclosed in Q3, we plan to complete some of our major plant outages earlier 2020, reducing or steelmaking coal production in the first half of the year and increasing production in the second half of the or the extended construction outage for me to September at Neptune will also affect our quarterly cost of sales as.
As a result, we expect our cost of sales to be higher in Q1 2020, then in Q4 2019, and then to decrease in the fourth quarter 2020, when we are back to near full production levels.
Finally, as part of our strategy to maintain production capacity of approximately 27 million tons in the valley are Elk few operation is scheduled to complete its plant expansion project in the first quarter of 2020.
Turning to our copper business units. Our Q4 results are summarized on slide seven.
Copper production declined by 2000 tons from a year ago, primarily due to the labor action that Carmen de Andacollo, which resulted in around 9000 tons of lost production.
This was offset by increased production from Highland Valley as a result of higher copper grades and recoveries.
Overall 29 in copper production was in line with guidance.
Our cash unit costs before by products decreased by about 18 cents U.S. per pound in the fourth quarter.
However, lower Mali, and zinc prices and sales volumes resulted in substantially lower byproduct credits and as a result.
Our net cash unit costs were up six cents per pound.
For the year cash production costs came in just below the lower end of our annual guidance range.
Looking forward to 2020, we expect our copper production to be similar to last year and our net cash unit costs to decline.
Moving onto slide eight I'd like to provide a quick snapshot of our progress on QB, two which is one of the world's largest undeveloped copper resources.
QB two is expected to have low operating costs initial mine life for 28 years and significant potential for further growth, which we are evaluating as part of the cube three expansion study.
Overall progress stands at about 25% engineering contracting and procurement activities are each over 95% complete.
With earthworks and concrete installation well advanced the project has commenced steel erection and the placement of mechanical mechanical equipment, including the first components for the grinding mills in the concentrated.
Photo on the right shows the first mill shell being lifted into place.
Destruction of the tailings facilities and pipelines the roads and power lines is also progressing.
Roger continues to target first production of the fourth quarter 2021 with ramp up to full production expected during 2022. However.
I have been delays in the schedule, primarily due to permitting and social unrest and those delays will also affect cost.
I should note here that the recent weakness in the Chilean peso is having a significant beneficial effect on project capital expenditures.
As we've said before an updated capital estimate and baseline schedule is currently under development with completion expected by the end of March 2020, and we'll be going through that at our Investor day on April Onest.
On slide nine you can see the primary crusher area, where are we are in the process of pouring concrete foundations and completing the platforms for the or transport conveyors that will take the crushed material to coarse ore stockpiles, providing fee for the mills.
Overall, the project has moved over 12 million cubic meters of earthworks, representing approximately 47% of the overall plan.
Majority of the remaining earthworks are associated with the tailings management facility the pump station platforms and the pipeline right of way.
For the next slide you'll see concrete installation is progressing well and both the cost trader import areas with approximately 50000 cubic meters or 29% place to date.
This slide shows the progress we've made in the grinding area of the concentrated where we have been pouring concrete for the two sag and the four ball mill since may.
We will continue with concrete structural steel and Miller action in this area throughout 2020.
Moving to the flotation area of the concentrate on slide 11, you can see the first of 14 650 cubic meter flotation cells in place on its foundation.
In addition to the erection and mechanical equipment, we continue to advance the concrete foundations for the molybdenum plant and cost straight and the tailings sectors.
Platform for the tailings transport thicknesses near completion and the copper Dan with the tailings management facility has reached its crest and work is ongoing with respect to the starter down.
On Slide 12, you can see some of the progress on the pipeline with the contractors working on multiple fronts developing the platform and the trenching.
Upstreaming and welding is now also underway.
Photo shows the pipe stringing and welding for the 36 inch water system with the transfer the pipeline to the left to the photo and construction of the eight inch concentrate transport system will follow a similar process.
Finally on slide 13, you can see the port site.
We are progressing both onshore and offshore activities. This photo shows progress of the desalination plant with foundations well advanced ahead of installation of mechanical components.
Overall the project team continues to focus on investing construction across all areas of the project.
On our zinc business unit results are summarized on slide 14, and as a reminder, answer I mean is incorporated financial results are reported in our copper business unit.
Red dog sales of zinc in concentrate were above our guidance range at 174000 tons.
Red dog zinc production declined by 29000 tons compared to year ago, primarily due to reduced mill throughput as a result of planned mill shutdowns related to the VIP to mill enhancement project.
At trail operations, the electrical equipment failure in August contributed to a 10% reduction in refined zinc production and negatively affected trails profitability in the fourth quarter. However, the repairs were completed but in November ahead of schedule.
Looking forward, we expect Red does contain zinc sales to be 135 to 140000 tons in Q1, reflecting the normal seasonal pattern.
Red Doug's production is expected to be lower in the first quarter due to both lower grades and VIP to commissioning activities for the full year. We expect her zinc in concentrate production to be 600 to 640000 tons, including co products zinc production from our copper business unit.
Net cash unit costs at Red Dog are expected to increase in 2020, primarily due to lower production and increased treatment charges for both zinc and lead are expected to follow the normal seasonal pattern.
Our energy business unit results are summarized on slide 15.
Gross profit before depreciation and amortization from energy business increased by 129 million, primarily due to higher realized prices.
As I noted earlier during the fourth quarter, we recorded a noncash pretax assessed asset impairment or interest in Fort Hills at 1.24 billion or 910 billion. After tax as a result of lower market expectations for future Western Canada select heavy oil price.
Adjusted operating costs were higher in Q4, compared with the same period last year, reflecting the impact of lower volumes in the current period operations also advanced overburden stripping to take advantage of winter conditions, resulting in higher costs.
Despite the government of Alberta is mandatory production curtailments being in place throughout 2019, both production and unit operating costs remained within our annual guidance for the year.
Overall gross profit before depreciation and amortization was $144 million for the full year.
Turning to slide 16, and raised 21, our innovation driven business transformation program with a focus on transforming our business generating significant value through 2021, we launched the program at our Investor and Analyst day last year Incented initial target in May 2019 to implement projects that would generate.
150 million in annualized EBITDA improvements by the end to 2019 as I said earlier, we have exceeded the initial target and implemented initiatives aimed at achieving $160 million an annualized EBITDA improvements as of December 31st.
That is based on commodity prices on that day December 31st and those prices were substantially lower than when we set the initial target back in may.
Approximately 65% of EBITDA improvements comes from application of data analytics at our processing facilities, 25% come from analytics of our mining processes and 10% from improvements in maintenance to the application of machine learning.
Overall 30 different projects are now currently operating.
Going forward, we plan to expand these projects implemented to date more broadly across all our operations as well as to identify and implement some new projects to create additional value.
For 2020, we are targeting implementing projects that are aimed at generating an additional 350 million in annualized EBITDA improvements for a cumulative total of around 500 million.
Looking forward to 2021, we are targeting implementing project for aimed at generating a further 500 million an annualized EBITDA improvements by the end of that year. So as I mentioned earlier that would be a cumulative total of $1 billion for the raised 21 program. Those are ongoing annualized EBITDA improvements, which are recurring year after year.
Which represents significant value.
With that I will pass it over try mills for some comments on our financial results.
Thanks, Don I'll start with a summary of changes in our cash position during the quarter on slide 17.
We generated 782 million in cash from operations that we received 25 million an equity contributions from Sumitomo metal mining at some with total corporation for the QB two project at 14 million came from investments that asset sales in the quarter, we spend $883 million on capital projects and capitalized stripping costs were 100.
And at $52 million.
We purchased 148 million in class B shares paid 71 million and interest and finance charges.
55 million on investments and other assets and we made lease payments of $43 million.
Our quarterly dividend use $27 million in cash and after these and other major items are minor items, sorry, we ended the quarter with cash and short term investments of approximately a billion dollar.
Slide 18 provides an update on our companywide cost reduction program, which has implemented in Q3 2019 in response to the global economic uncertainty at Q4, we achieved approximately $210 million of capital and operating reductions that exceeded our target of $170 million and looking at 20.
20, we now expect around 400 million of capital and operating reductions which are included in our guidance was therefore increased our target for total reductions of approximately $610 million from previously planned spending through the end of 2020 and that compares with our original target of $500 million.
To achieve our targeted cost reductions, we expect to eliminate approximately 500 full time equivalent positions by the end between 20, some of which we expect come from attrition exploration of temporary or contract positions and current job vacancies.
Our target cash cost reduction do not include initiatives that would result in a reduction in the production volumes of our commodities or that could adversely affect the health and safety environment.
Turning to slide 19, our financial position remained strong. We currently have approximately 5.8 billion of liquidity and that includes $532 million of cash.
We have no significant debt maturities prior to 2035, and we have investment grade credit rating from all four credit rating agencies, we as Don mentioned, we closed the U.S. 2.5 billion limited recourse project financing facility.
We used to develop QB two.
That was done in the fourth quarter, and we expect start drawing on that facility shortly.
As we previously mentioned the QB two partnering transaction and the financing plan dramatically reduced tax funding requirements for the project at no contributions to the project our expected from tech until early 2021.
Don mentioned earlier, we reduced our total shares outstanding to 547 million shares through purchases under our normal course issuer.
So with that I'll turn the call Don for his closing comments.
Thanks, Ron as I said at the outset, our focus remains on those aspects of our business within our control are focused on our four key priorities first the development of the QB two project, which is a key component of our future growth second to executing our raised 21 program to improve efficiency and productivity across our business third the execution of our priority.
Roger to Neptune terminals and fourth our companywide cost reduction program.
Spending increased target now of approximately $610 million reductions up from the 500 back into our target.
Obviously and Thats from previously planned spending through to the end of 2020.
These priorities are consistent with executing our straight forward strategy at running our operations safely efficiently and sustainably to generate cash successfully execute our QB two project and return additional cash to shareholders.
With that we'd be happy to answer any questions that I should say that some of our management team members are calling in from different location. So there may be a brief pause. After you ask your question, what we sort out who's going to answer it.
With that back to you operator.
Thank you.
Please press star one at this time, if you have a question, yes, we filed participants, but just a follow up question.
We thank you for your patience.
Our first question is from Orest.
Well cuddle Pete from Scotiabank. Please go ahead.
Hi, Good morning, I was hoping we could get some more color on the guidance for the coal segment for 2020 I find it very confusing why the cost guidance is so high given last year, you were pushing volume in order to maximize margin, obviously with the lower coal price we've been here.
During.
Contractors have been reduced overtime reduce strip ratio coming down and that all of these efficiency programs raced 21 and others how come we're not seeing that at all flow through the cost guidance in 2020.
The over to Robyn share Mehta.
You've got I guess, the biggest influence that you're going to see on cost guidance through 2020 really comes down to the production rate, we're able to operate at so.
And we walk through the constraints that are on the system, particularly in Q1, where we're going to be close to 5 million production in Q2 in Q3, where we have a five month plant shutdown at Neptune. So when you take that production off we're going to have to reduce our production at the mine sites.
But I want to come back to there are number of factors that are changing and it's consistent with what you were what you're thinking as far as a declining cost base. So I'll just walk you through those because this is happening through the year and you'll see it really translate in Q4 in interest 2021 more back to full production levels. So we've got it would you have a declining strip ratio.
Strip ratio was 11.4 in 2019 and should be around 10.6. This year, but by 2021, it's going to be below 10, and it will be sustained below 10 going forward.
We are moving cardinal into closure this year, that's going to happen about mid year.
That's going to reduce the overall cost of the business by about $3 a ton we won't see that through 2020, but we will see that into 2021 and help you which is or one of our lowest cost operations is moving from 7 million to 9 million. So thats part of part of the production constraints in the first quarter is we need to take a shutdown to get that expansion.
But that's also not only is going to reduce our or replaced the tonnage that we shut down at Cardinal it's at a much lower cost based on what Cardinal was.
The work, we're doing on Neptune, not investments going to significantly reduce our logistics costs and then as Don mentioned was raised 21, theres a huge amount of potential past certainly past 20.
As we developed a program through 2020 into 2021, so all those things combined you put them altogether by Q4 of 2020 and going into 2021 will be at a cost base less than $60 per ton.
So our costs are coming down at just we have to get through this production constrain period.
Okay. So when we look ahead to 2021, assuming you're back at your 26 to 27 million tonne paper run rate for volumes.
Adding all these pieces together are we looking at potential $10 per ton savings as I kind of the ballpark.
Yes, I'll stick to the 60 dollar a ton marker so we'll be below $60 a ton and we'll achieve that rate by Q4 2020.
Okay.
But the managed Dolby around 26 to 27 million.
Thank you.
Thank you.
I'll. Following question is from Matt corn from Goldman Sachs. Please go ahead.
Hi, good morning, a follow up on coal when you're looking at the co ops Holistically, we've seen is persistent challenges.
You confident you're looking at the business today that the Netone Neptune build out the L. few investments.
This is going to be really enough to provide long term stability to the segment or is there more that you may need to do to invest to get there I was there any practical way to add redundancy bypass misled bottlenecks in the chain say between your storage and your port that you may have to do just just looking for ideas there.
Yes, I mean, a lot of the work we've done over the last three years and in terms of expanding some of the mining areas at El few at Fording River at Green Hills.
At line Creek. These these are the assets that we've consolidated down to how the stable base of strip ratio getting the strip ratio down below 10 to one that's critical to the business.
Moving away from the higher cost operations like Cardinal.
Thats going to be good for the business.
The work we're doing at Neptune. This this is going to strengthen our entire logistics chain. So thats the stability that we required and we've we've suffered for for the last few quarters. So I think thats incredibly positive and then just.
Again, the potential that raised 21 has to the coal business and all the business and.
This is tremendous and we saw good evidence that.
But many of the programs, we've initiated and color starting to yield that kind of benefit so were much stronger going into this Q4. This year. Unfortunately again, we have to get through a couple of quarters of transition, but as we get into Q forward into 2021, we're pretty well set up here very strong cost base.
Hi, Amit let me then rotate copper yet on QB two development could tell us a bit more what's been the nature exactly the permitting delays how much of a delay has there been with those permits versus the initial expectations and has the social unrest remained an ongoing pressure there as you as you try to move materials people around to the site.
Hey, we're going to start with deal I understand that in the Alex Chris for might touch it runs off.
And all thanks.
To start with.
I'll talk about permitting primarily the delays have been in.
Toro and.
Sectoral permits so the small number a huge number permits but small permits.
So lets a construction overall, we have over 2000 of these permits.
And.
Theres multiple levels of government that we need to work through to get those so that has slowed things down.
On the archeological clearances.
And part of that is also due to the social unrest.
But the regulatory agencies to process these applications and permits.
Have been have been slower than we anticipated, but partly due to the social unrest.
And.
One of the agencies was even on strike for part of that period as well. So that has had an impact just back to the social unrest.
I think QB two is made out.
It's better than other projects and other operations in Chile.
But there's no question we have been impacted.
It does affect movement of equipment movement of people.
Through the period in particular after October 18.
Our workers were concerned about their families in homes.
So the logistics of getting the workforce up to site.
Has had an impact on the project.
And I think as we put in our release, we are in the middle of.
Competing.
Updated cost estimate and scheduled for the project and that will be released before the end of quarter.
Hi, Thank you very much.
Thank you.
Following question is some Greg Brian from TD Securities. Please go ahead.
Thank you I just wanted to take the cost guidance on the coal business a step further effect if I can.
Transportation costs this year over $40 a ton.
Given all the moves you've taken how do you expect that too.
Evolve over the next several years.
Well, what we would say is certainly going to go down but how much. It goes down will depend on the tonnage is that go through each of the ports and that won't be determined Greg can till sometime probably towards the end of the year. So we can't give you exact answer but we're highly confident it will be going down.
And should be a very very beneficial thing and then the reliability will be going up which is which is incredibly important and and contamination won't happen. So that's also important.
Don curious about the decision to delay the pre feas on Q3 that can't be a big expense item.
No it wouldn't be a big expense item, it's more about keeping the focus on QB, two and making sure everything's going smoothly there and.
It's also probably just part of overall CRP and the company cost structures programs. So we we slowed down on all the projects satellite as well and and use reduced cooler Creek and others. So it's as part of the whole thing, it's not really specific to cube three.
Okay. Thank you.
Thank you.
My question is from Chris stemming from Deutsche Bank. Please go ahead.
Hi, John a couple of questions from me, maybe just starting with overall capital capital management, and then thinking about any asset sales I'm. Just wondering if you could comment on any of the project satellite areas, whether they could be asset sales there over the course of this year and weather.
Would then be tied back to capital returns in the next 12 to 24 months. Thank you.
Yes, no as I said before we think a.
For now and the not too distant future say Nicholas or projects that Theres a lot of interest in there and.
Pre krona virus I would have said that this year.
There would be a at least one asset sale and that the board would probably look at that capital. However, much it was in terms of a.
Additional buybacks, so thats, where thing with krona virus still prevailing I think.
Most people are going to going to wait and see how that shakes out.
Still unknown, what the long term effect is not just the these itself, but the effect on.
Inventories at different nodes and supply chain I think we have to get a better view and see how long that takes to clear whether it's two or three months or 10, or 12 months and so someone making investments like that would probably want to see that too. So we'll go we'll go pretty slow on that for now but.
But if.
The market starts to clear and.
We think buyers have confidence and we'd be back at that pretty quick.
Okay. Thanks. Thanks on then just to circle back to a couple of the other questions that were already but just in a slightly different why.
Just wanted to be quick so on on the cost at target six tin mill, and you're expecting to get coal costs into 2021 below $60. A ton is that with the majority of the savings will actually be shown in the numbers. It will be in the Olympics. Another portion thats capex as well or is it out.
Sort of call as well just just trying to get a feel for which we'll actually see those savings come through the financials. Thanks.
Over to run so that was the cost reduction program, yes, yes, they're all over the place there's.
Obviously, various buckets of capital spending.
And there within the.
Each of the various business units out there.
Savings in the satellite projects as Don mentioned earlier, there's administrative cost saving some of them will be included in that sort of the GE in a number that you see others will be in the admin costs at the site.
There is.
Other income expense items in there were as an example, we've.
Monetize some hedging contracts that we had in place for small dollar amounts so.
Split all over the place the basic.
The split for.
210 million or 2019 was about 60 million in capital.
So 150 million in capital 60 million Opex and about 75% to that came from the operating business units and then the other 25% came from.
Satellite the corporate initiatives and then go forward on the 400 million.
No.
65% of that is at the operating business units the big swing there is that.
One of the big initiatives as we were planning on refreshing a lot of our IP system and that's been put on hold so that's that's the reason for the drop in the.
Percentage allocated to the producing business units and more to the other business units and the target for the 400 million target that's up to 20 of Opex and went.
Capex.
Maybe just related to the coal part of your question and I'm sure people are addressing this to but for further clarity.
In closing Cardinal River, which was one point more a 1.4 million tons and replacing it with 2 million tons at Elk few is quite significant so the Cardinal river tons were lower revenue per tonne than the new tons that elkview and the Cardinals tons in terms of costs were close to Doug.
Well the costs that will have at El Cubo. So it's a really big improvement in the business and that's why we've moved up to get it done as best we can so.
A couple of course from now that business will be much stronger.
Having done this.
Okay. Thanks for the color just the last couple from me. The Rice 21 program just to be clear does that have any capex associated with it.
Yes, It does who was running in our guidance. There is about 85 million for Capex the total spend.
When you read the news about $140 million the raised 20 ones another sort of awkward one from an accounting perspective in that.
There is physically equipment, there's a software an algorithm writing and then there is out.
Assessment cost so that the costs will get split in three buckets. There will be included in our research and innovation line item on the based personnel and in the cash flow they'll be in investments and in.
Property plant equipment, then effectively the piece that goes into investments intangible assets at its that's basically the software and the algorithms. So things that you can touch and kick in field go into fixed assets. Other things that can get capitalized go into the up into the intangible asset bucket and investments.
And then sort of assessment cost said, you're looking at the various initiatives before you come to a conclusion, whether they're going to look or work or not those with those would be expensed as incurred.
Okay. Thanks, Thanks for that.
So I mean, it sounds like you know on net bypasses the savings and not nearly as hard as the headline numbers when you putting the costs, it's actually implement the program.
While the state the savings go every year right, whereas the costs there are one offs.
Okay and just last one from me just in terms of just to get full clarity on the port situation to understand in coal can you stepped through maybe 20 2021 and 2022 the percentage from each pool that you're expecting over that time, just trying to understand.
How you manage the Neptune situation as you take that offline and just making sure we've got the tons the tons understood. Thanks.
Yes, no as I said earlier, we won't be able to do that till probably towards the end of the year that it hasnt yet been decided how many tons will go through each of the three boards.
Okay. That's it from me thank you.
Thank you I'll. Following question is from Gordon Lawson.
Got a dime capital. Please go ahead.
Thanks for taking my question.
In terms of railway delays they were to and in the near term do you believe you can make up for the losses by the end of Q2 or could this be more drawn out.
And also given current share prices do you anticipate being more active at the end the program in the near term.
I'll take the first wanted to then turn it over to Ian Anderson on the Harlan This politics sequans on on the Etsy I'd be we've.
I've done about 800 million of the billion dollars that we announced so that will resume when the blackouts finished so short answer is yes.
And on rail hard to know, but give your best view.
So the weather conditions, we anticipate where we get encountered in Q1 those appear to be largely resolved the blockade situation in the inventory situation. We're in now is very fluid and so we do not anticipate at this point that we'd be able to make up those volumes over the first two quarters.
And we'll look forward to doing that as of course year progressive income.
Okay. Thank you very much.
Thank you well following question is from Carlos de Alba from Morgan Stanley. Please go ahead.
Great. Thank you very much done maybe just a follow up on rates Tony one is there any a split.
Even if it is just ballpark figure.
And how the savings will be distributor broken down by segment.
Yes, I'm going to turn that over to Andrew Milner or senior VP transformation. So if we look at the.
29, teeny the majority of the benefits coming through the processing and garmin side throughput improvements.
Largely in the base metals business, we tackle the projects that we saw their offering the guidance value.
That will continue into 2020, we now shifting as part of Rice 21 to the broader aspects of the program is integrating the autonomous work the full dr. integration work. So we'll see a ramp up in the analytic spicy mining predictive maintenance et cetera.
Initial phases, it's largely bain three putting crisis with cost savings things sales side of it to a lesser extent, but that will certainly ramp up as we as we head into into 2020. The other one I'd just like to sign on early nearly a point just on the value capture value uplift.
The value proposition does that is substantial if you just look at the example of 29 team, we invested $45 billion, but off to capture 150 million or 160 million what was it shaved cemetery and benefits. So it's actually caught a compelling investments.
Going forward price will be very much one of a lot.
Just want to value uplift.
We have the program in place now, where we've got staged guides and criteria for assessing projects well invest utilized projects, we'll look at the value uplift and they will like future decisions on future investment as we go forward.
But we're very confident that we will it shape, the 500 million dollar uplift Bcf and a billion dollars body and 21.
Alright, Thank you and then I'm not put all on the on the share buybacks.
So it wasn't mentioned before 80% has been completed from the previously authorized program.
Don how do you see that timing for a potential expansion or a new.
As shown on buybacks.
In light of that potentially review in the Capex of QB two would that happen would management for most of the board I knew program just after the new QB two Capex is announced.
And then depending on how that.
How the higher Capex what is it higher Capex then you will propose toolbox.
Our new program or it doesn't really is a moderating lean tools to QB two capex.
Well, we got a finished the first program the current program and we're not sure along that'll take but once that's done.
I would likely be passed when the QB two.
Information on on.
Capex and schedule comes out so it's a board decision there's nothing planned at the moment in the board would assess.
The overall market looks krona virus coal price all the normal things that you think about and look at our capital needs and decide if there's a there's surplus to add or asset sales.
Nothing planned at the moment, but the board will always be monitoring these on each meeting that we have.
Great. Thank you very much.
Thank you.
Following question, if I look aside from B. Riley FBR. Please go ahead.
Hey, good morning, everyone I'm, just just another one on the on the coal side and things to do seem out of out of sync there at this time.
Just wanted to get a little bit more color is related to Neptune at the end of today or is this perfect storm with whether rail and your Neptune development coming together or are there may be more specific processes that you can improve on your side that could.
Avoid similar outcomes future. Thank you very much.
Thank you good so as usual, it's a combination of things, but it's probably closer to the perfect storm have you had to pick one so.
If you started big picture and say look the currently buyers has hit the basic commodity markets. We don't know, how it's going to shake out, but generally they'd be weaker for a period of time until this whole thing sources a cell phone throughout the supply chain. So we're saying, we'll do our part and cut back production a bit I noticed that thats, helping to strengthen the coal price has been effective so far.
That then with reduced production gives us opportunity to take the the five month shut down a neptune, which assists with the construction and and helps helps manage things there. So it's kind of seeing an opportunity and taking it.
In terms of making those decisions but.
We've got to get through these two quarters, but boy assessed the business up in a really good position as we get to the ended the year like this this transfer from Cardinal River to help you is very significant to its a much higher quality business. Once we've completed that so a lot of its happening. These two quarters no question, but.
Certainly comes to an Indian business in good shape after that.
That's helpful perspective, I appreciate that and then.
My second question on QB, two and I appreciate Bob will have an update here before the end of quarter, but I'm sure. You can appreciate that this has been.
An overhang for the stock and investors are eager to kind of find out what the number yes, and I understand it's early in and there.
No.
Sure some work to be done can you maybe ballpark.
Potential cost inflation.
The 10% 20%.
Below that any any color that you could share at this point I think it would be really appreciated by the market. Thank you.
I certainly understand why you're answering the question, but Oh, I'm, sorry, I'm not going to be able to do that.
I will give you the answer it's only maybe six weeks away not even that and then you'll get lots of detail and then we'll be available in April 1st in the Investor Day to go through all the detail I think it's best to get to get the two true story, rather than making the estimates at this time, but it might just add back on the coal business like when I say, we got to get through these.
Two quarters, but once you get into really even in Q3 in Q4, we go into a period of time, where coal costs continue to go down first the few expansion that we talked about but then as Robin said the strip ratio is coming down this year and again next year, then we get Neptune place and that lowers our cost in a in those.
Just excited so.
We're quite excited about coal businesses tend to be somewhat stronger.
Six months for now, but yes, we gotta go through these quarters than other markets short term always always is short term, but but even medium term not even quite is not that long till this business looks awfully good.
That's very helpful.
I really appreciate it and that's the flat to you and the team.
Thank you.
Thank you I'm. Following question is from Brian Macarthur from Raymond James. Please go ahead.
Good morning, I'm, sorry to go back to the call again, and I hear everything you're saying about getting to the next two quarters, but there's also a statement in here.
But the risk if you don't complete Neptune on time and your West Shore terminal contract expires, you may have to pull back production and sales. So can you just go through it looks like you have some mitigation in there with your deal on.
Ridley, but can you just answered that really deal that goes from three to six and then you have an option to 9 million tons. If for some reason Neptune delayed west shore expires can you get 9 million tons through late Ridley next year in not short period of time, while you're buffering everything because.
It will impact the cost to can you just go through that scenario. Please.
Almost two quick points, and then turn it over to Rio and Ian So the language and our disclosure as what you expect that we do it's our job to highlight the risks. So we've done so so it's nothing more than that.
In terms of.
Let's go to the really contract now than so.
We want us or rail.
Okay.
So.
When you look at what we've announced on contract I mean, there is additional capacity.
On C. and there is additional capacity.
Like you've described.
Yes, we're actually doing that.
Continuing to to progress commercial and operational loss.
To complement our capacity at Neptune.
And keep in mind also that the five month outage that we're doing at Neptune will bring benefit to the schedule and there is a possibility that we will also get benefit from tonnage.
Going through Neptune.
It's difficult to estimate.
This point.
And then with respect to other alternatives, we're not going into we're not going to go into further details at this point because it's essentially.
It's really sensitive.
Great. Thanks very much.
Thank you.
Following question is from an exciting from Citi. Please go ahead.
Yes. Good morning, just one question for me on the energy business.
Right now I guess generating negative cash flows negative headlines.
Where does this business fit in your portfolio on the long term.
Especially given your.
Targets around carbon neutrality and stuff like that thank you.
Hey, I'm sort of a big picture question answered two parts first what we've said is that against this is really focused on Fort Hills support Hills has been very.
Very successful from an engineering and offering point of view and in the the only month.
The last month it was allowed to run full loaded it averaged 104% of capacity in cash costs of 23 Canadians was pretty good asset since that time, we've had the capacity shut in Alberta and it doesn't look like its can change anytime soon now of course is due to the pipeline issue and so really.
For Fort Hills to.
Achieved the kind of results that it was built for we have to wait for the pipelines to be completed and during that time Suncor believes there is really good bottlenecking offered de bottlenecking opportunities that can increase the capacity.
As much as 20%, so, allowing those two things to happen certainly increases the value of Fort Hills, We've said that at that time, which is a couple of years off.
That if we're not getting paid in the Teck resources share price for that asset, which might be one of our top three assets in that time than we would look at doing something to release that value.
Whether it's a spin out or sale or or some sort of transaction, we look to make sure that the shareholders to some value. So that's how we think and I think we did that than than probably a frontier and lease for 21 would go with it.
The specifics on frontier course straight before federal Cabot now we don't know.
What the decisions going to be and I think we've come this far we're just going to wait and see what the answers at this stage.
I've said before us anyone's guess.
Thank you.
Following question is from Orest Wowkodaw from Scotia Bank. Please go ahead.
Oh, Thanks for taking the follow up just in your three year guidance for Highland Valley copper at a 155 to 165000 tons does that assume an expansion kicks in somewhere in that timeframe.
No in fact, specifically it doesn't assume that ER and an expansion if anything could probably even potentially drop that for a short while the.
But that that's the existing plan.
Better grades as we go deeper in the pit and we're getting tremendous benefit from raised 21 throughput initiatives as well as the recent de three mill that was installed.
And commissioned in 2019.
Okay. Thank you and then just on QB two I realize this study is underway, but can you give us a sense of how much of the original capex was exposed to the peso versus the dollar.
Yes.
It's close to 70% and the other.
Part of that question and answer is that.
The U.S. dollar component is generally more upfront in terms of the things you're purchasing whereas now.
Between now and finished the project high percentage of labor, which of course essentially in pesos. So pesos around 800 today, so pretty pretty big benefit.
Thanks very much just.
Just to remind people when we sanctioned the project 625, Chilean pesos to the U.S. dollar.
Well I think we've got a time for one more question. Thanks.
Jimmy I'll ask question is some Greg Barnes from TD Securities. Please go ahead I just want to squeeze in around the trial.
Issues in the Elk Valley, how serious is that and.
What mitigation measures do you think you need to make.
Returning to a.
Robin sure matter goes.
Yeah, I mean, we're we're still evaluating it we had the one to one population measure last through the summer season, So and that showed a decline in the population and right now we're into that technical review, that's going to take some time theres.
Multiple different possible causes from any from water quality issues to flow conditions habitat availability predation lots of different scenarios around natural causes. So we have to get through that process of understanding what what the potential root causes.
We're confident that whatever we find as a root cause we'll be able to mitigate and move forward, but that that's about where we sit right now theres not much more we can say until we get through this study.
Yes.
ALOG sorry.
Right.
Possibly three to four months I think we're looking at that's the last update I had really strong team. That's on it external people are coming to help us understand what's happened so okay, what three to four months shouldn't get.
Okay. Thanks. Thanks.
Your next question. Please go ahead Mr. Anthony.
Okay I just want to say, thank you to all for joining us today, and maybe just to remind you that particularly when talking about QB two none of the information that we just as new it's all sort of been things we've disclosed for several months now and we look forward to being able to var fully answered the question.
On Capex and schedule.
At Investor Day on April 1st and we hope to see all that.
Thanks very much.
Thank you.
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