Q2 2020 Teck Resources Ltd Earnings Call
Ladies and gentlemen, thank you for standing by welcome to tax second quarter 2020 earnings release Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session. This conference call is being recorded on Thursday July 20, Threerd 2020, I would now like turn the conference.
Call over to freeze your fillets senior Vice President Investor Relations and strategic analysis. Please go ahead.
Thanks, very much Laurie and good morning, everyone. Thanks for joining us for Tech second quarter.
2020, <unk> results conference call before we begin I would like to draw your attention to the caution regarding forward looking statements and slide to this presentation contains forward looking statements regarding our business. The slide describes the assumptions underlying those statements various risks and uncertainties may cause actual results to very check does not assume the obligation to update.
Any forward looking statement, but also like to point out that we use various non-GAAP measures. In this presentation you can find explanations and reconciliations regarding these matters in the appendix with that I'll turn the call over to Dawn Lindsay President and CEO.
Thank you appraiser and good morning, everyone. Thanks for joining us today.
I will begin on slide three was our second quarter highlights followed by no sorry, CFO, who will provide some additional color on the financial results. We will then conclude with its unique session where run at nine additional members versus the management team would be happy answering questions.
So these continue to be challenging times will works its way through the code would like to pandemic.
Hi Tech, we remain focused on protecting our people in communities well continue to operate responsibly safely support the economic recovery in the weeks independently.
We took steps during the quarter to further strengthen our financial position and reduce cost and position tech to significantly improve margins towards the end of 2023 2021, as we complete or major capital projects.
We're also pleased to be recognized as one of the that's 50 corporate citizens in Canada, right like corporate nights, the 14th consecutive year.
Turning to our financial results on slide four.
In the second quarter revenues were 1.7 billion gross profit before depreciation amortization was 453 million.
Profitability was impacted by the significant negative effects to covert I'd add on what prices and demand for products.
Well its abnormal cost because it depends on it.
Bottom line adjusted profit attributable to shareholders was 89 million or 17 cents per share on both the basic and fully diluted basis.
Details of the second quarter its various adjustments on slide five.
The most significant adjustment was 147 million to cope with 19 expenses in the quarter on an after tax basis, which was primarily related to the suspension of our QB two project.
We also had a 69 million dollar adjustment for environmental costs, which relates to the impact of re measuring or de commissioning in restoration provisions for our closed operations using the current credit adjusted risk free this calories.
In addition, we had adjustments or 38 million per inventory write downs in 17 million for share based compensation.
This was partially offset by commodity derivatives and taxes and other items, which grew 20 million 21 billion respectively.
With these and other minor adjustments Bottomline adjusted profit attributable shareholders was 89 million or 17 cents per share on both the basic and fully diluted basis.
Now I'll run through key updates for the quarter starting on slide six.
Coordinating endemic obviously had a significant significant negative the pack business in the quarter.
So all of our operations are currently producing comprehensive buyers prevention measures in place.
The economic impacts of the pandemic have reduced imagine prices for our products.
We expensed 260 million in costs associated with Cobot 19 in the second quarter on a pre tax basis and this includes 151 million of QB, two demobilization, remobilization and care and maintenance costs, and 75 million aboard and cost that would otherwise have been capitalized at QB.
Two construction not been suspended.
And we'll speak to these items in a few minutes.
Looking at our key updates in or steelmaking coal business on slide seven.
We continue to focus on increasing margins not volumes.
Second quarter sales were 5 million ton.
Endemic continue to negatively impact supply and demand.
Victory outside China.
Just to ask if everyone could please go on mute a so we can.
Hey, push up like thanks very much.
Chinese steel production, Richard your prepaid debit levels during the quarter and established new average daily record highs in both May and June.
We are shifting to a lower cost base due to a declining strip ratio also due to the L. few plant expansion, which was completed.
Cardinal River closure and as well as our cost reduction and raised 21 programs.
Our adjusted site cost of sales are expected to decrease over the remainder 2020 and to the ended the year, we'd expect to be below $60 per ton.
Our strip ratio was 11.4 to one and 29 team. We now expected to decline to be low tend to one like 2021 as planned.
We completed the major expansion of or else you operations plant in Q2 despite dependent.
Now has the capacity produced 9 million tons annually, which will enable us to replace that higher cost reduction from Cardinal River with higher quality coal products and lower cost somewhere help you operations.
As planned cargo wherever completed its final production in June after 51 years that mining the operation is now transitioning to closure they'll come back to its good making coal business and just a few minutes.
Turning to QB two on slide eight.
To be too is a key component of text future growth as we rebalanced our portfolio.
Construction activities are ramping back up with over 3000 people currently on site and robust covert 19 prevention protocols in place.
We are planning to continue a gradual ramp up of the construction work force over the next three months towards the pre suspension workforce level as conditions allow.
We expect to have approximately 4000 people on site at the end of July.
And approximately 8000 people on site by the end of October.
We're also aiming to achieve overall project progress.
Close to 40% by yearend.
The impact of this essentially on cost and schedule will depend on the likes of the suspension the ramp up period that I just described.
Now I'll provide more detail at QB two in few minutes.
Looking at progress on our Neptune facility.
On slide nine.
We continue to advance the project, which will secure long term.
Very low cost and reliable supply chain solution for steelmaking coal business.
Major equipment deliveries remain on track.
Who 19 related issues have not substantially impacted works on the critical path.
The project remains in line with the previously announced capital estimate and the schedule.
Terminal operations were suspended for five months as we previously announced Sir you may in order to improve productivity and safety at the terminal as we advance construction completion of construction is still expected Q1 2021.
Just about eight months away.
Turning to key updates on our financial position on slide 10.
We have a strong financial position to weather the effects of the pandemic and we took steps to enhance it even further during the second quarter.
This includes adding a 1 billion U.S. two years unsecured revolving credit facility, bringing the total committed credit facilities now to $5 billion U.S.
We also issued 550 million you asked a 10 year notes.
On July 20 to 2030.
Bearing interest at 3.92 cents per annum.
We use the net proceeds to purchase near term notes and to repay amounts drawn on our 4 billion dollar revolving credit facility.
This is a conservative so we think is prudent during these calls with 19 times it reinforces our commitment to maintaining very strong liquidity and our investment grade credit profile.
We also continue to focus on our cost reduction program.
We have achieved significant reductions as of June thirtyth, including approximately 250 million in operating cost reductions and 430 million of capital cost reductions in <unk> Ron will provide further details later in the presentation.
Looking at our guidance on slide 11.
We have issued updated guidance for the second half of 2020, which was visits to reflect the continued uncertainty around the extension duration of the impact as a pandemic.
Both demand and prices for commodities.
We've also change the categories under which we present, our capital expenditure guidance. So going forward, we will present capital expenditures in three buckets.
First sustaining capital then growth capital and finally capitalized stripping, which you've all been getting used to four five years.
We will continue to report QB, two capital expenditures and external funding separately.
Spending grievously Celtic art rise as major Aspen capital is now primarily considered sustaining capital and new mine development.
Good growth capital.
The Neptune upgrade project reached 21.
Our considered.
Both gross capital.
You will find all the details of our updated guidance in the guidance tables in our press release.
I will now run through highlights of our second quarter by business unit, starting with steelmaking coal on slide 12.
As I mentioned earlier Q2, steelmaking coal sales were 5 million tons and this is higher than originally expected. Despite steelmakers cutting production production faster than during the global financial crisis in 2008 in 2009.
Our adjusted site cost of sales increased to $60 per tonne, reflecting the covert 19 impacts to our production cost.
Production averaged around 80% of planned in the quarter due to the pandemic.
We reduced our workforce by up to 50% for physical just seeing requirements started on March 25th and then we ramped back up to 75%.
10.
And on May 12, we were trigger workforce levels to 100%.
Looking forward, we expect five to 5.4 million tons of sales into three given the impact of the pandemic on supply demand, particularly ex China.
Adjusted say cost of sales are expected to decrease over the remainder of 2020 as I'd mentioned, we expect to end the year below $60 per tonne site costs.
Our production guidance for the second half the year reflects the estimated impact so dependent and the suspension of terminal operations at Neptune.
Turning to our copper business unit.
Our Q2 results are summarized on slide 13.
Copper production at 59000 tons in the quarter reflects the 43 days temporary suspension of operations that add to Nina to support Peruvian over 19 response up his answer facilitate a change in workforce.
And to me that has since then ramped up to full production, which is ahead of our original expectations.
And we now expect to achieve full production and the complete the quarter.
At Highland Valley.
After initially reducing onsite reports by 50% in scaling back operations.
We have now gradually ramp back up to full production rates.
In Chile, and our Carmen de Andacollo and could that have Blanco operations.
Generally maintain production levels, while reducing the onsite workforce where possible.
Significantly lower total cash unit costs before byproduct credits and the same period last year.
Select our cost reduction program or CRP and also favorable exchange rates.
Lower byproduct credits resulted in slightly lower net cash unit costs. After byproduct credits in the same period.
Turning to QB two on slide 14.
As I said earlier, we are planning to continue a gradual ramp up of the construction workforce over the next three months towards the pre suspension workforce level as conditions allow.
The impact to the suspension on costs and schedule, we'll of course depend on the length of the suspension and on that ramp up period.
In the second quarter.
<unk> expense to 133 million of costs associated with the TV to budget suspension.
And also 75 billion of interest for the project they would have otherwise be capitalized if construction had not been suspended.
As at June Thirtyth, we have expense to total of 165 million due to the suspension excluding interest.
Looking forward in the third quarter, we expect to continue to expenses some costs associated with the project suspension as well as some interest it would have otherwise be capitalized.
Assuming the ramp up proceeds through the third quarter is currently plan.
Aggregate estimated impact from the suspension is expected to be approximately 260 to 290 million U.S. excluding in transit.
With a schedule delays of approximately five to six months.
In addition, we expect to construct more cap space.
In an incremental cost and $25 million to $3 million U.S. to ensure that we can maintain necessary physical distances protocols to protect the health and safety of our construction workforce.
If we are not able to wrap up through the third quarter. According to the current plan.
Each additional month of partial suspension impact is expected to have an additional cost impact of approximately 25 to 35 million.
And one month of additional schedule delays.
Our zinc business unit results for the second quarter are summarized on slide 15, and as a reminder, add to meaning zinc related financial results are reported in our copper business unit.
Red dog zinc in concentrate.
Sales were 93800 tons.
Selecting the normal season pattern of Red dog sales.
Our net cash unit costs. After byproduct credits were six cents U.S. per pound lower than the same period last year.
By three cents per pound in unexpected costs associated with cope with my team.
Travel restrictions and modified schedules remain in place at Red dog due to the fly in fly out nature of the operation and maintenance schedules and our ability to respond to make these challenges were impacted as it was all of that in Q2.
Red Dog zinc production was lower than same period, one year ago, primarily due to goes maintenance challenges and also to lower grades resulted from mine sequencing changes to manage safe water levels, which restricted some access to high grade ore.
We continue implementing an increased number of tailings and water related projects in 2020 to manage increased precipitation water levels at Red dog. It seems the frequency of extreme weather events has been increasing and these projects are designed to ensure we could continue to optimize the mine operations.
A trail operations production of refined zinc in the quarter was impacted by and you'll see gross to me.
Looking forward the Red dog concentrates shipping season commenced on July 13, following the delayed due to the failure of the loading on on one or two shipping barges.
Shipping is being completed with one barge dock regional now and we currently expect it repairs to the other barge will be completed by the end of July.
This will affect the timing of customer deliveries, but barring unforeseen severe weather conditions, we do expect to ship all red dog production during the second season.
We expect Red dog sales of 160 280000 tons of contained zinc in Q3, which reflects normal seasonality.
Red Dog production is expected to returned to full production rates in the third quarter as throughput and grades crew.
However, water levels at site May continue to restrict access to high grade ore in the second half 2020.
Our energy business unit results for the second quarter are summarized on slide 16.
As previously announced the Fort Hills partner safely and because it officially reduced operations to a single same facility during the quarter, which helped to reduce the negative cash flows lighted cobot 19, and the unprecedented low western Canadian select prices.
Production was also negatively impacted by extreme wet weather, resulting in flooding in the mining area in June in early July.
However, we expect to remain within the full year production guidance that we provided in Q1 to 2020.
As a result of lower realized prices, we recorded inventory write downs, the $23 million into second quarter.
Please note that.
Adjusted operating costs are lower in the quarter because of inventory write downs, which adjusted out.
The first half of the year and including 46 million in the period write downs are safe production costs are within our previously issued in the guidance.
37 to $40 Canadian per barrel bitching them for the period.
Looking forward our guidance for production operating costs in capital spending is unchanged from the disclose we provided last quarter.
Fort Hills partners continue to monitor market conditions and May adjust the operating plan for Fourq those accordingly.
With that I'll pass it over to our nose for some comments on our financial results falling over to you.
Great. Thanks, [laughter] excuse me.
Thanks, Don and I'll start by addressing a change is that our cash position.
During the second quarter, which was shown on slide 17, So we bought generated $300 million and cash flow from operations in the quarter.
We issued a U.S. 550 million up the 10 year notes and use the net proceeds to repurchase that 268 million at the notes maturing in 2021, 22 and 23.
And use the balance to reduce draws on the EUR 4 billion that revolving credit facility, resulting in the transactions being leveraged neutral.
In the second quarter, we had net reduction of U.S. $32 million on the draws against our revolver and we didn't draw U.S. scattered and 88 million on the QB two project financing that accounts for most of the increase in our total debt, which which totaled 6.2 billion at the end of June versus 5.5 billion at the end of March.
Our capital spending was 889 million in the quarter of that 97 was stripping activities and the the largest single piece was $446 million on QB two.
We paid 70 578 million in interest and finance charges at 52 million on expenditures on investments and other assets, we repaid 40 million of lease liabilities and pay 26 million for our regular five cents quarterly based.
So after these and other minor items, we ended the quarter with cash and short term investments of $336 million.
Now turning on to the cobot expenditures on slide 18 in in terms of the accounting.
We're doing is cost related to capital projects that do not qualify for capitalization are expensed as incurred in our other operating income expense line item and these are primarily a they need demobilization remobilization care and maintenance costs.
It's not directly related to the production of our products our expenses incurred in cost of sales.
But they're not included in our costing of inventory so they're not flows through our future earnings when the products are ultimately sold so there [laughter] basically expensed in the quarter incurred.
And again borrowing costs on capital projects that are temporarily suspended our charged against finance expense as as they're no longer allowed to be capitalized while the project is down and that's primarily at QB two <unk>.
We deduct it all of our covert 19 related costs at our expense from a profit attributable to shareholders. Our adjusted earnings table to assess readers and analyzing understanding our operating result, absent the effects of independent.
In the second quarter, we expense 260 million related to co bid on a pre tax basis hundred and 33 million of that related to the temporary suspension of construction that our QB two project and 18 million was related to the temporary closure of and Amina and coal that 19 that fund donations.
$75 million and additional finance expense.
It was expensed rather than capitalized against QB two during the construction period, and we had 34 million related to a other incremental costs at our various operations. So on a year to date basis, we've expanded $304 million related to covert 19 and that includes 80 million of interests that would.
Otherwise have been capitalized.
[noise] slide 19 summarizes our cost reduction program. So to the end of June we have achieved approximately 250 million of operating cost reductions.
I haven't heard young enough capital cost reductions and up that totaled about 305 million was achieved in the second quarter.
And just as a reminder, these reductions are against what we were expecting to spend back at the end of June 2019, when we started looking at a at cost reduction opportunities. The drought reductions are spread throughout the company with the majority of the operating business units. They include the satellite projects the exploration projects, all righty systems and our.
Add mandate operating costs throughout the company.
The savings from our cost reduction program have been included in our guidance since we've announced the program by back and Q3 with our Q3, a 2019 results and they are included in our current updated guidance as well.
Turning to slide 20, we had a strong financial position to weather the effects of the pandemic and as Don mentioned earlier, we took steps to enhance it further during the second quarter by adding a new two year unsecured revolving credit facility. So together with the U.S. 4 billion revolving credit facility, which matures in 2024.
You asked 2.5 billion project financing facility for QB. Two this new 1 billion facility and the extension of debt maturities gifts Tech significant liquidity as we complete QB two and the Neptune terminal facility upgrade while we go through the Covance situation.
We currently drawn $195 million on our U S 4 billion revolver.
And our current cash balance is 430 million.
What's available on our lines of credit we currently have Canadian $6.9 billion I've been quit liquidity.
Importantly.
Our.
Our facilities have do not have any earnings our cash flow based financial covenants. We do not have a include a credit rating trigger.
There's no a general material adverse effect borrowing condition. So the only financial covenant that we have is a net debt to capitalization ratio that cannot exceed 60% at June thirtyth that ratio was 22%.
For our QB two project, we have currently drawn $563 million on the 2.5 billion limited recourse a facility going forward a project funding will be from that fine project financing till the project reaches a specific ratio of I project financing to so total shareholders' funding.
Tex Mex contributions are not expected until the first half of 2021 and of course that is subject to the impact of the pandemic on the project schedule and timing of the capital spending.
We do not expect coping 19 impacts to prevent us from drawing on the project financing facility and as previously mentioned, we yeah. We issued the 550 million of notes are due in July 2030, they bear interest at 3.9% and we use the that proceeds to purchase $268 million over the 20 ones.
20, twos and 20 threes.
And the balance of those proceeds were used to reduce the draws on the for building a credit facility.
We've also given notice of our intention to redeem the remaining U.S. 13 million balance on the 2021 notes that were not tender to our recent offer a that's expected to happen by the end of this month.
After that we'll leave us with only U.S. $258 million of notes maturing until February 20.
2023.
And after that there are no notes due until the new 10 year notes mature in July 2030.
The combination of these various transactions, there's obviously a leverage neutral. We also have investment grade credit ratings from the for credit rating agencies. So overall, our financial position is in good shape to allow us to weather the challenges around cobot 19, and with that I will turn the call back over to dawn for his closing comments.
Thanks, Ryan wrap up on slide 21.
That has quality operating assets and stable jurisdictions were advancing at softer growth strategy that is funded and is being implemented we continue to progress or four key priorities, which are the QB. Two project raised 21, Neptune upgrade project and our companywide cost reduction programs would be spending.
We are executing on these priorities to create value position tech for decades to come and we're confident that their strategy will drive significant value over the long term as the world recoveries from corporate 19.
And with that we would be happy to answer your questions I should say that like many of you most of us or on phone lines from home. So please bear with this is Lee what we sort out who will answer your questions.
Operator over to you for questions.
Certainly thank you.
The first once again, please press star one on your telephone keypad. If you have a question.
The first question is from Orest.
Quota from Scotia Bank. Please go ahead.
Hi, Good morning last quarter, you weren't that you were seeing customers defer contracted coal volume I'm, just curious if you're still seeing not what our customers I guess outside of China are still deferring and whether the guidance for Q3 assumes a higher proportion of spot sales.
In that number.
Okay. Thanks source good question, they'll turn that over to real.
They all fully.
Yeah can you hear me, though.
Go ahead there.
[noise] then you can.
Yes, we can't.
Okay. Thank you.
Thanks for the question or is the so actually we're seeing quite the opposite the like now you're right in Q2.
Deferred sales, but now it's some of the customers that had the food safety.
Actually bringing some back into Q2.
And there's a couple of reasons for that it's actually a first if you look at the steel price.
It is back to mirror he wasn't ones at the beginning of 20 Twond prove cold at night.
And as steel production is coming back of course.
Demand.
For our customers products is increasing and we are seeing some increase production in some areas.
But as steel mills reduced production. During Q2, we were also a lot quicker to reduce their inventory as well than they did enjoy the global financial crisis.
Nice basically leverage to learn.
The technical learned from that period. So of course as production is starting to ramp up for steel products being to import.
Steelmaking coal from the market and this is what we are seeing from our customers and your last question on the ratio of a spot to contracted sales.
Our ratio remains very similar around 40% or contracted sales and the balance spotty.
Well that's great. Thank you that's great to hear and then just finally on the cost for coal you talked about exit rate this year of on site costs.
Less than $60 a carton.
By yearend.
That's certainly a big improvement from what we've seen the first half the or should we take two to mean that for cost for 2001 at least on site costs are going to average below that 60 your time.
I think your meaning 2021, I'll turn it over to.
Yeah, you bet got appreciate the question Auris, there's a number of things that have happened in that in their coal.
You over the last few years and I've kind of walk to group to down a few times I'm going to take the opportunity to take a shot out and again just because it sets up for the structural change that's occurred.
So the first thing that I've spoken to a number of times, it's the strip ratio.
That's a key cost driver for us and for the last three years we've been.
Conditioning from non coal mountain closure and setting up for the expansion of LPG.
We need to go where we want to go from seven to 9 million tons to do that we had to run a higher strip ratio through 29, <unk>. So I was around 11.4 to one.
We're going to come in around 10.7 to one in 2020, but in the second house were actually going to be mining it less.
And that'll continue that through the through into 2021 and forward. So.
Not key structural change of getting the strip ratio established at a 10 to one average or below was was the biggest part of getting our cost structure adjustment.
Second P. pieces out was bringing Cardinal river to closure. So that's been done that should.
And just to put that in perspective.
That operation ran it almost double the cost of sales.
The B you average so bringing not to closure actually reduces our cost per ton by both three bucks a ton. So that's where cost of sales right. So that's been a that's been established and then third piece of the puzzle was getting help you expanded.
And we successfully done not few now is capable of 9 million tons per year. So when the market comes around we're well positioned now with that operation, which is low cost and produces a higher quality products. So.
No. This has been talking about a few times again, but that will generate about a $160 million of EBITDA annually.
If the price or calls on 150, and actually exchange around 135 to one three.
So.
No not structural shift from shopping shutting down high cost tonnage and replacing it and more with low cost tonnage has had a significant structural change and then the fourth component.
There were executing through 2020 is raised 21, and we know and I've spoken to in overtime is that kind of value that that can create across the company and certainly within the Colby. So.
When you combine all those things together.
When I say, we will exit 2020, $60 a ton or lower.
We will be less than $60, a ton going into 2021 and be able to sustain dot and we've got.
No significant opportunity to build on that Oh, not a performance just went to work being done in raised 21. So.
Pretty excited about both the second half of this year and and 2021.
If you look at cost to sales below $60 a ton Merck.
No that's roughly $44 done U.S., so on an operating basis, where we're going to be operating a good cost.
That's excellent. Thank you very much of the color.
Thank you next question is from Craig Barnes from TD Securities. Please go ahead.
Yes. Thank I just want to continue on the coal side on Neptune Dawn it sounds like it's on track the completion Q1.
Just wanted to understand more about the rail capacity, it's true Vancouver to get the volume of coal to Neptune that you want to the work.
I didn't done to open that up is that being done as we speak or is it and completed the will it be ready by the time that Neptunes Wendy.
Yes, it is and Oh, <unk> I should say just before I turn it over to you and I understand that that so we had a terrific visit to two sided Neptune just last weekend is impressive what they've been able to copper so far and you gave us a lot of coke. That's so even though you there if not a real.
Yeah, I'll take that to dawn so.
Greg That's one thing Hey, we've also had the visits with T M to some infrastructure upgrades that.
Due.
To address.
Includes cottage this is on schedule progressing very well.
At this point, we have more concerned with capacity being sufficient to maximize the volume throughput.
Through June which was the overall.
Goals to ensure that too long to competitive supply chain.
Great. Thanks, Ralph Dawn secondarily.
Guidance on QB two construction now.
Just to be clear by October sitting everything goes. According to plan you will be backup told construction on the project.
But that is the plan, though obviously everything subject to a.
The wrap up from here, where we're actually booked 3400 people on site today, and we think we'll be at 4000 by the end month, which is not that far off of course.
And between now and then one of the key.
He.
Criteria is to get to do a room and developed protocols just as has been done with the health authorities elsewhere in the country.
To do that so if all goes according to plan, yes, we'd be at full strength by October and starting to get that you know, 3% to 4% to completion per month thereafter, so it isn't done yet obviously, there's still a ways to go but they were encouraged we come from.
Demobilization level was at about 400 people inside so we've come from 400 to food and 400.
Headed the right direction, but.
Uh huh, so it's totally scope.
Okay and again according to plan for five to six month delay in the construction schedule will mean that you get to store in the mill hopefully by the end of 2022 was it.
The thing.
<unk> yeah.
The 22 I do what we said the way of five to six months you know, we initially said Q2 2022 so.
You should think in terms of a couple of quarters that's right.
Okay, great. Thank you.
Thank you.
A question is from Curt Woodworth from Credit Suisse. Please go ahead.
Hey, good morning darn.
Morning.
First question is just sun portfolio cuts and so when you kind of evaluate the copper supply landscape today like codelco and others in terms of.
Challenges to meet mine production I Wonder if you could give us an update on projects satellite and any monetization efforts. There I would think with sort of the recovery we've seen in the markets there and maybe some.
Some more momentum on that front.
Yeah, I'll turn it over to a Andrew gold and just a minute, but yeah. We remain constructive on the copper market for the long term, which is why we have oh portfolio rich and opportunities to develop but but we don't need to do them all ourselves. So as we've said in the past.
If a market conditions are appropriate and interests is there we could.
Hello radar contributed to another company take back shares that sort of thing there are two projects of the five.
At our advanced enough that we think it's appropriate to look at.
Potential transactions when the market is right, but we're not quite sure the markets all the way there yet still copper courses had quite a run.
Why do I stop there in turn over to Andrew with any other thoughts that you may want to ship.
Can you hear me a dumb.
Yes.
Okay. Good.
I think you have a great deal tried to what you said that clearly there's some significant logistical constraints as a result, cobiz 19 in advancing fieldwork and for that matter. If we want to conduct any form of sales persist that would be just extremely challenging.
But.
Very good shape when.
It becomes logistically more practical to.
Two.
Potential buyers interested parties two sides so.
We continue to get a a lost interest these are very good project.
Well I won't standards and honesty I spoke about.
Posted coping blockade.
He's thinking to advance could've been notwithstanding 20 to 21.
Okay and makes sense and then just a follow up maybe for Alan on the coking coal market. It seems like you know there's been some increased activity out of India, but then.
There's been some reports around quota restrictions being potentially exhausted and China I was wondering if you could just provide a little bit more you know grain your outlook in terms of what you're seeing perhaps regionally in terms of the demand.
Trends, you're seeing and coking coal thank you.
Yeah. So thanks.
So, let's let's look at maybe China for stage two to address one part of your question on the import restrictions so.
The China economy is is we continue to recover.
Showing well and the steel industry is.
Producing very strong do right now with.
Achieving record production in both me in June so year to date did they are running at a high level and that's a result, seaborne coking coal imports into China.
I have also been very strong media tidied up 11 million tonne <unk> year over year.
And.
There's a couple of reasons for that.
Reduce Mongolian coking coal imports on one thing that down.
Yeah.
The lower domestic coke and coal production.
Actually down 3 million tons, you will be.
And the seaborne price is still lower than that.
Coking coal price today.
60 Bucks and it's it's been above 15 for a while now.
And then where we're seeing.
Sustained demand increasing demand from.
The coastal steel mill.
So that is that is all helping with seaborne market now when we look at outside of China.
And then.
Depending on on the market areas, there is definitely who still risk.
And then it.
But we are seeing some economies we open.
As I answered.
One question.
We are seeing some customer you bring back but originally the food tons into Q2.
And that's a result.
The opening economies, but it is also.
The result of.
Expected.
Supply disruption ongoing supply disruption this year, but also expected [noise] further production cuts as we're going through the young whether it's related to cold at night.
Or overall minor disruption.
So when you look at the Woodmac signal.
There are forecasting that.
Seaborne exports this year will be down 2 million tons that include somewhere around 10 million tons from the U.S. little bit less from Australia.
And Russia, Canada, Mozambique somewhere to the too.
<unk>.
And for those other markets outside of China, The China steel exports, but also a lot lower this year, which is continuing to support production as Kannan Commons in those other parts of it.
In India and monsoon season.
We'll be old grew the during the quarter. So we are expecting.
Some demand come back as it is all of that as well.
Great really appreciate it thank you.
Thank you next question.
Keepers been asking from BMO capital markets. Please go ahead.
[noise] changed very much a I just wanted to get some more color from you guys on on what's happening at Red Dog. If you don't mind I know in knee and DNA. It says that there's a risk to.
Hi to grade I guess, specifically for the second half a year, it's the water.
Water conditions continue to restrict access can you tell me a little bit about what what is the risk to the guidance that you've given and a and how much additional its or work might need to be done or capex might need to be spent to mitigate those risks.
Okay. Thanks, Jackie will turn that over.
Eller says that [noise].
Yeah, that's still thinks dawn and thanks Jackie.
To give you a bit more color on on the issue.
You know due to changing climate conditions, we have experienced higher precipitation levels.
At Red Dog in recent years, and and are just charged capacity for a water that we do collect on site.
Is restricted and and it's also dependent on background levels in our discharge water as well. So we are seeing naturally higher levels that were discharging into which does restrict us so in order to manage those water balances we are actually storing.
Water in various areas in or at the site and that includes in our in our pets and so when we have to start water in our pet.
It does restrict us from accessing the higher grade at the bottom of the Pip and we're having to mine a little lower lower grades towards the top of the pet.
So what we're doing about it is we are raising the tailings dam to store more water in that facility that will be complete.
In the next two to three months for the next lifted the tailings dam and we're also building that's normal course, but we're kind of staging that in a bit of a different way to get capacity earlier [noise].
We're also increasing our water treatment capacity and putting in a oh.
Bob.
It's probably a costing in the range of $25 million U.S. a that wasn't originally budgeted.
Okay. Thanks, So that's sort of a one time Oh I guess both of those things are onetime costs and then after that you should have sufficient water capacity to manage going forward.
Through feature tailings dam lifts and other water management.
That's exactly.
And if I can just that's one follow up question on Red Dog I noticed that the back of the Andy anywhere where you talk about the costs.
The royalties for Red dog seem to be a credit to she checks this quarter and can you just help me maybe interpreter explain what what happened with the royalties in the think division this quarter. Thanks.
[noise] wrong I'm not sure if you want to take that one.
[noise] [noise] [noise] dry mills through there.
Sorry, just my apologies coming out from you if the cash flow royalty based calculation.
So it.
Right up to dig into the numbers, there I'm, not one, but and and its [noise].
It ties in with when we received the the of the receipts from the sales and when we pay our bills and stuff and in the first half of the year were generally I buying a lot of supplies.
And paying for those supplies getting ready for the shipping season and of course, we have no lower sales volumes. So the revenue coming in as a lesser number so there's a good chance that.
So, but generally catches up in the latter half of the year, where out you'll see the largest royalty payment would normally be.
Q1 based on the Q4 results.
Okay got it thanks, a lot Ron.
That's it for me.
Thank you next question is from Oscar Cabrera from C.I.D.C. Please go ahead.
Oh, I can't give greater and good morning.
Everyone.
So I'm just wondering and then QB two there's been reports coming out of different companies and she'll everywhere.
There's no there's you never <unk> workforce.
You know two thirds supported by a couple of US not so wondering in their ramble, a assumptions that you're making for labor force in the QB two construction.
What are your assumptions in terms so.
Allowances like the government to.
Two to do everything safely.
And then secondly, there was sold so this is and also being reports so labor just been reluctant to a robot site without any you know quick policies on Oh go ahead and I just wonder if you can comment on that as well.
Okay. Thank you Oscar good question, and I'll turn that over to either Alex or deal.
Alex either yes, Alex here, so maybe I'll.
Asked her to Oscar here and then deal can chime in if he is any additional digital comments, but I'll ask our priorities here continue to be the safety of or workforce and supporting the Chilean efforts to limit the transmission or covert 19. So the project team Bechtel, we've been working very closely with the government with or subcontractors and with our unions and they've done a really good job in developing.
And putting protocols in place to manage the workforce to camp environment in the transportation of workers to and from the site.
So over the last couple of months, we spend a fair bit of time.
You know ensuring there that are essentially the.
The protocols, we put in place are working well the governments, but often expected inspected and dark are quite complementary in terms of in terms of what we're doing.
So we have a trigger action response plan in place to manage the situation should we see an outbreak.
And then those protocols. We haven't played there to manage you know so doing turned that we ensure that we have time identification of symptoms up, particularly as we see some case cases of workers that are ripe site, you know, who who may or may bring the disease with them. So we're looking at that testing.
Basically quarantined medical treatment and working with the government on that and we have a conflict committee that meets regularly to review the status of what we're doing and approval of the additional ramp up changes that were that we're having so a lot of protocols in place and working very closely with both the government and and our subcontractors in Union.
So we haven't seen any substantial challenges to date, but should we do so should we see challenges. We do have a response plan I'm prepared to manage manage those so without maybe El Paso deal. This if he has any additional comments on that.
No I think I think it's covered it off well Oh.
You know.
Add Oscar.
As for those who followed US close the through the beginning construction. This project you may recall that during the first year, we had several delays related to permitting and there's a there's very slow in a permanent process, but one of the silver linings to the to cope with delay.
Is that a the government a federal government and local governments and independent regulators and so on had been working very hard and getting through that so yesterday, we actually got the final.
Group of permits that had been outstanding. So we're very very pleased about that to you ever go close construction.
No. That's helpful. Thank you Don and.
They'll now we just if I may going back to the <unk> <unk> <unk>.
The coal market.
It sounds like Youre more optimistic on the fundamentals of Oh metallurgical coal.
However, we haven't seen prices.
No no above $110 on based on plot that this wasn't last.
Month, or so I would just wondering if you can comment on this notion to know well Chinese.
We thought and of course top of a year make sure that they're having no materials to grow system that can have [noise].
More disruption.
I mean that is the various argument that bullish argument is that there's enough demand on the second half.
That's why you know all the things that.
I do have pointed to.
It would suggest to higher hard coking coal prices in the second half a year.
More well on that.
The interesting concepts I thought and.
Just things that go to Qualys markets, you can always create a scenario with bullish or bearish based on on a number of factors like you've listed but we're all going to turn it over to you. If you want to take a shot it and answering that.
Yeah sure.
Thanks Oscar.
So yes, the prices is holding around $110 right now.
So we are seeing positive signs out there in terms on the man the weather itself, China or markets outside of China.
But of course, there is still uncertain too with the pandemic.
And we've seen reduction on both the demand and the supply side. So that the market is still trying to find the balance.
Sure but.
We are.
Cautious who more optimistic about Q2, then we lose too.
At the beginning of.
Q2, so we are soon changes with respect to restocking.
Not credence to restocking in China.
Right now.
Because China steel industry is running at record high levels.
And and when when you look at what is happening in terms supplying the increase in seaborne supply is just about balancing the reduction.
Mongolian imports, but also domestic coking coal production.
It's been a hope that answers your question.
And although that that those real thanks very much and.
Congratulations for a strong performance so when they are challenging situations.
Thank you. Thank you.
Operator, I think we've got time for maybe one more question here to talk to the are.
Certainly the next question and last question is from Alex hacking from Citi. Please go ahead.
Hi, Good morning, I, just wanted to clarify something on the a under QB two Capex I think when you when you when you put out the update a few months ago.
You said that the sensitivity to the pay so <unk> if the pace I think you would republished at 775 as the underlying assumption is set at the pace I went to a 50 that would be about a 240 million dollar benefit on the Capex should we assume that that you know relationship is linear obviously copper.
Has strengthened the peso strengthened so if the peso what to go back to 700 would it be fair to assume kind of a $240 million headwind. There I'm just trying to understand how that relationship works. Thanks.
Okay that would be for Alex please and at the time that we publish the pace of was 850 after which is why we did that sensitivity its rate close to the 775 770, or so you know I'm Alex already yeah, certainly thanks, sorry, Thanks, Alex and general.
The exchange rate changes the exposure to the exchange rate is somewhat different but but in general there. The relationship is close to linear.
Obviously, the the higher the or the say the lower the peso becomes against the U.S. dollar, though the less exposure you have to the Chilean peso, but.
Inside of a couple of hundred a piece so to the U.S. dollar exchange rate that relationship you can assume that it's supposed to linear.
With with the just just around 70% or 69% of or to go capital that to expose the Chilean peso.
Thank you.
Thank you I think I think that so was the last question. So I just want to see thank you everybody for joining us Oh after the call today, we're very pleased to get Q2 behind US you to 2020 was that was a tough one for sure things have been.
Uhhuh significantly we're delighted to have the out few plant expansion are complete and got that done despite cobra declines it to be ramping up slowly, but surely at QB, two and look forward to getting back to pull strength there, but in October and we're looking forward to a continued a global recovery.
From the pandemic Ah Ah throughout Q3 in Q4, it will speak to you again a in October thanks, very much all leading adjourned.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
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Office people.
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Yes.
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[noise] 50, though.
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Okay opinion.
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[noise] <unk> 50 phone.
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Okay.
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