Q3 2020 Teck Resources Ltd Earnings Call
Ladies and gentlemen, thank you for standing by welcome to Teck's third 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. It's.
This conference call is being recorded on Tuesday October 27 to 2020.
I would now like to turn the conference call over to Frazer Phillips Senior Vice President Investor Relations and strategic analysis. Please go ahead.
Thanks, very much Melanie good morning, everyone and thank you for joining us for Teck's third quarter 2020, <unk> results conference call before we begin I would like to draw your attention to the caution regarding forward looking statements on slide two.
This presentation contains forward looking statements regarding our business.
Slide describes the assumptions underlying those statements various risks and uncertainties may cause actual results to vary Teck does not assume the obligation to update any forward looking statements I would also like to point out that we use for it.
Non-GAAP measures in this presentation, you can find explanations and reconciliations regarding these measures in the appendix.
Now I will turn the call over to Don Lindsay, our president and CEO.
Well, thanks, very much greater and good morning, everyone. Thank you for joining us this morning.
I will begin on slide three with her third quarter highlights he'll be followed by Ron Millos, our retiring CFO, who will provide additional color on our financial results. We will then conclude with acute <unk> session, where Ron and several additional members of our senior management team would be happy to answer any questions.
Before I started you want to say that after 25 years with Texas is expected to be launched last quarterly conference call I, just want to personally and on behalf of our whole team think on cruise many outstanding contributions to check over his 25 years with the company and we wish him the very best in his retirement. Thank you Lorne.
Jonathan price decks, New senior Vice President Chief Financial Officer will join me in presenting our fourth quarter 2020 results in February.
So these continue to be.
And I guess no you called unprecedented times as the world adapts to the new normal COVID-19.
Despite the ongoing challenges our financial performance recovered strongly from the second quarter that clearly was very significantly negatively impacted by cold at night.
Despite the decline in realized steelmaking coal prices it will soon.
You did post gains in profitability and operating cash flows.
We made significant progress during the quarter on the execution of our major projects, including advancing the Neptune terminals upgrade in line with the schedule and the budget and also CP ramping back up construction and our QB two project.
We've also made progress in reducing costs throughout the supply chain improvements and cost reduction program and as a result at least 21.
Our adjusted cost of sales steelmaking coal is expected to be below $60 Canadian crude ton in December were around $45 U.S. retail at the mine site.
And across our business. So people have adapted to the new normal walking through the pandemic staying focused on health and safety well continue to responsibly produce materials that are essential to the global economic recovery.
Turning to our financial results on slide four.
Third quarter revenues were 2.3 billion gross profit before depreciation and amortization was 703 nine.
Bottom line adjusted profit attributable to shareholders was 130 million or 24 cents per share on both the basic and fully diluted basis.
Well these results reflect negative effect of COVID-19 on the prices and sales of the products compared to the third quarter last year. We also represents a strong recovery.
Q2, 2020, which would significantly negative.
It might depend on it.
I'll now run through some key updates for the quarter, starting with their student can cool business on slide five.
We are continuing to successfully restructure our cost base due to our planned decline in strip ratio.
With Yeltsin plant expansion and due to the closure of our Cardinal River operations as well as our cost reduction program CRP and our reached 21 programs.
Our adjusted say cost of sales are expected to decrease over the remainder of 2020 and to be below $60 per ton in the month of December.
Our strip ratio was 11.4 to 120 19 last year.
We expected to decline to around 10 to one throughout the fourth quarter and into 2021.
We completed the major expansion of our LTL operations in Q2, despite the challenges of the Pembina.
And that plant now has the capacity to produce 9 million tons annually, which enables us to replace higher cost production from our core liberal operations with a higher quality coal produced at a lower cost.
The operations.
At the same time, we're nearing the end of the major capital deployment phase for Neptune.
Next quarter and water treatment facilities at both Elkview and poor rigorous three capital projects that will be coming to an end by the end of next quarter.
Turning to our Neptune upgrade projects on slide six.
We continue to advance the project along with the previously announced capital estimate and schedule.
Planned a five month shutdown. The terminal operations was excessive successfully completed in September and all the different things that we wanted to achieve and accomplished during that five months with cheap.
Major equipment deliveries are now complete with all equipment currently on site.
A number of us want to have a visit or was this all goes see the new ship loader.
Now in place and we weren't we were thrilled to see it arriving on the special will ship called Jumbo wanted Cobra you because it sailed into Vancouver is Lions gate bridges, you put your good I'd tell you it was a beautiful site.
Neptune upgrade.
Of course secure for us in the long term low cost and reliable supply chain supply chain solution for steelmaking coal business.
We expect construction to be completed next quarter. That's one of the 2021 and the terminal capacity to increase as the new equipment comes online. So it does start to increase before the quarter is over.
We made solid progress during the quarter at or TV to project on slide seven.
QB two is a key component of course, the tests copper gold strategy, It's a big big part a bus rebalancing the portfolio and copper will ultimately be our largest business.
We currently have over 7000 people on site and are targeting over 9000 people on site by the end of the year.
All major contractors have remobilize work is progressing well across the budget than it is in line with our ramp up plan.
Construction of additional Caspida piece, that's being built in there is a cool night two packs will provide additional capacity as it begins to come online in Q4 2020 this quarter.
We are aiming to achieve overall project progress of approximately 40% by year end.
As a result of cold with Nike, we Expensed 107 million of cost related to the project's extension.
Construction.
$23 million of interest that would have otherwise been capitalized with budgets and the good quarter.
And to the end of September Weve expense total cost of 272 million.
How did 3 million of interest that would have been the capitalized for the project.
We commenced capitalization of boiling cost some students who participate in the third quarter consistent with the return to active construction on the project and assuming the ramp up to see through the fourth quarter. As currently planned the aggregate estimated impact from the suspension is expected to be approximately.
$350 million to $400 million U.S., excluding interest with the schedule delay of approximately five to six months.
As well as additional Tam stays as an incremental cost 45 million was above that.
First production at QB two is expected in the second half of 2022.
Turning to slide eight.
Attack, our approach to see to sustainability or core to the success of their business.
But schools 19 protocols remain in place at all of our operations, we continue to focus on preventative measures and controls and compliance.
And integration into our normal.
Year to date, our high potential incident frequency is 31% lower than the same period between 19 at 1.1 per million hours work.
In September together with the EPS Corporation, we entered into a long term power purchase agreement to provide 100% renewable power for Carmen de Andacollo operation in Chile.
This agreement is expected to eliminate approximately 200000 tons in house gas emission each and every year.
It is our goal to be the leading diversified mining company when it comes to sustainability and yes, you rankings of performance I'm proud to say our efforts on sustainability revenue recognized by a number of organizations.
I'm 2019, Teck was named to the Dow Jones sustainability World Index.
10 consecutive year and we were.
GAAP ranked mining company in the index.
We're also the top right to their site knows my company on sustained Olympics.
And our highly ranked on NFC I in comparison to our peers.
We are and I see a member company I just finished a three years as chair.
We've been recognized as a strong performer I assess pudsey for good and others.
We were proud to announce yesterday in Texas has been named to the.
Forbes world's best employers 2020 list, which is an employee driven ranking of multinational and large companies want 45 different countries. They looked at topics, including COVID-19 response.
And willingness to recommend an employee or two friends or family.
Well we are of course, we are proud of our performance, but we do know that there is more work to be done on these issues as they become much more important in those two quarters.
I will now run through highlights of our third quarter by business unit, starting with steelmaking coal on slide nine.
Third quarter Steelmaking coal sales were 5.1 million tons, which was within our guidance range.
We had planned mining and production outages at our operations in the third quarter to correspond with anticipated reduced demand because of 19.
We reduced logistics capacity in accordance with that.
Using the planned five much shutdown at Neptune terminal and that was completed in September.
And as a result, or Q3 production at 5.1 million tons is 22% lower than the same period last year.
And that affects cost as you would expect our adjusted cost of sales at $67 per tonne reflected that lower production and lower sales volume.
Transport costs were higher than the same period, a year ago, primarily due to the lower volumes to Neptune during the planned five much shutdown criminal operation.
And on August 25th we announced that we signed an agreement in principle with west shore terminals for the shipment of 32.25 million tons, starting on April 1st to 2021.
Together with the Neptune upgrade when our contract with Libya, and this will provide much greater flexibility and optionality protect shipments and contribute to reduce costs and improve performance and reliability throughout her steelmaking coal supply chain. So looking forward, we expect strong sales of 5.8.
The 6.2 million tons to 420 20 up from the.
5.13.
We expect our adjusted they cost cost of sales to decrease over the remainder of the year and to be below $60 per ton December supported by the destruction of the cost base and as soon as the coal business.
Turning to our copper business unit.
Third quarter results as summarized on slide 10.
At you mean, it performed well at full production rates in the quarter. Following the temporary suspension of operations due to colder nights and for them to 2020.
Production was lower than the same period last year, it will find the valley and combat corridor.
Valley production was impacted by a larger than expected or following a change in mine sequencing earlier in the year in support of reduced waste movement as well as maintenance challenges.
Production is expected to be hired before.
Increased mill throughput and higher ore grades.
Decrease and the coil was primarily the result of lower ore grades which were expected in the mine plan.
And also reduced mill throughput due to longer than anticipated.
Shutdown.
Notwithstanding the reduced production, we would expect a cost to go higher we actually had significantly lower total and net cash unit cost in the same period last year and this was supported by cost reduction for them and the contribution from leased 21.
Looking forward, we lowered our copper production guidance range for the second half of 2020, 140, 855000 comfort you can 5000 tons than before and that's due to the lower production at Highland Valley.
Our zinc business unit results for the third quarter are summarized on slide 11, as a reminder, add to mean is zinc related financial results are reported in our copper business unit.
Red dog sales of zinc in concentrate were 175300 tons, which was in line with our guidance range.
Red dog zinc production is significantly improved to 21.
Climate change I have to say is affecting site conditions.
Limited our ability to discharge to water.
However, operating restrictions due to excess water were resolved in the third quarter, we completed a raise of the tailings facility earlier than originally planned which provided us with additional flexibility to water storage.
We also installed a new water treatment plant to increase the water discharge capacity when permits limitations a lot.
At trail refined zinc production was higher than Q3 of 2019 and looking forward we.
We continue to expect to ship all concentrate during the Red dog shipping season.
And just a matter of days.
And repair to the loading arm and one of the two shipping barges was completed by the end of July.
We expect sales of Red dog zinc in concentrate of 145 to 55000 tons in the fourth quarter, which reflects normal seasonality.
We have lowered our guidance for net cash unit costs in the second half the 2020 to 30 to 40 cents U.S. per pound from previously 40 to 50 cents coupons for loves that correction.
Our energy business unit results for the third quarter are summarized on slide 12.
Our realized prices and operating results were significantly impacted by both lower production and the material decline in benchmark oil prices compared with Q3 of 29.
As previously announced the poor kills partners safely and efficiently reduced operations to single training facility in the second quarter, which helped reduce negative cash flows in the third quarter in light of coordinating them.
And the very low western Canadian select prices.
Production was also negatively impacted by extreme wet weather, which resulted in soft conditions in June and continuing into July.
Looking forward the Port goes partner decided to restart the second train and to ramp up production to around 120000 barrels per day by the end of the year and that was earlier than had previously been anticipated.
On October 23rd just five days ago, the government of Alberta announced that it will not issue monthly production limits for the December 2020 products in one.
And then December 2020 that needs that operators will be able to produce above the previously issued production limits without having to purchase could see on the credit or do apply the special production allowances.
The curtailment rules have been extended to December 30, plus 2021.
Whatever the government about where to will only issue ministerial orders to limit production when they feel is neither.
Required ministerial others will be issue there.
30 to 60 days notice to allow time for producers who responded accordingly.
For Hills partners continue to monitor the business environment.
Plans to maximize cash flow, including the potential to increase production.
<unk> costs.
We have lowered our guidance for adjusted operating costs in the second half of the year to 35% to $38 Canadian per barrel of bitumen down from the previous 37 to $40 per barrel, but of course, what we're all looking forward to is to get into that that level that we were in in December of 2018 win which was the last month.
Hills was allowed to run at full capacity and then that money that averaged 201000 barrels a day at a cash cost of 23 Canadian per barrel, but looking forward to getting back there sometime in the future.
And with that I'll pass it over to our Nols for some comments on our financial results facility.
Oh, great. Thanks, Don I'll speak to the changes in our cash position during the third quarter and that's on slide 13.
We received net proceeds of 540 million from debt in the quarter and that was made up of that draws of Usforty 9 million on our revolver and Usthree hundred 41 million on the QB two project financing facility.
We generated 390 million cash flow from operations, we spent 589 million on capital projects and that included 246 million on on QB, two and 89 million on the Neptune facility upgrade our.
Our stripping activities I used 110 million that was lower than our Q3 2019, due mainly to the planned mining and production outages at our steelmaking coal operations in the quarter, we paid 104 million in interest and financing charges and 54 million and expenditures on investments and other assets lease payments.
41 million and we paid 27 billion in our regular five cent quarterly base dividend and after these and other minor items, we ended the quarter with cash and short term investments of $403 million.
Turning to the impact of COVID-19 in our business is on slide 14, as Don mentioned earlier, well, our third quarter financial results reflect the negative effect of COVID-19 on the prices and sales of our products compared with the same period last year, we saw strong recovery compared with Q2 of this year, which was significantly negatively impacted by the pandemic.
In the second quarter of all of our minds had recovered from COVID-19 production disruptions and in the third quarter, we Expensed 130 million related COVID-19 on a pre tax basis, which is half the amount expenses in Q2.
Course, we Expensed 107 billion other operating income expenses related to the temporary suspension of construction and re mobilization at QB two project and 23 million in additional finance expense representing interest that would have otherwise been capitalized of construction on QB two had not been suspended.
Well, we have certain increased costs associated with operating our minds at full production and the new normal environment COVID-19, such as medical testings safety equipment and supplies and additional transportation and accommodation cost for social distancing.
Their cost of operating in this environment and are not adjusted for an adjusted earnings calculations.
And on a year to date basis, we expenses a total of 434 million related to COVID-19 and that included $103 million of interest that would otherwise have been capitalized.
We read commenced capitalization of borrowing costs and the QB two project in the third quarter and that was consistent with our return to active construction on the project.
Barring any further negative developments around COVID-19, we do not expect significant COVID-19 specific costs on a go forward basis.
[noise] slide 15 summarizes the latest results of our cost reduction program to the end of September we've achieved approximately $270 million of operating cost reductions of 500 million of capital cost reductions. These reductions are against what we were expecting to spend back at the end of June 2019, when we started looking for cost reduction opportunities.
Ladies so we've made pretty good progress against our target of reductions of $1 billion. The reductions are spread throughout the company with the majority of the operating business units and it also includes satellite projects the exploration projects, our IP systems, and our admin and marketing costs throughout the company.
The realized and remaining Tom.
Targeted cost reductions from our cost reduction program have been included in our guidance since we announced the program in October last year and are reflected in our current guidance as well.
Turning to our financial position on Slide 16, we have a strong financial position with current liquidity of 6.8 billion Canadian and this includes our cash balance and the amounts available on our U.S. 5 billion of committed revolving credit facilities. You asked 3.8 billion is available on our 4 billion facility that matures.
In the fourth quarter of 2024, and our U.S. 1 billion sidecar that matures in the second quarter of 2022 is Undrawn importantly.
Importantly, both of these facilities do not have any earnings or cash flow based financial covenants I do not include a credit rating Trevor trigger and do not include a general material adverse effect boring condition. The only financial covenant is a net debt to capitalization ratio that cannot exceed 60% and at September thirtyth that ratio was too.
3%.
There are two U.S. 2.5 billion limited recourse project financing facility for QB. Two we've currently drawn about eight U S $860 million of which 240 million 341 million sorry was drawn in the third quarter.
Going forward I project funding will be from the project financing until the project reaches a specific ratio about project financing to total shareholders funding.
Techs next contributions to project capital for QB, two are not expected until the first half of 2021.
And we have no significant note maturities prior to 2030 investment grade ratings from all four of the credit rating agencies. So overall, our financial position is in good shape to allow us to continue to weather the challenges around COVID-19 and to complete the Neptune facility upgrade and the QB two project and with that I will.
Turn it back over to Don for his closing comments.
Thank you Ron and to wrap up on slide 17.
Despite the ongoing challenges or financial performance did recover strongly in Q3.
Following the second quarter that was obviously negatively impacted by cool with my team.
We believe the tech has quality operating assets and stable jurisdictions, and we're advancing a copper growth strategy that is funded and is being implemented.
We continue to progress or four key priorities to create shareholder value and position tax two decades to come.
Those are the QB two project reached 21, Neptune and our company wide CRP cost reduction program.
We believe tech is well positioned to generate shareholder value as it will adapt to the new normal with cold at 19.
And with that we would be happy to answer your questions I should say like many of you most of US run phone lines from home. So please bear with US if there is a delay what we sort of tool answer each question. So now operator over to you for questions.
Thank you please.
Please press star one at this time, if you have a question there will be a brief pause whether participants register thank you for your patience.
Your first question is from Orest Wowkodaw of Scotia Bank. Please go ahead. Your line is now open.
Hi, good morning, I'm going to I was hoping we could get a bit more color on the cost guidance in coal I find the language in the mdna fairly confusing because it on one hand, you say that you expect a onsite cough and cold to exit this year at sub 60 Bucks a ton, but then in.
The disclosure it also talks about kind of preliminary 2021 like.
Cash guidance to be in line with H, two levels, which are 60 to 64.
Can you help explain how should we should interpret that.
Yeah, I'll turn it over to turn it over.
Robert in just a minute but.
You should have the context that we haven't finished our budgeting for 2021, yet so we didn't want to put a formal numbers very specifically until weve done that and that that process is ongoing there are always a number of different factors with any operation that come that you you know throughout the course of the year. So we want to make sure that we have examined.
All those things before we put a very specific guidance, but for sure. The cost structure of the business has been materially reduced well would be plus or minus a couple of bucks going forward. We are at a level, that's a substantially lower than it was before and then the starting point going into 2021 is pretty good.
With that said Robin over to you.
You bet. Thanks.
Thanks to our suck some.
As Don said, you know, we're going through a budget process right now so there's a lot of things like whole. This in this plant maintenance outages that normally occur in Q2, and Q3 that we ought to take into account and we've also got to new water treatment facilities coming online this year with 40 herself.
To be completed in.
The end of Q1 as well as the few saturated rock Hill, which is just going online now so so those things all have to be rolled into a budget but.
I want to give you I'll give you a few important data points that will help you kind of frame of you around us.
So our strip ratio and this is a key cost driver is going to be where we are coming down to around 10 to one through this last quarter. We won't go through 2021 dot tend to one and we see ourselves over the next few years staying at 10 10 to one and again, that's an extremely important cost driver force you remember our strip ratio through.
2019 was 11.4 to one it's going to be around 11.1 to one to 2020.
So now that we've got.
You mentioned a few behind us.
We see that strip ratio stable pricing. So thats, one really important data point, Don also mentioned the closure of Cardinal River.
Our structural point of view that was our highest cost operation lower quality coal not tonnage and more actually has been.
Then created through the L. few expansion, which is now successfully executed and we're we're running at a pace of 9 billion per year at that operation and that's our lowest one of our lowest cost operations.
Hi.
In the in the business and at a higher quality coal. So so that's another factor you have to take into account because it's both cost and it gives us greater value on the product side.
The other thing that probably haven't talked much about but through this time through the Corbett time Weve maintained our mine plans and the key assets.
So weve got healthy raw coal inventories now going into 2021, and if you remember that was one of the constraints that we actually suffered through here over the last couple of years, when we were driving to produce into the high price market.
So that's behind US. So we don't have healthy Rocco inventories. Our mine plans are are very stable and thats why were able to maintain that tend to one.
And the other piece of the puzzle is we've had trouble with full clean coal inventories as well and that's three of the four operations now or are pretty much down to stable levels and that means that's no longer a constraint for us. So that's another reason that we've got a pretty strong base going into 2021.
And then I guess to lend on one last positive note. We're we're driving range 21.
That strategy through coal and we're seeing significant value right now and I kind of just to illustrate it we saw.
Record high mine productivity in Q3 above anything we've seen.
Previously so.
That will be sustained for and that's the kind of structural change that's occurring that supports a very strong cost base going into 21.
So again I don't want to get.
Aseptic numbers out at this point as we go through the budget.
But suffice to say, we're operating off a much much better cost base that we have through this two year transition phase.
But robin just on that I mean for all the reasons you cite here I guess I'm not understanding why costs are not going to remain below 60 Bucks a ton in 2021.
For Q4, I mean, one one aspect about Q4 as we don't have plant shutdowns in that quarter is typically a quarter, where that's all behind us and we on average will operate at a lower cost normally in Q4 than we do over a full year.
So quarter to quarter.
You're going to have different.
Impacts on your cost base. So that's you know that's why we're confident will one.
When do you are below $60, but that doesn't mean that every quarter forward and 21, we'll be at that same level.
Okay.
Okay. Thank you very much worse, you can assume it is certainly our objective to stable at $60. If we can.
It's at all possible, but we don't want to over at present right now until until we're finished the budgeting process.
Yeah, Okay. Thanks Todd.
I might add just a haul truck productivity comment that Robin made but we actually had a.
Really high record called truck productivity during spring run off for those of you ever been affirmed the pit and see what it will conditions are like at that time of year, that's incredible savings to be able to make so recently one is certainly helping us a lot.
Next question please.
Thank you. The next question is from Carlos de Alba of Morgan Stanley. Please go ahead.
Hi, Good morning. Thank you My question, maybe Darren you saw on Highland Valley Copper I just saw on two points there first.
Given the guidance for <unk> for the fourth quarter you see respected then that the hard for that process in Q3, and then resulted in lower output Uh huh.
So think of the past and moving well.
For work that is normalized and production should stabilize your beyond the fourth quarter guidance that was provided and also not oh well that operation.
Well you've been on production.
Quarter declined significantly year on year.
Due to particularly lower grades and what can you comment in terms of the multi.
Molly grade going forward that heightened Molly thank you.
Okay I think both of those questions can go to Dale Andres. Please.
Yeah, Thanks, Carlos just.
Just to start on the first question with hardness.
Well basically there is two factors that led us to change to the mine plan and the sequence for the year.
One due to reduced stripping around a little bit in the second quarter, where we focus more and on the on the on the valley pit.
And as well as some geotechnical constraints that limited our flexibility for for the various ore sources that we feed to the mill. So we found ourselves in a particular area and the pit that was harder than expected an area that we didnt quite have as much hardness data around and that's the reason for the for the lower guidance.
For the quarter, we do expect higher production.
M. throughput going into the end of the fourth quarter, and a and into 2021 as well so.
Well, we won't completely be out of that area. In 2021, we do have other areas that will.
Blend and mix was softer ores. So we don't anticipate the same kind of issues as Q3 going forward.
Just on Mali again, it's due to the change in mine sequence originally more wars plan from from other areas of the mine and when we change the mine sequence that directly affects the Somali production grades.
So again, we don't anticipate that.
As as low as we have had for Molly we do anticipate that strength thing going forward as well well issue updated.
Guidance for 2021 on on Q4, EPS, we finished the budgeting process.
As a as well.
Excellent. Thank you very much good luck.
Thanks.
Thank you.
The next question is from Curt Woodworth of Credit Suisse. Please go ahead.
Thank you good morning.
A question on coking coal you know curious what you're what you're seeing on on the demand side, given some of the port restrictions announced in China. It seems like if you look at the domestic price in China, it's up about $15 a ton to 200.
Yeah. It starts really in price has done a quick you turn you know given their out of the market. So it seems like the arb is extremely wide.
And potentially India is coming back to the market. So just curious your what you're seeing with respect to that and do you have any sense at a consumer level, how you're viewing coking coal inventories because obviously, it's there's no limit data for us to look at thank you.
Thank you for your question I thought this would actually be the first question of the day there.
There are some exciting developments, there, but tell turn it over to real fully.
Alright, thank skirt.
So maybe I'll start with your second question with respect to inventories.
So you will recall that two steel production was actually turned down in glass furnaces were shut down a lot quicker.
With the pandemic.
And as a result of that inventories of steelmaking coal were also brought down very quickly so.
Going into this quarter and from the second half of the second quarter of the third quarter really.
We've seen.
Blast furnaces restarted again and as those blast furnaces are you starting.
The steelmakers are trying to replenish inventories as well so orders have been trending up and that is reflected in our Q4 sales guidance.
Just a note of caution on that demand is not yet back to pre coal that level. So just just want to qualify that calls.
Now your first question on what is happening.
Yeah.
With with that.
The coal market overall.
The impact of the height seaborne import restrictions. The first thing I guess to say is there has been no official announcement on on those restrictions, but they appear to be mainly directed toward Australian coal.
And we're continuing to see China steel production run at record high levels, So you're quite right. The steelmakers requires steelmaking coal.
And we are starting to see a few.
Sales to China above original expectations and that is coincides well with.
With our operations ramping up through the quarter as well then it was just explain.
Now when we look at China per Se and.
There's three sources.
Steelmaking coal for China seaborne market is one Mongolia is another and of course domestic coal where where the majority of the coal comes from.
And so on the seaborne side.
The impact of the pandemic has reduced supply from the main supply areas, Australia, U.S., Canada in Mozambique.
Are all down and its total of around 20 million tons.
This year to date, Australia alone this down around 10 million tons August year to date, so that annualizes roughly at that excuse me.
And when we look at.
I eat smart data.
For October steel, making coal vessel loadings are actually trending down somewhere around four and a half million tonnes a month over month.
So there is like CNN back from from that report.
And another point to make is there is vessel queues.
The the China ports.
Around 6 million tons of coal is sitting in humans right now at the port.
But we do not see any Australian cargoes are waiting at Chinese ports being diverted to other ports and.
As as you mentioned with the gold prices, having come down quite a bit actually close to $30 since the beginning of October.
It's quite difficult to resell some of those cargoes as has the loss would be quite large on top of the extra cost to move the coal but there is also another part is if we look at.
December 2019.
The stats were showing that only around 120000 tons.
Were imported into China from the seaborne market at that time, However, again I Hs.
Market data shows that around 4.8 million tons of coal was off loaded in December of 2019, but did not make it into the stats on pillar 2020.
And that that could happen again, and we we are hearing.
In the market that there has been at least one Australian coking coal vessel that was discharge after that.
So how long will the band last Oh, we don't know but.
Pat Quinn Mongolia imports were banned in 2016 and 17 they lasted less than one month.
[noise] at another point to keep in mind is of course, there is inventory in China.
We're estimating that there is somewhere around 45 to 50 million tons.
Hey, coking coal and coking coal equivalent.
In the supply chain in China, right now that is equivalent to about four weeks had the rate that China is is running right now.
So they are of course consuming some of that inventory as has tightened goals.
Now the other two areas for supply of the steelmaking coal into China Mongolia.
So it's logical for Mongolia to benefit from the possible laws Australian coal imports and.
The market is expecting that won't go you guys trying to recover the loss exports during the early months of the pandemic when the China border was shot.
And [noise].
Ongoing exports were down 10 million tons September year to date.
But they also reached a new record high in September.
Just around 3.9 billion tons in the month.
And and if Mongolia can keep running at record high levels for the remaining three months of the year imports from Mongolia in 2020 would still be down somewhere around 6 million tons year over year.
Yeah. The other point is that.
Goliat imports.
Imports have never run this kind of level for three consecutive months. The previous record was in August 2019, and it it was one month.
Around 3.75 million tons.
And then Andy with domestic and China.
China domestic production is virtually flat September year to date.
Expectations are that.
China domestic production will be flat.
For the full year 2012, compared to 2019 their production in 2019 was right around 480 million tons.
And we're seeing more aggressive safety and environmental inspections ongoing in China. So.
And.
The belief in the market.
Supplied production.
Coking coal from Australia will be flat.
For the full year.
Eventually we're expecting that.
The global demand.
We will be on that on effect by those trade restrictions.
And we're also expecting that the improved sentiment and the potential disruptions related to weather and.
In Australia.
In the fourth quarter and ultimately that in early 2021.
Support increased activity in the steelmaking coal market and we are seeing that has shown.
Our guidance for Q4, so it's a long answer I know.
But there's a lot of moving parts and as I said right at the outset that.
Has been no official announcements about this there's also expectations that quotas port import quotas [noise] will reset at the beginning of 2021, but you know same thing again, the quota as I talked about a lot in the market, but there is really no official.
Announcement about that.
Real any further color on the Chinese domestic price and the spread between that and the seaborne price and whether any of that will find its way to a non us drilling seaborne supply.
Hey, Yeah. Good questions on we the current arbitrage is somewhere around $70 or.
Just under that actually.
And we're starting to see them.
[music].
New sales to China above original expectations are and.
Yes, there if if.
Steelmakers become pinched for steelmaking coal it could very well continue looking to the seaborne market for more supply from regions other than Australia, and that could very well continue to push price.
Thank you I appreciate all the granular data that's very fascinating.
And maybe a quick one for you Don.
As were kind of coming out of pocket, obviously that the base metal performance I think it has been it's been pretty remarkable or certainly within both copper and zinc.
You know with respect to portfolio construction can you give us an update on kind of projects satellite has there been any more traction there with regards to you know divestiture potential and then I guess similarly with Fort Hills as you see some.
Some additional capacity coming on is there there's been some consolidation in the energy is there any.
I'm going to any potential for.
Looking at monetizing that asset potentially ahead of when you would get back to your more.
Baseline level of you know the 200 barrels a day and 23 cost structure. Thank you.
Yes, so first on on projects satellite or you know, we continue to add value, where we can on the five different assets as you know there's still travel restrictions. So whether you wanted to do a sales process or not it would be difficult for people to say due diligence and and so on but we certainly like the way the diary.
And the market is taking and as you point out to copper zinc has performed.
Perform pretty well so the the market looks stronger than it was when we had on this after an l. sale process before so that should be a benefit we're.
We're not we're not in rush because.
We can't really do anything you'd want to do until you have much freer travel.
And than we have today, but certainly the assets are getting more valuable and at some point Oh, we will engage in some sort of a transaction to to get that for shareholders in terms of Fort Hills I think.
The partners will have to come up with a plan on on how they ramp up.
At hillside two to the next level as I said in my comments I will be looking at different market conditions and operating parameters, but you.
The objective would be to get back to full production.
And thereby lower their cost per barrel quite significantly as it goes up.
So I think you'll see.
Some version of that Suncor is the managing partner, obviously and and.
And then you'll see announcements from them.
On on that.
Due course and in terms of where it stands within the tech portfolio construction I think you called it a.
We have said for more than a year now that if we get through some of these.
Issues in the market in terms of getting it back running.
Capacity and people better visibility on the quite funds.
And it is clear that we're not going to be paid poured in tech resources, and we will visit a transaction.
Where it gets a little differently, whether it's no rights sale per cash whether its contributed into another.
Another company, taking back shares in some sort of consolidation play it's not loss unless there's some consolidation going on in the sector.
So you can assume conversations are taking place but.
I wouldn't anticipate.
In the near term.
Not until we've been able to ramp up and demonstrated with the acid can do I mean the.
Well important was first started that occurs to me that nine months. It was absolutely terrific operating performance for the start up and got to a point, where it was running about capacity and as a as they've been told 80% or projects that scope never had design capacity on this.
On got there pretty quickly and had has been pretty bottlenecks and on top of that so.
If you want to be sure we can demonstrate that value before we engage in a transaction but.
But alberta has removed the cap sooner than people expected and.
We started that the second train now so it's and correct.
Great, Thanks, very much or something.
Thank you.
The next question is from Greg Barnes of TD Securities. Please go ahead.
Thank you.
Sure Donald real do you have the ability to meet additional demand from China is a Canadian coal you said that coming to you.
Does the guidance imply that you are getting some of that demand or is the upside to that number the guidance number.
A real Oh altered.
I'll turn it over to you, but Greg as you might expect I'm, putting a lot of pressure on.
Okay.
Yes, hi, thanks, Greg so.
Yes, we we are are starting to see some of that demand and we are making a few sales into that demand.
But.
As as we look at the.
The full quarter keep in mind that yeah.
The guidance that we've provided is based on the fact that.
Overall demand.
For steelmaking coal in the world not only in China, but in the world is not back pre coal that level. So.
The guidance is we feel it is appropriate and let's keep in mind too that.
<unk> remains a risk to the recovery with the second wave that we were seeing the defendant in.
In a number of places in the world.
Getting hit pretty hard right now.
Sure.
Just want to go back to our first question on the cost of 2021 does that also include some.
I guess conservatism or <unk> volumes could be next year, and obviously you don't have any guidance out there yet.
Yes, it does look challenging into 2021 still.
That would obviously have an impact on the unit costs at volumes on backup to that 26 27.
I'll, let robyn.
Okay.
Initial production plans, but directionally, Greg we want to be going into 2021 at full production or very close to it.
Go ahead Ron.
Not much downside to that dawn that's the plan so.
<unk> said, we would go into 21 quite strong with with a healthy raw coal inventories are stable mine plan.
Record productivity is all those things set us up so if the market supports full production.
The plan, obviously is to meet that demand.
Okay.
Just a follow up question finally for you Robyn in the Mdna. It says something about regulatory changes coming shortly that will increase water management costs.
Over and above the 350 to 400 million that's planned for 2021 through 2020 full.
What is that all about.
Yeah, probably defer to Peter for that one.
Yeah. Unfortunately.
Greg there's not much more we can say on that in light of the ongoing prosecution, but we do expect some additional regulatory requirements.
In the near future and that will come.
Compliment measures that were already taking out of the Elk Valley water quality plan and to the extent that does represent a significant change in our spending plans, we we'd probably make an announcement when those are finalized.
Okay fair enough. Thank you.
Yeah.
Thank you.
The next question is from Jackie pits Delaski of BMO capital markets. Please go ahead.
Hi, Thanks, very much I have a couple of questions I guess I just wanted to ask first your dividend policy I know when you initiated the formula the dividend Formula last summer.
You'd mentioned four four last year, you would either provide an update on your dividend in November or in February and in fact, I guess it came in February last year. This year.
How about a sense of what the policy is going to be on that going forward can we expect a dividend announcement.
Next month or are you more likely to update the market in February on that.
No. It would be February there. The decision was made to wait until the year is complete before determining any supplementary capital returns we have the capital allocation model, that's published and I believe we keep it in the IR appendix a in every presentation. So you can see how the decision making close on that.
One.
If there's a cap.
Capital available for further returns above the base dividend and we.
We we have in the past surveyed shareholders to determine whether buybacks or or cash dividends are our preferred and then the board makes a decision at that stage. So.
Basically nothing has changed from loved ones.
Okay.
Thanks and to follow up on Gregs question about coal and if you do see and I know I know you mentioned that there's still some risks to the to the volumes and alike, but if you do see higher demand for coal.
Hey from China through Q4 and through 2021.
Are are there still mechanisms like like you've had in the past you push the mines to raise volumes could you bring in contract labor or something like that too.
<unk> produce more than what you normally would for a short period to take advantage of that high demand is that still possible.
Robin.
Yes, well, it's less possible than it might have been when we had six operating mines were down to.
For now so flexibility around that as you.
Incrementally less I guess than it was before.
There's there's still opportunity I think there's some latent capacity and in the one mine right now, but it's pretty marginal so.
That's why I was asking was the change to the number of mines, yeah that makes sense. Thanks, and maybe just one final question I know it's.
It's difficult for you guys to comment on on the water treatment costs some <unk>.
We've seen some press releases press reports recently about about with some more stringent water.
Water treatment protocols, whether it's through Canada or or in some of the U.S. states like Montana. This is there potentially more that teck would have to do to keep selenium levels under control beyond what you guys have already envisioned in the water treatment plant.
Sure is something you can talk to on that.
Yeah, I think we start with Peter on that one and then maybe one.
Yeah. So I think you know what we have to do over the long term is going to depend very much on the results of our.
Our current program and ongoing environmental monitoring, we're obviously committed to protecting.
Water quality.
As far down as as the Transboundary impact some of our operations, including linked to the Nusa.
And the the there there was Montana rulemaking, that's still ongoing I were primarily regulated NBC and the BC government hasn't yet.
Announced a recommended water quality objective for.
For Lake Kuiken, Nusa and they recently announced they remain committed to a science based process.
And and that BC will only commit to a standard once.
Once that that science based process has a has been fulfilled and obviously, there's ongoing consultation with the to Navajo nation counts. So we're participating in the regulatory process on on both sides of the border and from a from a good news perspective.
Annual average selenium levels in late two conducive has been stable since 2014, and we expect to see reductions in those levels as as treatment capacity comes online.
As Robin said earlier, the ultimately saturated rock those being commissioned in the.
Supporting a active water treatment facility is coming online very shortly so.
But it's difficult to say Jackie what the.
What the future holds but I think we believe that our current.
Spending estimates are reasonable subject to the.
Additional regulatory actions that Greg.
Spoke about which which may.
Require some some additional spending.
Okay. That's helpful.
And the good news Jackie is in the next three or four months, our capacity to treat waters. The boat to go up dramatically from seven and a half million liters. A day currently 247 and a half million liters. So that's the Elk few et cetera will be finished shortly in wrapping up and be finished or under.
Under budget and ahead of schedule and then the fording river active water treatment plant will be coming online.
In the next quarter, and so that will really increase the capacity for water treatment and will demonstrate a how the other plants or EPS or EPS or not plans EPS reps are coming on will continue to help them. So we're looking forward to getting that capital deployment, which makes the company better company behind us so.
So we're past nine o'clock now so I'm going to call. It close and just make a couple of final comments first I do want to see how exciting October eightth was and because those of us in the company because in the morning, We had pictures sent to us in Chile, where we sub ball mill number one being <unk>.
Almost rolled into place and that's just a significant.
Threshold of constructions through things like 'cause equipment to get in there and that afternoon, we saw the ship loader coming in from Vietnam.
Moving into the harbor sailing underneath the Lions Gate bridge and these are two big pieces of equipment into two initiatives that we have that are really going to make the company not much stronger through decades to come on the coal side. The Neptune initiative is going to lower costs by by quite a few days.
Others for decades to come on a lot of tons and just make us a stronger more competitive steelmaking coal business and of course QB. Two weren't finished is going to double on a consolidated basis copper production and change the look of our oil and this is a this is what we're working towards making the company a a much stronger company.
Commodity prices will be what it will be but certainly gambling assets, we'll we'll do much stronger and then finally I do want to say thank you to run those once again for tremendous 25 years of contribution.
Making this company was is today, we very much wish you all the best in the timeline. Thank you for that and on the service.
With that operator, we'll close.
The conference has now ended please disconnect your lines at this time, we thank you for your participation.
This conference is no longer being recorded.
She's promoted coffeehouse it does that help.
[music].
Sounds office people.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
Okay opinion, not because it had been.
The company.
She was pending.
[noise] 50, though please note that this call.
Since call has ended please disconnect your line at this time thank you.
Okay opinion.
She was pending.
[music].
[noise] 50 phone.
Note that this conference call has ended.
Disconnect. Your line at this time thank you.
Okay.
So tell me.
Yeah, she was pending.
[music].
Oh 50 phone please.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
Okay opinion, not because it had been.
The company.
She was running.
[noise] <unk> 55 no.
This conference call has ended please disconnect. Your line at this time thank you.
Okay opinion.
Tell me.
She was pending.
[music].
[noise] I Miss I don't process before.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay opinion okay.
So tell me.
Okay, she with funding.
[music].
I don't know 50 people.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
Okay opinion, not because it had been.
Okay.
I see okay, she with funding.
[noise] <unk> 50, though.
This conference call has ended please disconnect. Your line at this time thank you.
Okay.
Tell me.
She was pending.
[music].
[noise] segment profit before.
Please note that this conference call has ended.
Disconnect. Your line at this time thank you.
Okay. That's good for that.
<unk>.
Yeah, She was funding.
[music].
60 for them.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
Probably not because it had been.
The company.
She was pending.
[noise] <unk> functions.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
That's correct.
Tell me.
She was pending.
[music].
[noise] I mean, its I don't process before.
Note that this conference call has ended please.
Disconnect. Your line at this time thank you.
Okay opinion not because.
If you're telling me.