Q4 2020 Teck Resources Ltd Earnings Call
All participants please standby your meeting is ready to begin ladies and gentlemen, thank you for standing by welcome to the Techs fourth quarter 'twenty to 'twenty 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 is being recorded on Thursday February.
18th 2021, I would not like that drove up the conference call over to Fraser Phillips Senior Vice President Investor Relations and strategic analysis. Please go ahead.
Thanks, very much Eric.
And good morning, everyone. Thank you for joining us for Teck fourth quarter 2020 results conference call before we begin I would like to draw your attention to the caution regarding forward looking statements on slide two.
<unk> contains.
This presentation contains forward looking statements regarding our business. This 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 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 measures in the appendix with that I will turn the call over to Don Lindsay, our president and CEO.
Thank you.
I will begin on slide three with highlights from 2020 and Jonathan price.
Present.
He will join me in presenting our fourth quarter 'twenty. Two so we will conclude with a Q&A session, where Jonathan and I and several additional members of our senior management team would be happy to answer any questions.
So without question 'twenty 'twenty was one of the most challenging years any of US has experienced as we worked to manage through the global pandemic.
Its impacts on our people our communities and the economy.
And the Tech team I believe rose to meet that challenge and putting in place comprehensive measures to protect the health and safety and to ensure we could continue to operate responsibly and progressive strategy to grow copper price.
Off price productivity and cost structures that are existing operations.
In the fourth quarter, we delivered this from this quarterly financial results in 2020, while also outperforming the same period last year.
As of the end of the year, we achieved our target of 40% overall completion of QB, two which is expected to double our consolidated copper production by 20 points of free.
This in conjunction with our ongoing focus on reducing costs and it reached 21 per operations will ensure that we are well positioned as the rollout of vaccines and broad based economic stimulus right global economic recovery and associated commodity demand.
Our steelmaking coal.
Yeah.
Our sales reach.
On average $58 per ton in the fourth quarter and this was ahead of plan and reflects or structural or phosphate.
I would just suggest that everybody goes on.
The real question.
Okay.
We exceeded our target for our cost reduction program.
More than $1 billion in savings as of the end of 'twenty.
Well, we did recording our safest year on record.
So there's quite a performance in health and safety in 2020. It is with regret that I report that we did have a fatality at our Red dog operations.
January of 'twenty one.
Each of investing into the Ensign is underway and our condolences go out to the family and friends and the entire red.
Turning to an overview of our financial results on slide four as I.
I said earlier, we delivered the strongest quarterly financial results for 2000.
In the fourth quarter revenues were.
And adjusted EBITDA was $839 million.
Bottom line adjusted profit attributable to shareholders was $248 million, which is 47 per share or <unk> 46 cents per share basis.
Our fourth quarter profitability improved from a year ago, reflecting significant increases in <unk>.
Prices.
This was partially offset by a substantial decline in steelmaking coal price compared with the same period last year.
The average of the F O B, Australia price assessments declined from approximately $138 U S per ton.
Albert do approximately $102 per ton, but yeah.
For the full year, we generated $8 9 billion in revenue and $2 6 billion and adjusted EBITDA.
Bottom line adjusted profit attributable to shareholders 501.
Which is $1 five per share or a dollar force.
Sure.
We still.
The minutes.
Once again, if we could all go on to get that would be appreciated.
I will now run through some key updates for the quarter, starting with QB two on slide five.
Do we do we need to execute on our copper growth strategy you'd be too as most of you know is a very long life low cost operations with major expansion potential and this is expected to double our consolidated copper production by 2023.
Construction is progressing well across all areas of the project and is in line with a defined schedule that we developed last may as a result of COVID-19.
Interest expense, we had 2020, we gradually ramp back up over the year and we're now at pre COVID-19 levels in accordance with the plan.
I'm very happy to say that in spite of the significant COVID-19 challenges we haven't.
It's true.
'twenty with an overall completions for the year of 40%.
Got it.
Back to the capital estimate of five point being U S before COVID-19 impact.
And first production you would still expect the second half 2022.
The Gulfport capital cost is.
Is estimated at $3 2 billion U S and again that is before the COVID-19 impacts.
We have updated our estimate of COVID-19 impacts, which now stands at 450 to 500 million U S.
Represents an increase of around $15 million from our previous guidance range, but in line with expectations.
This includes the addition F space that we have.
Line that we have constructed to prevent transmission of COVID-19.
With 19.
And so we now have adequate cash based on site.
Approximately 200 million of these costs have been expensed.
I wanted to spend a few moments taking to some of the construction progress at <unk>.
Slide six shows an aerial view of the concentrator grinding area, which remains the critical or has the longest schedule pathway. The projects I have to say, it's going very well.
In the photo you can see where we are significantly advanced the construction with the Sag mill and two ball mills grinding line one already in place and the concrete for the line two Sag mill and ball Mills is complete and we began installation of ball mill numbers free earlier this month.
We are well advanced with steel erection in the area as you can see in the very bottom left you can just seats free of the 14th flotation tanks that had been interacted with the internal installations already underway.
Slide seven shows the starter dam area email to Kelly with facility.
We have completed the construction of the copper dam, the undertone dreams and lining of the upstream piece of the starter dam.
Now working on hauling compacting to fill the complete the starter dam, which utilizes some of the current Teck mine fleet and also several of the Cat 794 trucks of the new fleet, what can now be mission.
In the background you can see the excavation of the preparation works on the Easter button, which is nearing completion.
The pipeline right of way of platform development is over 95% complete and we continue with vending stringing welding boring and covering of the NWS pipeline mom.
<unk> now and you'll see that it shows a section of the water pipeline being lowered into place.
This is the pipeline and of course, we'll bring desalinated water from the port.
<unk>.
On slide nine you can see a photo from really are in January during one of our marine work fronts. We're piling it on the jetty from the store have to be aware that in addition to the works that are still in right. Here. We are also pipe pile driving offshore from a temporary island, which supports two additional work on for Jerry and eventually.
And eventually they'll then going together.
You'll see on slide and a key milestone with the completion and opening of our integrated operations Center in Santiago, where our team is working on operational readiness and training on the simulator and the team is carefully designed built facilities. So that the multidisciplinary operations team from.
Price is integrated planning value chain optimization process control and reliability they'll all have real time.
And tools to manage our <unk> operations and as you might expect that several jobs hundreds of jobs that had been high at the mine site at 14000 feet elevation, well now actually be in this area in Santiago.
Turning to slide 11.
Despite ongoing challenges associated with COVID-19, and thanks to the tireless efforts of our employees and contractors our operations.
Resilience and performed in line with the plan in.
2020, and without significant impacts carrying over to 2021 operating plants.
We achieved.
Unit level guidance for production.
<unk> unit costs for the second half of 2020.
As I've already noted 2020 was our safest year on record.
Our safety performance metrics were at their lowest for the full year.
With a significant reduction in incident frequency.
Safety of course is a core value for Teck and stringent COVID-19 prevention protocols remain in place at all sites at all times.
On slide 12, we continue to focus on increasing margins not volumes in our steelmaking coal business maximize cash flow from operations.
We completed.
And pre commissioning of the <unk> saturated rockville expansion in the fourth quarter on schedule and below book.
EBITDA is now underway.
Yeah, that's right.
<unk> has been achieving your complete removal of selenium nitric from up to 10 million liters of water per day since 2018.
It is part of our ongoing work to implement the Elk Valley water quality plan to maintain helps as well.
Our steelmaking coal operations <unk> expansion doubles, the water treatment facility.
Blockchain is capacity to 20 million water per day.
As I mentioned earlier, our adjusted site cash cost of sales decreased to an average of $58 per ton in the fourth quarter. So below the $60 per ton target that we had and that represents a $9 per ton decline from the third quarter and that was better than planned.
This substantial reduction in our cost of sales reflects a structural shift to a lower cost base, which was driven by five factors first our <unk> plant expansion from seven to 9 million tons of capacity. So an incremental 2 million tonnes of low cost high quality coal.
And the closure of our higher cost Cardinal River operations, which is now complete.
We have declining strip ratios, which would correlate it and as part of the plan.
We have the benefits of our cost reduction program.
Then also released 21.
And innovation.
Sales were up ended for Q4 of 2020 guidance range at $6 1 million tonnes with nearly 20 percentage of sales to Chinese customers, which benefited our fourth quarter realized price.
We are continuing to prioritize available spot volumes to China, which is expected benefit of a price really realizations in Q1 and 2021.
Importantly, steelmaking coal prices have increased significantly since the start of the year in response to improving demand in markets outside of China, and the trade flows rebalancing.
F O B, Australia pricing levels increased significantly over a three week period and are currently approximately $40 U S per ton higher than they were at the start of 2021 and CFR China prices have increased.
Above $220 U S per ton.
Since January one 2011, I do want to remind you that the applebee, Australia price has averaged around $170 on normally or $180 per ton on an inflation adjusted basis.
Our public activities at $50 per ton increase in the <unk>, Australia steelmaking coal price would increase our annualized.
By around $5 billion. So that's $40 increase that we currently have would be an increase in EBITDA of about one 2 billion.
Where it was running at before.
Moving to slide 13, net at Neptune, we are nearing completion of the upgrades and expansion to secure long term low cost and reliable supply chain for steelmaking coal with true.
Structurally leave our costs lower for decades to come and we will ensure that we can capture high prices when they are there.
We achieved 90 per cent overall comparison again.
And look forward to completing this in the next town center.
All major equipment has been installed and significant new facility.
Moreover, if loader that per.
Single car dumper.
Okay.
Perfect.
Construction completion of the remaining inbound facilities associated with the new double railcar dumper is expected around the end of the first quarter.
Significant effort has been put into maintaining that schedule, though through additional labor and multiple shifts and overtime and.
And when you take that together with an already congested site.
Which is of course, the impacts from COVID-19, as well we have seen very significant impacts on worker productivity and this has increased costs, which are expected to come in approximately 10% above our prior estimate before COVID-19 impacts of about $800 million.
Now if you go back to the beginning of the pandemic since the onset of the pandemic COVID-19 has impacted packaging project costs by an estimated an additional $80 million to $100 million.
Pandemic has caused delays and some equipment delivery, where spend is driven work re sequencing and schedule extension of certain systems as well as reduced the productivity of the construction workforce as they manage through if any COVID-19 protocols.
However, first call through the upgrade facility is still expected early in the second quarter.
On slide 14, our strong sustainability performance continues to place Teck at the top of ESG rankings by the major ratings firms.
We are the top ranked mining and metals company on both the S&P Dow Jones sustainability World Index.
And sustained analytics.
Have an a rating in the top quartile from mining on MSCI.
We were recently named to the global 100, most sustainable corporations list by corporate Knights in their own.
This month Teck was named for the fourth consecutive year to the Bloomberg gender equality index.
While these third party rankings of ESG performance are definitely encouraging we know that they will need to remain focused on continuing to build on our strong ESG track record to ensure that we meet the expectations of our ship.
Society more broadly.
I will now run through highlights of our fourth quarter by business unit, starting with copper on slide 15.
And it had a strong fourth quarter supported by an increase in copper prices copper.
Copper production in the quarter was 78100 tons with a net cash unit costs of $1 27 U S per pound so.
It's actually continued to be impacted by harder than expected ores barring a change in mine sequencing in 2020, and port and produce waste movement as well as maintenance challenges.
At the same time production at <unk> was higher than a year ago due to higher mill.
Yeah.
Significantly lower net cash unit costs than in the same period last year were driven by higher cash margins per byproducts reported by of course, our cost reduction.
And reached 21.
Now looking forward to 2021, we expect higher production and final valley and at Janina offset declines.
Good day, and a coil and at the end of the mine life.
Net cash unit costs are expected to be slightly higher.
And in 2020.
Our business unit results for the fourth quarter are summarized on slide 16, and as a reminder, <unk> zinc related financial results are reported in our copper business unit.
Red dog sales of zinc and concentrate were 149000 tonnes, which was in line.
<unk>.
Red Dog zinc production was up for 2019 due to higher mill throughput and improved recoveries.
At trail operations refined zinc and lead production was higher than the same quarter in 2019.
Back then was impacted by an electrical equipment failure and the zinc refinery.
Looking forward to 2021, we expect sales of Red dog zinc concentrate to be lower than normal in the first half of the year, particularly in <unk>.
This reflects.
In 2020 due to water constraints.
Net cash unit costs are expected to increase from 2021, due primarily again to lower production volumes in 2020.
And your prior years.
Net cash unit costs are expected to vary significantly on a quarterly basis throughout the year.
And that is why.
With our normal seasonal sales pattern.
Looking at steelmaking coal on slide 17.
Despite the challenges in 2020, the steelmaking coal business unit achieved a substantial ramp up in production sales in the fourth quarter as I mentioned earlier sales were near the top end of our guidance range and our average price reflected sales to Chinese customers increased nearly 20% of total sales.
Higher CFR channel right.
Our adjusted site cost.
Each region to.
To an average of $58 per ton in the fourth quarter, reflecting a structural shift from a lower cost.
Looking forward.
The recent severe winter weather, which you all experienced as impacted our production and logistics service providers over the past two weeks.
And if we can include these adverse weather impacts we expect sales of five eight to $6 3 million tons in the first quarter of 2021.
We will continue to prioritize available spot sales volumes to China, which is expected to result in favorable price.
Patients, we expect our realized price in Q1 2021.
Hi.
The 10 year average of realized savings, which is normally around 92% of the benchmark.
And we expect it to be higher than that.
Q1 2021.
Reasonable amount.
For the full year, we are transitioning to full production rates to meet anticipated demand.
Our adjusted site cash cost of sales.
$59.
Or dollars per ton with the first and fourth quarters near the lowering guidance range in the second and third quarters near the higher end.
Zone.
Of our.
Outages.
Costs are expected to decrease.
The $36 per $39 per ton for the full year with the completion of our Neptune upgrade enhanced network flexibility cost are expected to exceed the horrendous and the range first half a day.
During the final stages of the Neptune.
<unk> finished.
And then they will be at the lower end of range. The range in the second half <unk> is up and running.
Our energy business unit results per quarter are summarized on slide 18.
Our realized.
Prices and operating results were significantly impacted by a material decline in benchmark oil prices and the decision to reduce production compared with Q4 2019.
As previously announced the Fort Hills partners safely and efficiently restarted the second train facility and ramped up production in the fourth quarter to approximately 120000 barrels per day.
And as I noted earlier during the fourth quarter, we recorded a noncash pretax asset impairment for our interest in Fort Hills at $597 million or $438 million after tax.
Due to lower market expectations for long term Western Canada select heavy oil price.
Looking forward to 2021, we expect our share of Fort Hills annual production to increase approximately 25% from 2020 levels and our adjusted operating cost to decrease by approximately 20% compared to 2020, we expect production to be lower in cost to be higher in the first half of 2021.
And then improve in the second half as production has ramped up we will be pushing hard to get Fort Hills back to full production along with our partners.
As soon as we can.
The Fort Hills partners continue to also focus on cost discipline and on maintaining the operating and capital cost savings that were achieved in 2020.
While assessing plans to prudent increase production back to nameplate capacity.
And we are encouraged by the recent significant improvement in benchmark oil prices with West, Texas intermediate over $61 U S. So low it was off just a touch.
And spot Western Canada select close to $50 per barrel.
And with that I will pass it over to Jonathan price per some comments on our financial results.
Thanks, Tom and if I could just ask everyone again to mute that mics, if they're not already place.
So I'll start by addressing the detail of the quarter's and the year's earnings adjustments on slide 19.
In Q4, 2020, we recorded a noncash after tax impairment of $438 million on our interest in Fort Hills.
Environmental costs were 201 million after tax primarily relating to a decrease in the rates used to discount of decommissioning and restoration provisions and increased expected remediation costs.
After these and other minor adjustments bottom line adjusted profit attributable to shareholders was $248 million in the quarter, which is <unk> 47 per share or <unk> 46 per share on a diluted basis.
The changes in our cash position during the fourth quarter are on slide 20.
We generated $594 million in cash flow from operations.
We spent $930 million on sustaining and growth capital.
Excluding $493 million on QB two.
Third and $50 million on the Neptune facility upgrade.
Stripping activities were $120 million, which was lower than a year ago, primarily due to the decrease in strip ratios at our steelmaking coal operations.
We paid $55 million in expenditures on investments and other assets.
We received net proceeds of $540 million from debt in the quarter, which included a draw down of $474 million on the QB two project finance facility.
Redemption or repurchase and repayment of debt totaled $30 million.
We drove a net $174 million on a revolving credit facilities.
Lease payments totaled $39 million, and we paid $64 million in interest and finance charges and.
From $26 million in a regular price.
Quarterly base dividend.
After these and other minor items, we ended the quarter with a cash and short term investments of $450 million.
Now turning to our financial position on slide 21.
We have a strong financial position with current liquidity of $6 5 billion Canadian.
This includes our current cash and the amounts available on our U S 5 billion of committed revolving credit facilities.
Three seven U S billion is available on our U S 4 billion facility that matures in Q4, 2024, and our U S $1 billion sidecar that matures in Q2 2022 remains undrawn.
Importantly, both facilities do not have any earnings or cash flow based financial covenants do not include a credit rating trigger and do not include a general material adverse effect borrowing condition.
The only financial Covenant is a net debt to capitalization ratio that cannot exceed 60%.
And at December 31st does that ratio was 24%.
Of our U S $2 5 billion limited recourse project financing facility for QB two.
We have drawn U S $1 1 billion of which U S 368 million was in the fourth quarter.
Going forward project funding will be from the project financing facility until the project reaches a specific ratio of project financing to total shareholder funding.
Teck's next contributions to project capital for Q2 are expected in the first half of this year subject to the impact of COVID-19 on the project schedule and timing of capital spending.
We have no significant note maturities price at 2030 and investment grade credit ratings from all four credit rating agencies.
Now as Don mentioned earlier, we exceeded our target for our cost reduction program, realizing more than $1 billion in savings as of the end of 2020.
During the period from October one 2019 through to December 31st 2020 efforts from our cost reduction program reduced our planned spending at the end of June 2019 book.
By 1.065 billion of which $355 million low operating cost reductions and $710 million with capital reductions.
Of this $210 million of the total was realized in 2019 and $855 million, which realized in 2020.
As noted on our cost reduction program is now complete and reductions are included in our operating plans and guidance going forward.
Finally, as shown on the slide and as Don has mentioned, we have significant leverage to increase in copper in steelmaking coal prices.
Overall, we have a strong financial position to allow us to continue to weather the challenges around COVID-19 and to complete the Neptune facility upgrade and the <unk> project.
And with that I will pass it back to Don for closing comments.
Thanks, Jonathan I wanted to close with taking a quick look at tax prudent growth strategy and what many people are calling green metals. These days.
Teck is one of the best positioned companies globally to capitalize on the strong demand growth that we see for green metal, particularly copper, which is being driven by the global trends of decarbonization and the associated electrification.
We're already a decent size copper producer from our four existing mines, but more importantly, as shown on slide 22, we have perhaps the best one of the very best copper production production growth in the industry and pretty good jurisdictions as well.
By 2023, Teck will have doubled our consolidated copper production as we complete construction of <unk>.
This compares to average copper production growth at this 21% per our diversified mining peers, and only 11% growth per copper companies and these numbers are according to wood Mackenzie.
So teck does provide investors with strong copper growth exposure at a time when copper demand is set to expand significantly.
Moving to slide 23 that accelerated copper growth is the cornerstone of our strategy by growing our copper production, we will rebalance our portfolio.
A major green metals producer and.
And at the same time.
Yes.
It.
Makes carbon including steelmaking coal a much smaller overall proportion of our business.
Also continued to strengthen our existing high quality assets to raise 21 innovation program, which is harnessing cutting edge technologies, including artificial intelligence and automation to drive step change improvements in productivity efficiency safety and sustainability.
Everything we do is underpinned by our focus on disciplined capital allocation.
We were rigorous we will rigorously assess balanced future opportunities for growth with providing cash returns to shareholders.
And of course, we remain committed to strong environmental social and governance performance, including setting ambitious targets to reduce our carbon intensity and be carbon neutral across all our operations by 2015.
Wrapping up on slide 24. This is indeed, a very exciting time for our industry and protect their opportunities ahead in global growth from the transition to lower carbon economy drives a new green metal demand.
<unk>, how we operate both through cutting edge innovation and to improve productivity as well.
As leading ESG performance and we have a leadership team with the right mix of skills and experience to deliver on our strategy and with that we'd be happy to answer your questions and like many of you most of us non phone lines from home. So please bear with us if there's a delay while we sort out who will answer your questions. So operator back to you for questions.
Thank you. Please press star one at this time, if you have a question and the first question is from Emily Shang with Goldman Sachs. Please go ahead. Your line is open.
Good morning, everyone and thanks for taking the time today.
Maybe coming back to your last point, there on the copper price and positioning the company said Green metals as you look beyond the start up of QB, two and square what appears to be a very attractive supply demand outlook for copper.
And the very currently a very supportive commodity price environment can.
Can you, perhaps discuss what the pecking order for developing some of your longer term growth projects.
Including Zaffino and QB threat from the epic satellite projects, Darren maybe a potential pilot timeline before we could see capital being directed towards phase.
Yes, no excellent question because as you know we are rich in copper resources, we have about seven projects, but.
Not all of them will necessarily be built biotech.
<unk>.
There's a few obvious ones that we're looking at very closely everyone knows about <unk>. The fact is that <unk> is a resource has grown enormously and we're crossing the $8 billion ton threshold and headed to 10 and beyond.
At some point in time, <unk> will just be a natural deployment of capital, but whether that is sort of a 50% expansion of doubling of capacity or something larger like what.
Our chief operating officer Red Conger directly when he was at Freeport Cerro Verde in Peru.
As yet to be determined and won't be determined for some time, we're still at the.
Peter the scoping study heading to pre feasibility.
In terms of your question on timeline that one wouldn't be ready for sanction.
Until early 2025.
Note that teck itself would necessarily be putting up the initial equity capital because of our our deal with Sumitomo and then project financing capital from Teck wouldn't come up with for quite some time, maybe as long as 2027, Lisa So can do other things if we chose.
The Zap Fresnel project of course is already completed its feasibility study and the initial stages of environmental permitting.
We had started the sales process on that before Covid.
And finished the first round and very happy with the first round bids and in selected the second round per participants, but then COVID-19 hit and nobody was able to do it right and so we put the process on the shelf.
We won't be restarting that again until midyear at the earliest we want to get through the elections in Peru.
And.
Then take a look at what the world looks out but the one thing we know for sure.
Worth more today than it was pre Covid and you havent good indications of that from the different inbound calls, we get and the reason for that and so would say nicholas or or any of our other projects not only is the spot copper price that much higher but the perception of copper demand growth because of the electrification.
That's going on in the World Covid has actually accelerated de carbonization around the world. So people have shifted.
More positively in your view on copper outlook, and then the copper companies, including the mid caps they have real access to capital now and they look around for opportunities and they are very scarce and teck has a lot of them. So.
They approached us.
We'll take our time, but there is clearly things we could do there they're really exciting one to say Nicholas will.
We will be publishing the results of the pre feasibility fairly soon but suffice it to say that it is a very high IRR reasonably short construction schedule lower capital costs in both years.
$3 million range, so very manageable, we own 100% of it.
We've had inbound calls from several about this and the actual offers from people that we haven't even done any site due diligence or that sort of thing. So we know it.
Hot commodity so to speak.
But we won't be deciding again Phil.
After mid year some time.
Direction, we go on that whether we partner with someone else or.
Keep it ourselves or or something else. So that's it.
They'll give a feel for it but we do we do have.
A rich array of options to where true.
Great that's really helpful color.
One more if I may just around the latest on taxes on the met coal outlook. There I know you guys typically provide some really great color, but what are you seeing as associated with the.
Leann import ban.
China essentially.
What maybe.
Use of the latest on the global supply demand.
The seaborne met coal and how does sort of teck fit into all of that.
Okay. That's a key question that I'm sure everybody wants to hear the answer and I'm going to turn it over to rail fully in a minute, but I just wanted to finish the thought from your previous question that people may not have gleaned from my answer but.
We should note that in terms of returning capital to shareholders. When QB two finishes second half of 2020, which is just next year and we get a complete reversal in our free cash flow position is right now we're putting out a couple of billion dollars year to build it but once it's built the whole thing reverses to putting out money billions something surge coming.
Back in so it's more than $3 billion reversal.
And a good way and there won't be a project ready to build from a couple of years in between so we see a lot of free cash flow per a couple of years.
At least a couple of years from the 2023 and 2024.
2025 kind of range before any other project could be built when we true people understood that and we have our capital allocation framework and the IR presentation you can see.
The board has approved a capital to flow and at the end of that calculation a minimum of 30% is returned to shareholders through dividends or buybacks, but it could be 100 per cent of the surplus if that's what the board decided to do with that.
Net reale over to you on the key coal question.
Alright, Thanks Don.
Similarly for the question.
There is quite a bit in your question. So I'll start and talk about the band the China ban on Australia, and Cold and I'll talk about what we're seeing in demand.
And.
With quite a bit of a summary on the supply side.
As far as the band is concerned.
From what we're seeing and hearing in the market.
My customers and also our two offices in China.
There is no set date or clarity as to when the ban my day.
So in the meantime, what we are seeing and taking advantage of is.
The price premium for sales into China, If you look at our pricing today, the Fob Australia price is around $140.
Currently.
And the CFR, China price is at $220 per U S. Once you deduct ocean freight which for us is somewhere around $15 $16 currently.
That still leaves a premium above $60 per ton.
Our focus on trying to maximize sales into China to capture that benefit.
No.
We look on the demand side.
In China as a result of the bad we've seen a large increase in seaborne coking coal.
Imports in 2020.
To the second highest level on record at 49 million tons.
That compares to 60 million tons in 2013, which was the highest level and that was an increase of 8 million tons year over year.
Inventories at Chinese ports are currently very low they're sitting at somewhere around $2 4 million tonnes.
The record low was around $1 2 million in the record high was $13 8 million tonnes. So when you look at this.
With port inventories solar right now.
Around half of these tons being Australian coal.
Not clear customs due to the ban.
Port stocks are very low and the China CFR price is continuing to be high.
On February seven interest ahead of the lunar new year holiday it was sitting at somewhere around $230 U S per ton on a CFR.
CFR, China equivalent basis.
And China domestic production in 2020, only went up somewhere around 4 million tons of ore at less than 1% at 485 million tonnes.
So there is ongoing challenges to increase that production in relation to continuing safety and environmental inspections at the mines.
The other source of the.
Coal for China.
Mongolia, those exports were down 10 million tons to 24 million tonnes in 2020.
And when we look at the beginning of 2021 to date.
The number of truck movements through the border with China is still somewhere around 50% of where it was at the same time in 2020.
And as a result of this the Mongolian prices have also increased.
And again same day trial.
February seven price is tied to lunar new year, they were sitting at $218 CFR China equivalent.
And then when we look at demand in other market areas.
We're seeing demand improve.
<unk> seen that improvement start from around April last year that is.
Ex China market.
And in December the hot metal production increased for eight consecutive months.
With the primary increase is actually coming from Japan.
Japan Korea, Taiwan markets, nearly 10% increase in India was up close to 2%.
That is in response to around 80% of.
The blast furnaces that were closed at the start of the pandemic, 80% of those have already been announced.
Announced the restart of restarted that includes somewhere around 75 million tons.
The capacity that has been we started out of around 100 million tonnes.
What's shut down at the start of the pandemic.
And then lastly on the supply side.
So for seaborne supply.
We're seeing that 2020.
Yeah.
Supply was reduced somewhere around 27 million tons that includes Australia, and it was down around 15 million tons.
A U S supply somewhere around six to 8 million tons.
Canada in Mozambique down.
Three to 4 million tonnes.
And when we're looking at the mines the existing mines.
The reality is that.
What Mac is estimating the breakeven price is around $125 per ton.
For a large portion of 2020 the F.
Jeff will be Australia price was below that.
So that put a lot of pressure on mines, we've seen a number of mines shut down both in relation to economics, but also COVID-19 impact.
The combined export capacity that was shut down it was 45 million tons on an annualized basis.
We're estimating that there's currently still around 15 million tons or so that is shut down.
True.
And as we're looking into 2021.
It is early days, yet, but it's like.
Like I said at the start with <unk>.
Ongoing ban on.
Australian coal in China, It seems that there will be.
Continuing impact to Australia production.
So I'll leave it at that I trust that answers.
Fantastic that's super helpful.
Thank you. The next question is from Carlos de Alba with Morgan Stanley. Please go ahead. Your line is open.
Thank you very much everyone.
And just on QB, two if I may ask.
Are you guys planning on another update on Capex are you considering the Chilean peso, where it is today and it will be stronger than what you had baked into your estimates.
Know that you have provided a guidance on the impact on the move in the currency, but just wondering if you are planning on announcing any.
An update also.
When you consider the new impact from Covid related expenses.
Went up $50 million what are the assumptions around that when do you expect the spec of the cases.
And mek will be coming on the controlling in Chile, or what what can you tell us around your assumptions behind that number. So we can feel more comfortable with that.
The upper end of that range is probably going to price too much and then finally.
Just very quickly.
Also we can.
Can be too is it fair to assume that the contribution this year.
Q2, Capex from Teck will be around 630 to 600.
$50 million Canadian.
Thank you very much.
Okay, I think there's three questions within there I'm going to take the first one about a one week ago updating that with investments that I will turn it over to Red Conger on the second one on the.
Covid expenses.
Components from going forward.
And then either.
Rather Alex on the third one so.
When we did the different investment that we announced on April one 2020 that was a very detailed from the ground up every single contract reviewed by backfill to buildup off the total costs looking at all the contingencies in the rest of it. So that was a very very detailed exercise takes a lot of time and resources, we don't intend to do.
Another version of that as such but in terms of updating the numbers that were managing to that $5 to $6 billion. We would like to give you a more detailed update in Q2.
Actually we've got a few more months are running.
Got it.
Building building too.
Higher peak workforce is in the plan as we go towards the middle of the year. So the update we've given you today is that remains on track with what we had published on the <unk>.
First of April the definitive estimate.
<unk> the Covid costs, and then we get into the Covid cost estimate there.
Read over to you on.
Moving to Covid and how it's doing with Covid in costs.
Thanks Carlos.
We are assuming that we continue to manage the work force with all of the protocols in place that were.
This thing and executing very well right now we've been very pleased with the SMB.
Essentially no workplace crossing.
Of the virus. So far we are testing people before they come up.
Keeping them from.
From coming onto the property if people test positive with PCR testing. So that we've been very pleased with all of that at our work force is doing a great job self reporting and just staying off work.
Suspicious that day that they might be ill. So the assumptions that we have going forward.
Recall, we expanded the.
Housing.
Accommodations that we have up at site. The man camp was expanded so that we could maintain social distancing.
All of those working well.
All of the assumptions now.
Based on client experience, we are going to continue to.
The ramp up of headcount.
Space to do that work fronts develops.
And as you know with construction claims.
<unk> executed there will be more from.
Employees on site and assumptions.
The assumptions still put us in the second half of <unk>.
Next year for completion.
And Jonathan.
Jonathan I see you put your hand up to take the third question on capital.
Sure look just to say briefly I think the assumption of around $600 million Canadian.
Sure. So Q2 this year is about right. If you look at you know what we've said with respect to the.
On the project finance.
And obviously the share between ourselves and the Sumitomo.
Group, then yes about $600 million is about the right number.
Alright excellent. Thank you very much and good luck.
Thank you.
Thank you. The next question is from Jackie Presbyter Lawsky with BMO capital markets. Please go ahead.
Thank you very much I guess I'll just start by asking just a clarification following on Carlos This question.
You said in the release that you're.
Your COVID-19 related costs per cubic to our 50 million U S higher than they used to be so $4 $50 million to $500 million you'd previously given and then another number on top of that I think it was $45 million.
For GAAP expenses. So is it still another $45 million. In addition to that $4 $50 million to $500 million range or are you just sort of adding the two numbers together.
As we noted in the disclosure we've added that together. So it was just the one number.
It's a 50 is sort of what was expected by adding another quarter worth of operating with Covid and there was a.
A bit of a second or third wave, but from my call. It occurred during the period.
Thanks. Thanks, that's helpful. I was just wanted to clarify on that and then the other similar question I guess on Neptune just for clarification, because theres a few a few different numbers I think.
On the Capex, there as well so am I thinking about this right that you had.
$800 million roughly Canadian was your budget Youre staying now at 10% higher.
So lets say 80, and then another 80 to 100 million on top of that so you're kind of in the 90 $980 million range Canadian is that.
Am I, adding that up correctly is that all.
Yes, that's correct.
What we're doing with all the projects and it would be whether it's <unk> or <unk>.
Why don't you even plants or net.
Making sure that people can identify what the actual cost of Covid wise. This that's not going to be around hopefully one day with vaccines and the rest of it and then what cost measured against the <unk>.
Direct production.
Production cost would be but that's why it's broken out that way and that's helped price Waterhouse, our auditors would want us to net reported.
Okay, No that's great I, just wanted to make sure that.
Not double counting anything.
And then maybe just finally, one other question.
On the Highland Valley. It looks like your guidance has come down for 2021, and then maybe a little bit in the future as well can you maybe give us some sense of so is it still about where hardness, that's causing you problems there.
And do you see maybe the opportunity to kind of go back to your previous guidance range. If you are able to get more mat manpower onsite or worked through those partners issues.
Read I will turn it over to you or Mark decided if you like.
Yes, Thanks John.
Yeah, Jackie we've identified.
Rock type and this particular pushback hasnt been encountered for a long time. It was not included in our mineral model we've now.
Does that work.
We've done some drilling and we now have that identified in our mineral model and it's going to be with us for another year or so as we as we work through that so now well known accurately model then of course the <unk>.
Team's working every day to.
Optimize the performance given the ore types that we have blending schemes that we can do they are being very creative with.
Pending certain types two different primary crushers, which provide opportunities for us to optimize given that we now know that the ORC types that we're presented with so we'll keep you updated on that progress but for now it's it's known and map the modeled them. That's the difference. Okay. Thanks, Thanks, very much Fred and I.
Realize I've asked a number of questions already but if I could just ask one more.
Going back to the coal division the transportation cost guidance that you've given it's obviously down a little bit and that reflects the expansion at Neptune, but recognizing that the Neptune terminal isn't going to be running at full strength for the entire year.
Can you maybe give us a idea of when you expect to get its full run rate and then by extension sort of at that full run rate well, what we might expect that transportation cost might come down too going forward like 2022.
Okay, I'll turn that to either real or Ian Anderson.
Yeah, I can take that.
I can take that zone so.
Jackie Yeah, you're right we've indicated.
Lower transportation cost for 2021, and we've also said that we're expecting the first half to exceed the higher end of guidance as we're finalizing the last stages of the net upgrades.
And then the lower end of the range in the second half.
So that reduction a lot of it is associated actually too.
The increasing the net to usage.
We said also that.
First coal is expected to go through.
The new done per.
Early in Q2, and then we will be ramping up with.
Wet commissioning beyond that with Neptune expected to range.
Capacity.
The nameplate capacity is $18 5 million tonnes, but we're expecting net too too to be able to increase beyond that and we're.
We're expecting to exceed that $18 5 million tons somewhere around.
At the end of the third quarter or into the fourth quarter. This year.
And then for 2021 of course will be we'll be running net.
Two to maximize.
Somebody is utilization and reduce our logistics cost.
So it's we're modeling.
Transportation costs in 2022, it should be like around 35, $36, a ton or would that be reasonable.
Jackie it's a little bit Dave.
Day because.
There's more than just the port cost or is the real cost as well.
So we're in negotiations on that one, but we can't give you a really accurate.
Now I'll probably.
For the third quarter, when we see what the ultimate capacity will be because we are optimistic there'll be reasons.
A reasonable amount above the eight and a half plus the rail cost so theres two factors.
Factors that we don't know yet when would do.
Okay. That's I appreciate that that's it from me thanks very much everybody.
Thank you. The next question is from Timna Tanners with Bank of America. Please go ahead.
Yeah, Hey, good morning, just a couple of things I wanted to follow up on the transportation, but on the cost side. The range is between 59 and 64 and I just wanted to understand a little bit more what could drive the high end of the range and the low end just to get a little more color around that.
Robin over to you.
Yeah, you bet.
I was just going on and I'll try and give you a fair bit of context, just you can tell why they changed but probably the most important thing is that our costs are typically higher that would be towards the higher end of the range through Q2, and Q3 and Thats really because we do our annual maintenance outages through that period of time and so you'll see.
Those costs the closer to the top in Q1 Q4, typically they would be closer to the bottom end, because we'd be running pretty much flat out.
We are we have made our structural changes so the operating costs that we saw through the second half of 2020 or roughly what's giving us a sense of range from about 59% to 64. There are there are three things I do want to point out that our cost pressures that we do have to recognize this year. So.
One of them is the one time.
<unk>, which is we've got a mining.
We're mining through some old legacy waste type material and one of the operations in it we have to pay a contractor and Donald material. It's fine it's difficult to handle from that's a onetime cost that's putting a bit of pressure on our overall cost. The other one is we enjoyed some pretty low oil pricing through 2020, we expect as you see lately that that cost is likely.
Are going to be a little bit higher.
And then just ongoing water management, we're going to bring on June two of our water treatment facilities. This year. So we've got the DLP saturated rock fill which actually just started pumping water here three days ago, So pretty excited about that.
That will cost us some operating and then the fording River South.
After water treatment facility comes on mid year, So that will also start to.
To produce and generate some operating costs. So when you put those those three factors together they collectively represent about two to $3 a ton over what we would have seen.
Say in 2020.
I guess on the on the flip side Blake.
I think there's some really positive work.
Obviously being down on a res 21 side, we saw tremendous productivity improvements through last year, where we.
We're continuing to advance our strategy and we do see significant value being generated.
That value comes online in time, so it's difficult to kind of pin down when it happens. So so some of that will offset some of the cost pressures, but that hopefully gives you an idea of why we range somewhere between that $59 64 through the year.
Okay. That's helpful. Thanks, and then my only other question I wanted to highlight was just on the coal side I think you've also given guidance that about two thirds. If I recall of your coal sales had been kind of locked into contracts that are.
Tied to the Aussie price and then about one third will be available for the Chinese benchmark. If you will is that is that the right numbers is ever more complications around that thinking that I'm missing or is that roughly the way to think about the opportunity with the divergence of pricing this year.
A little less than one third but really all over to you.
Yeah. Thanks, Tom Thanks, Tim now what.
We set as our target is to sell seven 5 million tonnes into China. This year.
Of course that depends how long the bandwidth last and if there is import restrictions or other policy decisions.
So.
With what our guidance between $25, five and 26 million tonnes at <unk>.
Somewhere north of the 25% of our sales if we achieve that.
Seven 5 million ton target.
Now okay.
We're looking at a Q.
Q1 for sure.
For instance.
We're actually keep in mind that with lunar new year.
This is there's usually a bit of seasonality in Q1, but.
We're moving sales into China.
Kind of reflecting our target to maximize sales over there to capture it.
If I can premium.
<unk> said that we're expecting to realize materially higher prices day.
Our 10 year average realized price.
Okay.
The average of the three key assessment lagged by one month.
Okay. So the $7 5 million, though that that's a pretty net amount there. So there's not much flexibility there right. I mean, you have fixed contracts and and the ability to move things around is limited other than that amount.
Yes, that's correct.
We have.
Long term contracts with.
Long term highly stable reliable customers that we are delivering into and not knowing how long the China ban what lies in the.
The efforts that it took to develop those very long term relationships.
We are a long term supplier.
Reserves and resources for decades to come.
So we need to.
Balance.
Our sales book to take full advantage, but not only want to pinpoint I mean this is also looking at.
Multiyear.
Got it okay. Thank you.
Oh, operator, Eric I think we've gone over time I think.
Should I hand, it back to Don for closing remarks. Thanks.
Okay. Thanks, Frazer and I just wanted to say that the team that we're all feeling pretty good about.
How the company looks right now Q2 is on track Chile is doing a great job on vaccines by the way, while we're testing everybody we will actually be vaccine on site within a week. So that's another positive for maintaining control over COVID-19 and getting good productivity Neptune will be finished you'll soon and so that structural those are costs for decades.
To come and gives us the ability to capture higher prices when they're there.
Those costs at the mine site in our coal business have come down significantly and the cost and logistics would be coming down.
Throughout the year towards the second half of this year. So that's good raised 21 is certainly having its impact we're all excited about that and the market looks pretty strong our transition.
Two more green metals as they're called.
More copper.
Reweighting the portfolio is well underway and <unk> will be starting up next year. So coming soon thanks, all for being here today and look forward to the next quarterly call in July.
I know.
Thank you. The conference has now ended please disconnect your lines at this time. Thank you for your participation.
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[music] massage.
That's about 554.
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Silver opinion, not guess that that telephone fiance tell me neat seafood pay her because she was tightening.
[music] massage on force S. FIFA. Please.
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Seafood pet opinion, not kiss the telcos, they don't sit how many seafood pick that question about scaling.
[music] may settle out from a fever. Please note that this conference.
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That's helpful accounts, they tell me.
A question about training.
[music] massage out process people.
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Okay opinion, not guess at that telephone fiance tell me any CPU pay her because she was tightening.
[music] massaging process people.
Please note that this conference call has ended please disconnect. Your line at this time I think you see from pet opinion, not kisser type helical fan also tell me any seafood kick out clause was failing let's see.
[music] message.
Such off our first fever. Please note that this conference call has ended please.
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Super pit opinion, Nutcase telco accounts.
They tell me.
A question about training.
[music] massage out process people.
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Opinion, not guess attack telephone fiance tell me knee share.
If we pay her because she was tightening.
[music] massage on force S FIFA.
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From a pet opinion, not COVID-19 type helical fan answer to how many seafood kick out clause he was feeling.
[music] message.
From a first FIFA. Please note that this conference call has ended please.
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She's opinion that skill set that helps them they tell me.
A question about training.
[music] massage on process people.
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Opinion, not get set that telephone fiance, telling me knee share.
If we pay her because she about finding net fees.
<unk>.
[music] massage on force S FIFA.
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Seafood pet opinion, not kiss the telcos, they don't sit how many seafood pick that question about scaling.
[music] someway somehow.
First off our first fever. Please note that this conference call has ended please.
Disconnect. Your line at this time thank you.
Super pit opinion, not because the telco accounts they tell me.
A question about training.
[music] massage on process people.
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Silver Bay opinion, not just set that telcos.