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 the question and answer session. The conference is being recorded on Thursday of Fred.
Barry 18th.
'twenty, one I would I like to turn the conference call over to the Fraser Phillips Senior Vice President Investor Relations and strategic analysis. Please go ahead.
Thanks, very much of 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.
This presentation contains.
This presentation contains forward looking statements regarding our business. The slide describes the assumptions underlying those statements various risks and uncertainties may cause actual results to 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 Brett.
I will begin on slide three with highlights from 2020 and the Jonathan price.
What we'll.
He will join me in presenting our fourth quarter 2000, and so we will conclude with the Q&A session, where Jonathan and I and several additional members of our senior management team would be happy answer any questions.
So without question of 'twenty 'twenty was one of the most challenging years any of US has experienced as we worked to manage through the global pandemic and its impacts on our people our communities and the economy.
And the Tech team I believe the Roes to meet that challenge and putting in place comprehensive measures to protect the health and safety.
Sure we could continue to operate responsibly and progressive strategy to grow copper price.
The off price productivity and cost structures that are existing operator.
In the fourth quarter, we delivered the strongest quarterly financial results of 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 <unk>, which is expected to double of consolidated copper production by 20 points of free.
This in conjunction with our ongoing focus on reducing costs and the reached 21 per acre.
Patients will ensure that we are well positioned as the rollout of vaccines and broad based economic stimulus right of global economic recovery and associated commodity demand.
Our steelmaking coal at the Cat.
Sales reached on average $58 per ton in the fourth quarter.
The head of plan and reflects the structural shift or upstream.
And just adjusted everybody goes on.
That's the reopening of request.
Okay.
We exceeded our target for our cost reduction program with more than $1 billion in savings as of the end of 'twenty.
Well we did.
The recording our safest year on record.
And there's quite of performance in health and safety in 2020. It is with regret that I report that we did have a fatality at our read on the operation in January of 'twenty one.
Each of the investing into the incident is underway.
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 said earlier, we delivered the strongest quarterly financial results of 'twenty.
In the fourth quarter revenues.
And adjusted EBITDA was $839 million bottom.
Bottom line adjusted profit attributable shareholders of $248 million, which is 47 per share reported <unk> per share basis.
Our fourth quarter profitability improved from the year ago.
<unk> significant increases in.
Zinc prices.
This was partially offset by a substantial decline in the 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.
<unk> two of approximately $102 per ton.
For the full year, we generated $8 9 billion in revenue of $2 6 billion and adjusted EBITDA.
Bottom line adjusted profit attributable to shareholders 500 gig on the.
Which is the dollar five per share or a dollar of corp. Other.
Sure.
The scale.
The minutes.
And 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 of 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 the schedule that we developed last may as a result of the COVID-19.
And so I suspect the 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 hit the.
It's sort of the <unk>.
The 20 with an overall completion of the year of 40%.
Correct.
Back to the capital estimate of five point the U S before COVID-19 impact.
And first production is still on spec and 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 $50 million from our previous guidance range, but in line with expectations.
This includes the addition of space that we have.
On that we have constructed to prevent the transmission of COVID-19.
And so we now have adequate cap space of on site.
Approximately 200 million of these costs have been expenses.
I want 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 of the longest schedule path, where the projects I have to say, it's going very well.
On the photo you can see where we are significantly advanced the construction with the Sag mill of two ball mills per grinding line, one already in place and the concrete for the line to Sag mill of ball Mills is complete and we began installation of ball mill number three earlier this month.
We are well advanced with the steel erection of the areas 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 escalations already underway.
Slide seven shows the starter dam area the amount to the 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 on compacting the 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 east the button, which is nearing completion.
The pipeline right of way of platform development is over 95% complete and we continue with bending stringing welding lowering of covering of the NWS pipeline of mom.
Now and Youll see that it shows the section of the water pipeline being lowered into place.
This is the pipeline the of course will bring desalinated water from the port.
<unk>.
On slide nine you can see a photo of come earlier in January during one of our marine work price, we're piling it on the Jedi from the shore.
Have to be aware of that in addition to the works that are still on right. Here. We are also pipe pile driving offshore from a temporary island, which supports sort of two additional work on for Jerry and eventually the jetty the and eventually they'll then going together.
You'll see on slide 10, a key milestone with the completion of the 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.
Comprises integrated planning value chain optimization process control and reliability they'll all have real time.
And tools to manage our TV two operations as you might expect us several jobs of hundreds of jobs that had been high at the mine site of 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.
<unk> resilience and performed in line with the plan in the two.
2020, and without significant impacts carrying over to 2021 operating plants.
We achieved them.
Unit level of guidance for production sales and 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.
The significant reduction in incident frequency.
Health and safety of course is of 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.
Steelmaking coal business maximize cash flow from operations.
Depleted.
And pre commissioning of the <unk> saturated rockville expansion in the fourth quarter on schedule and below book and.
And commodity is now underway.
The L. P. That's the craft has been achieving your complete removal of selenium of nitrate 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 health of the world.
Founder steelmaking coal operations, the <unk> expansion double of the water treatment facility.
A lot of treatment capacity to 20 million.
On a 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.
The substantial reduction in our cost of sales reflects a structural shift of 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.
The closure of our higher cost Cardinal River operations, which is now complete.
We have declining strip ratios, which you've highlighted in his part of the plan.
Of the benefits of our cost reduction program and then also raised 21 on this.
And the innovation.
Sales were up and at the 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 the price really realization 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.
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 of increased through 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, yes per ton on and the inflation adjusted basis.
Our public entities.
$50 U S per ton increase in the Fob, Australia of steelmaking coal price.
The increase our annualized.
By around $5 billion, so thats $40 of 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 the long term low cost and reliable supply chain per 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% overall completion of the deal.
And look forward to completing this in the next set of <unk>.
All major equipment has been installed and significant new facility for the NDA.
The overlap if loader back 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 the schedule, though the 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 the.
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, as the impact to packaging project costs by an estimated an additional $80 million to $100 million pandemic.
Pandemic has caused delays and some equipment delivery, where sand is driven work re sequencing and schedule extension of certain systems as well as reduced the productivity of the construction of workforce as they manage through the of any COVID-19 protocols.
However, the 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 sustain the Olympics.
Of an a rating on the top quartile from mining on the MSCI.
We were recently named to the global 100, most sustainable corporations list by corporate Knights and they're on.
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 the fourth quarter by business unit, starting with copper on slide 15.
And it had a strong towards the fourth quarter supported by an increase in copper prices copper.
Copper production of the quarter was 78100 tons with the net cash unit costs of $1 27 U S per pound so.
We've actually continued to be impacted by harder than expected ores barring a change of mine sequencing of 2020.
Port and produce waste movement as well as maintenance challenges.
At the same time production of the amps Mena was higher than the 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 of course, our cost reduction.
And reached 21.
Now looking forward to 2021.
We expect higher production and find the valley and add Davina.
Net declines the comdata coil and at the end of the mine life.
Net cash unit costs are expected to be slightly higher than 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.
Right.
Red Dog zinc production was up for 2019 due to higher mill throughput and improved recoveries.
The rail operations refined zinc and lead production was higher than the same quarter in 2019.
Back then was impacted by an electrical equipment failure on the zinc refinery.
Looking forward to 2021, we expect sales of Red dog zinc concentrate to be lower than normal on the first half of the year, particularly in the <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.
Third the prior years.
The 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 the production of <unk> sales in the fourth quarter and 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.
The prior CFR channel right.
Our adjusted site cost.
The.
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 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.
The higher end.
Of 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.
I mean $59.
Or dollars per ton with the first and fourth quarters near the lowering of guidance range in the second and third quarters near the higher end.
Zone of.
Yeah.
Outages.
Okay.
Costs are expected to decrease the spread.
The $36 of the $39 per ton for the full year with the completion of our Neptune upgrade and enhance the all network flexibility costs are expected the CET per ended.
And the range first half of the.
During the final stages of the Neptune.
The question.
Then they will be at the lower end of range. The range in the second half of our snap <unk> is up and running.
Our energy business unit results from.
Quarter are summarized on slide 18.
Our realized.
Prices in the 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 restart of the second train facility and ramped up production in the fourth quarter two of 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 of $597 million or 438 million of after tax in part 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 on 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.
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 the capacity.
And we are encouraged by the recent significant improvement in benchmark oil prices with West, Texas intermediate over $61 U S of it was off just to touch the day.
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 the ask everyone again to mute the mics, if they're not already please.
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 of after tax primarily relating to a decrease in the rates used to discount of decommissioning and restoration provisions and the 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 of <unk> 46 per share on a diluted basis.
The changes on 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.
<unk> $493 million on QB two out of one.
Third $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 of our steelmaking coal operations.
We paid $55 million on 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 on.
On $26 million in a regular price.
The quarterly base dividend.
After these and other minor items, we ended the quarter with the 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 on the amounts available on our U S 5 billion of committed revolving credit facilities.
$3 seven U S billion is available on our U S 4 billion facility that matures in Q4 2024 on on <unk>.
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 the credit rating trigger and do not include the general material adverse effect borrowing conditions.
The only financial Covenant is a net debt to capitalization ratio of 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 the 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 of 2030 on 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.
By 1.0 of six 5 billion of which $355 million or operating cost reductions of $710 million with capital reductions of.
This $210 million of the total would realize 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 on 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 the complete the Neptune facility upgrade of the <unk> project.
And with that I will pass it back to the dome 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 of capitalized 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. The more importantly, as shown on slide 22, we have perhaps the best of one of the very best copper production production growth in the industry and in pretty good jurisdictions as well.
By 2023, Teck will of double their consolidated copper production as we complete construction of <unk>.
This compares to average copper production growth of just 21% per our diversified mining peers of 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.
Growing our copper production, we will rebalance our portfolio to become a major green metals producer.
At the same time.
It is.
If the.
Makes carbon including steelmaking coal a much smaller overall proportion of our business.
We're also continuing to strengthen our existing high quality assets to raise 21 of innovation program, which is harnessing cutting edge technologies, including artificial intelligence and automation the drive step change improvements in productivity efficiency safety and sustainability.
And everything we do is underpinned by our focus on disciplined capital allocation.
We were of rigor, we will rigorously assess and balance future opportunities for growth with providing cash returns to shareholders.
And of course, we remain committed the strong environmental social and governance performance, including setting ambitious targets to reduce our carbon intensity and the carbon neutral across all of our operations by 2015.
Wrapping up on slide 24. This is indeed, a very exciting time for our industry and protect there are opportunities ahead of the global growth of the transition to lower carbon economy drives the new Green day metal demand.
The strengthening how we operate book through cutting edge innovation and to improve productivity as well.
As leading ESG performance and we have the 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 on phone lines from home. So please bear with US if there is the 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.
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 on.
Maybe coming back to your last point, there on the copper price and positioning the company.
Green metals as you look on the start up of QB, two and square what appears to be of very attractive supply demand outlook for copper.
And the very currently in various of point of commodity price environment can.
Can you, perhaps discuss what the pecking order of developing some of your longer term growth projects.
Including the off for now and can be three on from the other satellite projects Darren maybe of potential Thailand 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 by tech.
<unk>.
There's a few obvious ones that we're looking at very close to the everyone knows about <unk> three of the pack as the Cubie is the 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 directed when he was at Freeport Cerro Verde in Peru.
As of yet to be determined and won't be determined for some time, we're still at the.
Peter the scope of the study heading to pre feasibility.
In terms of the question on timeline that one wouldn't be ready for sanction probably till early 2025, I should note that teck itself would necessarily be putting up the initial equity capital that because of our our deal with Sumitomo and then project finance capital from Teck wouldn't come up with per <unk>.
Quite some time, maybe as long as 2027, Lisa So can do other things if we chose.
On 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.
<unk> finished the first round very happy with the first round bids and selected the second round of participants, but then COVID-19 hit the nobody was even of the site and so we put the.
On 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.
<unk>.
Then take a look at what the world looks out but the one thing we know for sure because it's.
Worth more today.
Was pre COVID-19 and they have a good indication 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 the review 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 the.
They approached us.
We'll take care of time, but there is clearly things we could do there the really exciting one of the Saint Nicholas.
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.
Our capital costs and they were on both of the $800 million range, So very manageable, we own 100% of it.
We've had inbound calls from several of both 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 get the siding again Phil.
The after mid year some time on.
Shall we go on that whether we partner with someone else or.
Keep it ourselves or or something else. So that's the.
That will give the feel for it but we do we do have.
A rich array of options.
<unk>.
Great. That's really helpful color and one more if I may just around the the latest on taxes on the met coal outlook. There I know you guys typically provide some really great color on that but what are you seeing as associated with.
The Australia.
Ban.
The China are essentially on an end and what maybe I got views 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. The people may not have gleaned from my answer but we.
We should note that in terms of returning capital to the shareholders.
<unk> finished the 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 reverse instead of putting out money. The 1 billion something starts coming back in so it's more than $3 billion of reversal.
On a good way and there won't be a project ready to build for a couple of years in between so we see a lot of free cash flow per a couple of years on the.
And the least of couple of years from the 2023 of 2024.
2025 kind of range before any other.
It could be built when we true people understood that and we have our capital allocation framework in the IR presentation, you can see.
The board has approved a capital the flow.
And at the end of that calculation of a minimum of 30% is returned to shareholders through dividends or buybacks, but it could be 100 per cent of the surplus of.
That's what the board decided to do with that Ralph over to you on the key coal question.
Alright, Thanks Don.
Thanks, Emily 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 sitting in the man and end up with sort of bit of a summary on the supply side.
So as far as the band is concerned the.
From what we're seeing and hearing in the market from a.
Customers and also our two offices in China.
There is no set date of our clarity as to when the ban My day.
So in the meantime, what we are seeing and taking advantage of is the price.
Ice premium for sales into China, If you look at our pricing today the EF.
<unk>, Australia price is around $140.
The currently and the CFO of China price is at $220 of U S. Once you deduct ocean freight which for US is somewhere around $15 $16. Currently that still means a premium above $60. The U S per ton.
And our focus on trying to maximize sales into China to capture the benefit.
Now.
We look on the demand side.
China as a result of the bad we've seen the large increase in seaborne coking coal.
Imports in 2020.
To the second highest level on record at 49 million tons.
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 rep.
LOE was around $1 2 million of the record high of $13 8 million tonnes. So when you look at this.
Yeah.
Port inventories solar right now and around half of these tons being Australian coal that have not cleared customs due to the ban.
Port stocks are at the very low and the China CFR price is continuing to be high.
On February seven just ahead of the lunar new year holiday it was sitting at somewhere around $230 U S per ton on the.
CFR, China of equivalent basis.
And China domestic production in 2020, only went up somewhere around 4 million tons of ore at less than 1%.
485 million per tonne.
So there is ongoing challenges to increase that production in relation to continuing the safety and environmental inspections at the mines the.
Source of the.
Coal for China.
Mongolia of those exports were down 10 million tons to two 4 million tons in 2020.
And when we look at the beginning of the 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 the Mongolian prices of also increased.
And again the same day trial.
February seven price at the start of the 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.
Seen that improvement start from around April of last year that is.
Ex China market.
And in December the hot metal production increased for eight consecutive months.
With the the primary increase is actually coming from the Japan, Korea, Taiwan markets and the only 10%.
The 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 the restart of restarted that includes somewhere around 75 million tons.
Of capacity that has been we started out of around 100 million tonnes net.
Down.
At the start of the pandemic.
And then last lastly on the supply side.
So for seaborne supply.
We're seeing that.
20 <unk>.
On.
Supply was reduced somewhere around 27 million tonnes.
That includes Australia that was down around 15 million tons.
The U S supply somewhere around six to 8 million tons of.
Canada in Mozambique down three.
The three to 4 million tonnes.
And when we're looking at the mines the existing mines the.
The reality is that.
The woodmac is estimating the breakeven price is around $125 per ton.
For a large portion of 2020 the.
F O B, Australia of price was below that.
So that put a lot of pressure on 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 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.
Okay.
And as we're looking into 2021.
It is early days, yet, but at the like I said of the start with the on.
Going back on on.
In Australia, the 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 of your line is open.
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 the Chilean peso, where it is today and it'll be the stronger than what you had baked into your estimates.
Know that you have provided a guidance on the impact on the move on the currency, but just wondering if you are planning on announcing any.
An update also.
You can see there the new impact from Covid related expenses.
One of $50 million, what are the assumptions around that when do you expect the spec of the cases or the.
If the NAMIC will be coming on the controlling in Chile, or what what can you tell us around your assumptions behind the number so we can feel more comfortable on that.
The upper end of that range is probably going to reach too much and then finally.
Just very quickly.
Also you can be it.
Can be too is it fair to assume the the contribution this year.
The Q2 Capex from Teck will be around 630 to 650 million of Canadian Thank you very much.
Okay, I think theres the three questions within there I'm going to take the first one of the vote. When we'd go updating the investment and then I'll turn it over to Red Conger on the second one on the Covid.
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 of that was a very detailed from the ground up every single contract reviewed by back to al to buildup of the total costs looking at all of the contingencies in the rest of it. So that was a very very detailed exercise. It takes a lot of time 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 five 6 billion. We would like to give you a more detailed update in Q2.
We've got a few more months of running.
At the.
Building building too.
The higher peak of workforce is in the plan as we go towards the middle of the year. So the update we gave you today is that it remains on track with what we had published on the <unk>.
First of April of the definitive estimate.
Alluding the Covid costs and then we go to any of the Covid cost estimate there.
Read over to you on on the UV.
You'd be to Covid and how it's doing with COVID-19 in costs.
Thanks Carlos.
We are assuming that the we continue to manage the workforce with all of the protocols in place that were.
Practicing and executing very well right now we've been very pleased with the.
Essentially no workplace crossing of.
Of the virus. So far we are testing people before they come up.
Keeping them from from.
Coming out of the property of people test positive with PCR testing. So the we've been very pleased with all of that and our work force is doing a great job self reporting and just staying off work.
The reason suspicious that day that they might be ill. So the assumptions that we have going forward as you may recall, we expanded the.
The housing of.
Accommodations that we have of the sides of the man camp was expanded so that we could maintain social distancing.
All of this is working well.
All of the assumptions now.
All of based on client experience, we are going to continue to ramp.
The ramp up of headcount.
Space to do that work fronts develops.
And as you know the construction plans.
The executed there will be more on.
Employees on site and in the.
The <unk> still put us on the second half of <unk>.
The next year for completion.
And.
Jonathan I see you put your hand up to take the third question on capital.
Sure look just to say briefly I think the.
The assumption of around $600 million of slow Canadian Teck share. The QB. Two this year is about right. If you look at what we've said with respect to the.
The project finance.
The facility 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 on 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 released the your.
Covid related costs per cubic to our 50 million U S higher than they used to be so far of $50 million to $500 million you'd previously given.
Another number on top of the other thing was $45 million.
For cash expenses. So is it still another $45 million. In addition to that four of $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 the together so it was just the one number on it.
Chris of 50 is sort of what was expected by adding another quarter worth of operating with the Covid and there was the.
On a bit of a second or third wavelength of my call. It occurred during the period.
Thanks.
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.
Am I thinking about this right that you had.
$800 million roughly Canadian was your budget you are saying now it's 10% higher.
So lets say 80, and then another $80 million to $100 million on top of that so you're kind of in the 960, the $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 of the projects and it would be whether it's <unk> on.
Water treatment 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 the cost measured against the actual direct.
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 of net reported.
Okay. No that's great I, just wanted to make sure that I'm on.
No of double counting anything of it.
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. Okay can you maybe give us. Some census, so is it still the hardness, that's causing you problems there.
And do you see maybe the opportunity to kind of go back to your previous guidance range of if you are able to get more mat manpower on site or worked through those partners tissues.
Read I will turn it over to you or decided if you like.
Yes, Thanks John.
Yes Jackie.
Identified.
Rock type that in this particular pushback of Hasnt been encountered for a long time. It was not included in our mineral model we've now.
Done that work we've mapped it we've done some drilling and we now have it 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 sort of well known accurately model then of course, the the team's working every day to.
Optimize the.
Performance given the work types that we have blending schemes that we can do they are being very creative with.
Pending certain types of different primary crushers, which provide opportunities for us to optimize given the we don't know the the ore 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 model then that's the difference okay. Thanks, Thanks very much Fred.
Realized of the 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 of 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 the idea of when you expect to get its full run rate and then by extension sort of at the full run rate well, what we might expect that transportation cost might come down too going forward like 2022.
Yeah.
Okay, I'll turn that to either real or Ian Anderson.
Yeah, I can take that.
I can take that down so Jackie.
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 the last stages of the Neptune upgrade.
And then the the lower end of the range in the second half.
So the debt reduction the lot of it to the associated actually too.
The increasing the net to usage.
We said also that.
First coal is expected to go through the.
On the new dumper.
Early in Q2, and then we will be ramping up with.
Wet commissioning beyond that with Neptune expected to range.
The capacity.
On the nameplate capacity is $18 5 million tons, but we're expecting net too too to be able to increase beyond that and where.
We're expecting to exceed that $18 5 million tons somewhere around the the <unk>.
End of the third quarter or into the fourth quarter. This year.
And then for 2021 of course will be will be running.
Net too.
To maximize utilization and reduce our logistics cost.
So it's we're modeling.
The transportation costs in 2022, it should be like around 35 $36 of timing would that be reasonable.
Jackie it's a little bit.
Dave because.
There's more than just the port cost or is the real cost as well.
The on negotiations on that one, but we can't give you a really accurate.
Now probably the third quarter, when we see what the ultimate capacity will be because we are optimistic that it'll be quite a reasonable amount of above the five plus the rail cost. So there's two factors that we don't know yet when.
When we do that.
Okay. That's I appreciate that that's it from me thanks very much everybody.
Thank you the <unk>.
Question is from Timna Tanners with Bank of America. Please go ahead.
Yeah, Hey, good morning, just wanted a couple of things I wanted to follow up on on the.
Not the transportation, but on the coal cost side of the range is between 59 and 64 and I just wanted to understand a little bit more of what could drive the high end of the range on the low end just to get a little more color around that.
Robin over to you.
Yes, you bet.
I was just going on and I'll try and give you a fair bit of context, you can tell why they change, but probably the most important thing is that our costs are typically higher than the toward 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 youll see those costs the closer to the <unk>.
In Q1, Q4, typically they would be closer to the bottom end, because we'd be running pretty much flat out.
We obviously have major structural changes so the operating costs that we saw through the second half of 2020 of roughly.
Giving us a sense of range of 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 the the one time.
Cost, which is we've got on mining.
The remaining through some of 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 some of 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, and we expect as you see lately that that causes.
We're 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 the LP saturated rock fill which actually just started pumping water here three days ago, So pretty excited about that.
That will cost us some of operating and then the fording River South.
After the water treatment facility comes on mid year. So that will also start to 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.
In 2020.
I guess on the on the flip side I think there's some really positive work.
Obviously being done on the rate of 21 side, we saw tremendous productivity improvements through last year, where.
We're we're continuing to advance on 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 some of that will offset some of the cost pressures, but that hopefully gives you an idea of of why we range somewhere between the $59 64 through the year.
Okay. That's helpful. Thanks, and then my only other question on <unk>.
Wanted to highlight was just on the coal side I think you've also given guidance that about two thirds, if I would call of your of 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 of that is that the right numbers.
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.
The little less than one third but real over to you.
Yeah. Thanks, Tom Thanks, Tim Yeah, what we said is our target is to sell of seven 5 million tonnes into China. This year kind of.
Of course that depends how long the bandwidth of last and if there is import restrictions or other policy decisions. So.
With what our guidance between $25 five of 26 million tonnes, it's somewhere north of the 25% of our sales.
If we achieve that that 7 million.
On target.
Now okay.
We're looking at a Q1 for free.
Incidence.
We're actually keep in mind that with lunar new year.
This is there is 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 the cigarettes.
It can premium and we've said that we're expecting to realize materially higher prices there.
Our 10 year average realized price versus.
Okay.
The average of the three key assessments 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 are out of it is limited other than that amount.
Yes, that's correct.
We have.
The long term contracts with.
Long term highly stable and reliable customers that we are delivering into and not knowing how long the China ban what last and the.
The the efforts that it took to develop those very long term relationships.
We are of a long term supplier.
Reserves and resources for decades to come.
So we need we need to.
Balance.
Our sales book to take full.
Advantage, but not only on the pinpoint I mean, the this is also looking at.
Multiyear.
Got it okay. Thank you.
Oh, operator, Eric I think we've gone over time, I think we should 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 you know QB two 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 per maintaining control over COVID-19 and getting good productivity Neptune will be finished you'll soon and so that structurally the owners or cost per deck.
Sales to come and gives us the ability to capture higher prices when they're there.
The cost at the mine site in our coal business have come down significantly and the cost and logistics will be coming down.
Throughout the year towards the second half of this year.
That's good raised 21 is certainly having its impact we're all excited about that and the market looks pretty strong our transition.
The two more of green metals as they're called the more more copper.
Re weighting of 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 don't know.
Thank you. The conference has now ended please disconnect your lines at this time. Thank you for your participation.
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First off on first FIFA. Please note that this conference call has ended please.
Disconnect. Your line of at this time thank you.
She's the Pip opinion, not because the type of person say tell me the silver.
A question of what's pending the thing.
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Silver Bay of plenty enough just set the telephone fiance, telling me in the seafood pay of her because she about finding net fees.
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Please note that this conference call has ended please disconnect. Your lines at this time I think you see from pet opinion, not kiss the type of I'll call. It how many seafood pick that question about filling the seat.
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But typically not because of the telcos that don't fit telling me the super pit that.
The question about training.
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Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay opinion, not because of the telephone fan on let's say tell me knee share.
We pay her because she was finding the fees.
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See from pet opinion, not kiss the type of helical fan of I'll say tell me the seafood pick that question about filling the seat.
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That's helpful of Alphatec.
On me.
A question about training.
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Please note that this conference call has ended please disconnect your lines at this time. Thank you.
If a person the enough because of the type of alcohol sales. They tell me the seafood pick that question about scaling.
[music] the message out from the first fever.
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Typically not because of the telcos they tell me.
A question about training.
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Please note that this conference call has ended the please disconnect your lines at this time. Thank you.
Opinion, not because of the telephone fiance tell me the seafood pay on cause she about finding the fee.
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Please note that this conference call has ended please disconnect. Your lines at this time I think you see from pet opinion, not the kiss the type of I'll call. It how many seafood pick that question about filling the seat.
[music] the message.
Starting off on fifth fever. Please note that this conference call has ended please.
Disconnect. Your line at this time thank you.
Typically the enough because the type of telcos that don't fit telling me.
A question about training.
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Please note that this conference call has ended please disconnect your lines at this time. Thank you.
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The pet opinion, not kiss the type of helical fan of I'll say tell me the seafood kick out clause of trailing.
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She's the Pip opinion, that's because the type of help of healthy telling me.
A question about training.
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Silver opinion, not guess that the telephone fan on let's say tell me the seafood pay of her because she was tightening net fees.
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[music] the message.
First off on first FIFA. Please note that this conference call has ended please.
Disconnect. Your line of at this time thank you.
Some of the Pip Union not because the type of helpful of healthy tell me the silver.
A question about training.