Q3 2021 Teck Resources Ltd Earnings Call
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This conference is being recorded so it's closer to home that don't go as you see.
All participants please standby your meeting is ready to begin.
Ladies and gentlemen, thank you for standing by welcome to Teck's third quarter 2021 earnings release Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session. This conference call is being recorded on Wednesday October 27th 2021.
I would now like to turn the conference call over to Fraser Phillips Senior Vice President Investor Relations and strategic analysis. Please go ahead.
Thanks, very much Laurie.
Everyone and thank you for joining us for Teck's third quarter 2021 results conference call.
Before we begin I would like to draw your attention to slide two this call contains forward looking statements regarding our business.
It describes the assumptions underlying those statements various risks and uncertainties may cause actual results to vary.
It does not assume any obligation to update any forward looking statements I would 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.
Thanks, very much Fraser and good morning, everyone I'll begin with third quarter highlights on slide three followed by Jonathan Pryce, Our CFO, who will provide additional color on our financial results. Then we will conclude today's session with the Q&A.
Jonathan and additional members of our senior management team will join me in answering your questions.
So.
I'm pleased to report that our solid operational performance.
Bind with an extremely favorable commodity price environment third quarter resulted in a record adjusted EBITDA and record adjusted profit.
Third quarter adjusted EBITDA to $1 billion is more than triple the same period last year.
And note that September alone contributed to approximately half of the total.
Strong realized pricing continued across all of our principal products, particularly steelmaking coal, but also copper zinc and energy.
And if you look at the pricing we've experienced in October it's.
Higher than it was in September right across the board so it'd be a pretty good indication how we did in the month of October.
Despite the continued impact of COVID-19, as well as the impact of forest fires in British Columbia in July Q3 production was in line with plan across our business units and our annual production guidance remains unchanged.
However, as we previously mentioned.
We are seeing inflationary cost pressures, notably in the price of diesel supplies and labor costs.
Not unlike our peers these cost increases impacted third quarter operating results across our businesses and we are expecting upward pressure on our cash unit costs through the balance of the year and into 2022.
Despite this we have not changed our full year cash unit cost guidance, as we anticipate higher utilization and efficiency gains to partially offset some of the current pressures.
Looking ahead, we are well positioned to capture the significant good cash flow generation opportunities arising from current steelmaking coal prices in Q4 and into 2022.
During the third quarter, we continued to advance our priority projects.
Overall progress on our flagship QB two copper growth project has surpassed the two thirds mark as our team continued to aggressively manage their conditions, resulting from COVID-19.
Vaccination rates among the project workforce are high and more recently, we have been able to ramp up staffing levels with a focus on delivering on the projects key milestones.
We continue to expect first production at QB two in the second half of next year.
At QB two is expected to double our consolidated copper production by 2023.
We are though experiencing some upward cost pressures and we expect to issue updated capital cost guidance on the project in February with our Q4 results and I'll come back to this in a moment.
You see more of the latest progress on QB two I encourage you to watch a video of the project and view our latest quarterly photo gallery, which is in the investors section of our website and as a reminder, we are hosting a virtual site visit at QB. Two on November 1st. So please mark the date on your calendar and we hope you will join us.
Our Neptune facility continues to trap up during the third quarter.
Absolutely demonstrating the ability to perform at design capacity and just a couple of the Gainesville would actually loaded 91000 tons, a new all time record.
But don't get your calculators, you can't annualize that number but suffice it to say is it's going very well.
The facility is expected to achieve a run rate at its design capacity of 18000 tons or higher in the fourth quarter.
Our steelmaking coal supply chain transformation is contributing significantly improved optionality and reliability and with record high prices for steelmaking coal. It is an excellent time to be in charge of your own destiny.
Last week, we announced the conversion of our U S $4 billion committed credit facility into a sustainability linked credit facility to support our sustainability goals and to that end. We're also very proud to see our efforts recognized with an upgrade in our ESG rating from MSCI to double a.
From single, a which puts tech in the top decile of our sector in the head.
Most of our diversified competitors.
We were also named to the Forbes world's best employers list for the second year in a row and heading into the fourth quarter.
We are focused on continuing to optimize sales and production to capitalize on the high commodity prices and advancing our priority QB two copper project.
Turning to an overview of our third quarter 2021 financial results on slide four.
Our revenues improved significantly from a year ago, driven by increases in the prices of all of our principal products, particularly steelmaking coal.
Adjusted EBITDA as I mentioned earlier more than tripled from the same period last year.
Profit attributable to shareholders was $816 million.
Or dollars 53 per share and adjusted profit attributable to shareholders was $1 billion or $1 91 per share, which is more than seven times higher than the same period last year.
Slide five provides a snapshot of third quarter performance across their business units compared to last year.
Notwithstanding the effects of wildfires on our operations in B C.
Minor unplanned maintenance at Red dog.
Solid operational performance and high realized prices drove meaningful gross profit increases across the board in each of our business units and Jonathan will review our financial results in more detail in just a few minutes.
Turning to copper on slide six.
EBITDA for our copper business unit increased by 95% compared to the same period last year, driven primarily by the 43% increase in our realized price of $4 28 U S per pound.
Production was in line with plan. Despite the temporary suspension of our Harmon Valley operations in mid August due to wildfires.
Net cash unit costs reflect higher cash margins for byproducts due to substantially higher zinc prices.
We have maintained our annual production and operating cost guidance and copper despite upward pressure on cash unit costs.
Primarily due to higher consumable consumable costs, a stronger Canadian dollar and profit based payments at am to midnight.
Moving on to slide seven.
As I mentioned earlier, we continued to advance construction at QB two with overall progress now past the two thirds mark.
We have maintained our extensive COVID-19 protocols in order to protect the health and safety of our workers and our communities.
Working closely with the Chilean government, we successfully rolled out a vaccination campaign.
A portion of workers, who have been fully vaccinated.
Now exceeds 88%.
And in fact, 93% of workers have been administered at least one dose of the vaccine. So that's good.
Prescreening and onsite testing have been key to our success in managing case rates at site.
Actively advancing construction, but it's not over.
As COVID-19 cases, and Chile declined in the third quarter, we've continued to ramp up towards peak workforce levels to maximize camp occupancy, where we are now able to house three employees to a room.
Chile has cited our efforts as a model for managing workplace health and safety. During these unprecedented times and backfill in the case of QB two as one of their best performing projects worldwide for managing the spread of the virus.
Now we are reviewing our capital cost guidance and an updated cost estimate will be provided with our Q4 2021 results in February.
We are now seeing some COVID-19 related pressures continue.
Contingency.
And on our capital estimate of $5. Two 6 billion that we published on April one 2020.
We are continuing to review and manage these costs and expected an increase to our capital estimate of up to 5% could be required for additional contingency.
COVID-19 related capital costs are also seeing ongoing cost pressures as a result of continued absenteeism and labor inefficiencies.
We are managing these costs and have put in place a variety of mitigation measures to counter that many adverse effects associated with construction in this environment many of which are aimed at attracting talent employee retention and minimizing absenteeism.
The final extensive COVID-19 related impacts on the project schedule and budget will depend on our ability to establish and maintain adequate workforce levels and productivity.
Looking ahead, we remain focused on delivering two key project milestones and positioning for successful start up we continue to expect first production in the second half of 2022.
The critical path is the grinding circuit, which remains on track.
And in addition, our teams remain focused on the important port to current infrastructure, which will provide water for the concentrator and the photo on the right shows the truck shop, which is one of the really components being commissioned along with the main electrical loop to support pre stripping activities.
Other systems, such as the power Substations are also nearing completion to support overall commissioning activities.
Our operations in commission teams are working in close collaboration with our construction and corporate groups to ensure a successful start up and to drive value through linking people process and workplace design.
Our priority is to ensure a seamless transition to operations with our leadership team already in place as we wrap up the operations workforce.
Slide eight shows our progress in the port onshore area, including the concentrate storage building the filter plant and water pump station in the background and the desalination plant in the foreground.
Slide nine provides an overall view of the steel work for the grinding building in the background and the pebble crusher in the foreground.
The grinding lines currently remains a critical are longest path for the project and we continue to make significant progress here.
Slide 10 shows the upstream side of the starter dam at the tailings management facility, where we have raised the dam elevation significantly in the quarter and we continue to utilize the tech mind fleet and some of our new fleet of Cat 790, fours and they're performing very well.
We continue to be pleased with the progress, we're making and are excited about building on our construction successive state with a focus on delivering to the projects' key milestones we.
We look forward to sharing more of our progress with you at our QB two virtual site tour on November 1st.
Next we've summarized here zinc business unit results for the third quarter on slide 11, and as a reminder, <unk> zinc related financial results are reported in our copper business unit.
EBITDA generated from our zinc business increased by 24% compared to last year, primarily due to higher prices, partly offset by higher royalty costs related to increased red dog profitability.
At Red dog zinc in concentrate sales of 162000 tons was above our guidance range. Despite a late start to the shipping season due to weather and ice conditions and a record weather related shipping delays in July and August.
Lower Red dog zinc in concentrate production was primarily due to lower mill throughput and recoveries as a result of some unplanned maintenance, which is now behind us.
As previously announced refined zinc production at our trail operations reflects a temporary four day shutdown of the oxygen plant due to wildfires in August.
And looking forward, we expect to ship all of zinc concentrates from Red dog trainer current shipping season.
Assuming normal weather conditions for the next few days.
However, as a result of the late start to the season at various weather related delays a portion of our fourth quarter sales has been deferred to the first quarter.
Just a timing issue.
We expect Q4 sales of zinc and concentrate to be in the range of 140000 to 155000 tons.
Annual guidance for the zinc business unit remains unchanged.
Turning to our steelmaking coal business on slide 12.
Our steelmaking coal business unit had a strong third quarter, reflecting prices that are at unprecedented levels and a 16% increase in sales volumes relative to Q3 last year.
Sales were $5 9 million tonnes in line with guidance, including approximately $1 9 million tons of sales to customers in China that are.
That premium CFR, China prices, which increased to $402 U S per tonne from 257, you're asking the second quarter.
And we exited the third quarter at a record high of $602 U S per ton.
As I said earlier today's prices or even higher.
The remainder roughly 70% of our sales was sold based on the F O B, Australia price, which averaged $263 U S per ton compared with $137 U S. In the second quarter.
And we hit a record price above $400 per ton in late September.
Given strong commodity prices, we maximize the utilization of available processing capacity to meet additional sales opportunities into China.
While also completing a substantial proportion of our maintenance outages for the year during the quarter, so that sets us up really well for Q4.
Adjusted site cash cost of sale was $63 Canadian per tonne, which was within our guidance range as anticipated and it was $4 Canadian per tonne lower than a year ago.
Our transportation costs of $46 Canadian per tonne reflect higher vessel demurrage rail and port charges that were incurred as a result of the July rail service disruption caused by wildfires.
Okay.
Putting contracts in place to be able to ship through all three west coast ports, we had the flexibility to ops to divert some trains and vessel to Ridley terminals during the disruptions.
While this increased our transportation costs are somewhat it enabled market access for our steelmaking coal during this period.
Record high prices, so incurring these extra transportation costs to.
We continue shipping was clearly the right thing to do for the business because it was very minor amount compared to the margins per ton that we were making.
Looking forward, our fourth quarter steelmaking coal sales are expected to be $6 four to $6 8 million tonnes.
We will continue to prioritize available spot sales volumes to China.
Which is expected to result in favorable price realization, but we continue to target seven 5 million tons in sales to China in 2021 unchanged from our previous guidance.
We anticipate our 2021 production to come in at the lower end of our guidance range of 25 to 26 million tons as the wildfire impacts are not expected to be fully recoverable by year end.
As a result of inflationary pressures, including higher diesel costs.
Reliance on over time to offset increased absenteeism due to COVID-19.
As well as ongoing global supply chain constraints and disruptions, we expect to be at or slightly above the upper end of our full year adjusted cash cost of sales guidance range in the quarter.
Further due to inflationary pressures wildfire disruptions in the third quarter and increased ocean freight rates vessel to emerge in real surcharges, we expect to be at the high end or slightly above our full year transportation cost guidance ranges.
Should note that at this point, we are priced nearly two thirds of our fourth quarter sales based on F O B and C. F R China prices.
Have averaged $370 U S F O b.
And $561 U S per ton since September purchase just to repeat those numbers since September one the Aussie Jacobi price has averaged $370 U S per ton and the China's CFR prices averaged $561 U S per ton and you'll note those are substantial.
[noise] above what we averaged in the month of September.
Our upgraded Neptune facility, which is a crucial component of our steelmaking coal supply chain transformation is now ramped up.
Our equipment is performing according to or exceeding plan as a result, we're starting to see the benefit of meaningfully lower port costs with a higher percentage of sales volumes loaded at Neptune.
Well throughput was impacted by the BC wildfires in July Neptune demonstrated its ability to perform at design capacity during the second half of September as planned.
In the fourth quarter Neptune is expected to achieve a run rate at designed capacity of 18 5 million tons or higher.
Overall, our efforts to transform our steelmaking coal supply chain has and will continue to play an instrumental role in maximizing our operational reliability and market access optionality to capture strong commodity prices.
Turning to our energy business unit results for the third quarter on Slide 14, our results improved from Q3 2020, primarily due to an increase in western Canadian select prices.
However, this was partially offset by higher unit operating costs.
Production at Fort Hills increased by 20% compared to the same quarter last year, which was impacted by extremely wet weather conditions.
We have been working closely with suncor, the operator to address the operational issues reported last quarter, particularly you're dealing with the mining challenges, where we have extensive experience in.
We are seeing signs of improvement in mine productivity. Now. Unfortunately is now expected to transition to a two train operation and operate at full production rates by year end.
Our full year guidance for 2021 is unchanged and with that I'll pass it over to Johnson for some comments on our financial results.
Thanks, Don.
I'll start by addressing our third quarter earnings adjustments on slide 15 to reconcile off profit and adjusted profit attributable to shareholders.
The most significant adjustments in the quarter is $97 million in QB, two variable consideration owing to himself a former owner.
This is a derivative financial liability that arose from our 2018 acquisition of an additional 13.5% interest in QB SA through the private Chilean company.
Liabilities carried at fair value and any change in fair value is recognized on our income statement.
The purchase price included additional names that may become payable in the event that average copper prices exceed U S $3 16 per pound in each of the first three years following commercial production up to a cumulative maximum of U S $100 million if commencement of commercial production. The case prior to January 20 <unk>.
First 2024.
Nominal value was attributed to the additional payments at the time of acquisition.
As of September 30th 2021 the fair value of this financial liability increased by 97 million Canadian reflecting the discounted value of the maximum consideration.
The second largest adjustment in the quarter is $49 million in environmental costs on an after tax basis.
It's primarily relates to a decrease in the rates used to discount our decommissioning and restoration provisions for closed operations.
Share based compensation expense was $28 million in the quarter on commodity derivatives were $10 million.
After these and other minor adjustments bottom line adjusted profit attributable to shareholders was $1 billion in the quarter or $1.88 per share on an adjusted diluted basis.
Excluded from our earnings adjustments our results include gains and losses due to changes in market prices in respect to pricing adjustments, which resulted in $73 million of after tax gains in the third quarter or <unk> 14 per share.
Notably the large increase in steelmaking coal prices from Q2 to Q3 resulted in pricing adjustments of approximately $162 million in the third quarter of $103 million on an after tax basis.
Now the changes to our cash position during the third quarter are illustrated on slide slide 16.
We generated strong cash flow from operations of $1 $5 billion in the quarter, an increase of more than $1 1 billion compared to the same period last year, reflecting substantially higher commodity prices most significantly in steelmaking coal.
We invested $1 billion on sustaining and growth capital, including $676 million on the QB two project $48 million on the Neptune facility upgrade and $247 million in sustaining capital.
Capitalized stripping was $172 million, primarily related to the advancement of pits for future production at our steelmaking coal operations.
This was higher than a year ago, primarily due to decreased stripping activities in Q3, 'twenty 'twenty as a result of COVID-19 restrictions.
Debt proceeds on our U S $2 5 billion project financing facility for QB, two with $224 million in the quarter. We also repaid a net $360 million on our revolving credit facility.
In addition, we paid $120 million in interest and finance charges and $27 million with respect to our regular quarterly base dividend of five cents per share income.
Including these and other minor items, we ended the quarter with cash and short term investments of $390 million.
Now turning to slide 17, we are very pleased to maintain a strong financial position with current liquidity of Canadian $5 4 billion, including cash and the amounts available on our committed revolving credit facilities.
We ended Q3 with U S 219 million drawn on our U S 4 billion committed credit facility and with strong commodity prices, we have since reduced this balance to zero.
As Don noted at the beginning last week, we converted all U S 4 billion committed credit facility into a sustainability linked facility in support of Tech sustainability strategy goals and extended its maturity to October 2026. It is currently undrawn.
The sustainability linked facility involves pricing adjustments that are aligned with our sustainability performance over the term of the facility.
I should buy greenhouse gas intensity percentage of women in texts workforce and safety.
This further underlines the integration of sustainability performance into everything we do now including financing.
At the same time, we canceled all U S 1 billion credit facility maturing in June 2022.
As a reminder, the sidecar facility was established in June 2020 in the initial months of COVID-19.
Conditions and commodity prices have improved significantly since then and consistent with our confidence in the outlook. It is no longer needed.
As of September 30th we have drawn U S 2 billion from our U S. $2 5 billion limited recourse project financing facility for the QB, two project of which U S $178 million withdrawn in the third quarter.
We have no significant maturities prior to 2030, and we have investment grade credit ratings from all four credit rating agencies.
And then finally, a brief reminder, on our capital allocation framework on slide 18.
In the event, our cash flow from operations exceeds all sustaining and committed growth capital a base dividend payments and any cash required to maintain our capital structure, we generate what we refer to as available cash flow.
The first 30% if any available cash flow is returned to shareholders and the balance of 70% can also be returned to shareholders or otherwise used for investments in growth or debt reduction or a combination of these.
The board considers supplemental shareholder distributions each February when the full results of the year.
And with that I will pass it back to Don for closing comments.
Thanks, Jonathan.
So in summary, this is a very exciting time for our industry and protect in particular, there are opportunities ahead as global growth and the transition to a lower carbon economy drive new copper metal demand and in the near term given the current commodity outlook, we have the ability to generate significant EBITDA and free cash.
Well.
Looking ahead, we have an industry, leading copper growth profile and a very attractive copper pipeline.
We're strengthening how we operate both through cutting edge innovation to improve productivity as well as our leading ESG performance and we have a leadership team with the right mix of skills and experience to deliver on our strategy. So with that we would be happy to answer your questions and like many of you. Most of US are on phone lines from home. So please bear with us if there's a delay.
While we sort out who will answer your question. Thank.
Thank you and operator over to you for the questions.
Thank you we will now please press star one at this time if you have a question there will be a brief pause while parts Christmas participants register for questions. Thank you for your patience and the first question is from Oreste, while Codell from Scotiabank. Please go ahead.
Hi, Good morning in your release, you disclosed that there's several challenges related to the port and tailings facility at QB. Two can you. Please give us more detail on on what the issues are and whether you see any potential impacts of the schedule from these issues or is it strictly a capex issue.
And can you catch up here.
Okay, well first congratulations tourist you do it again.
First up so I'll turn this question over to Red Conger.
Yeah.
Fred you might be on mute.
Actually I do apologize his line has disconnected.
Okay. So what we're going to do is track red down because I'd like you to hear it a street from.
The man in charge and and we'll come back to your question and operator, if we could go then to the next question well, a I think a fraser's team will track down red.
Perfect on Mr. Walker, though you'll have to re queue up one saw I clear you from the queue right now please.
Yeah.
So the next question is from Greg Barnes from TD Securities. Please go ahead.
Thank you Tom can you give us some color around the inflation pressures you are seeing into 2022 other companies or other mining companies are saying it's in the ranges.
It's 5% to 7%.
Yes so.
Two or three comments and I'll turn it over to Jonathan and can even have robin there should that funded directly from the operations, giving you. Some more insights. So first of all it's not what we would call structural inflation, it's more broad based inflation from different input items, such as diesel and suppliers things related to supply.
<unk> problems that we all we all hear about it and it's not.
A order of magnitude.
Not in the range that you'll be aware of some of our major competitors and coal for example, calling for 20% increases.
It's something that in total it takes US you know, perhaps two to $3 a ton in coal higher than where we were so the percent the percentage would be.
And the 5% or less right now.
I don't know, how it's going to evolve obviously, there are some supply disruptions in the global economy, all over the place and so we want to make sure that we flagged that I think you all know it anyway.
But yes, we're getting hit with it too, but it's probably more moderate than some of our major competitors.
Jonathan any additional insight from you and then let's give a Rob mentioned that it's a chance to give more color Jonathan.
Yeah. Thanks, Don.
If we look at some of the underlying indices here and particularly the changes from 2020 flowing into 2021.
You look at crude up by 64% gas up 59% still up 55% now this flows through a whole range of categories of spend including diesel explosives grinding media and mobile equipment plot, you know tires chemicals et cetera et cetera.
You know there's also of course, some pressure coming through a whole range of other oh, the small consumables right across the business and one of the things that's impacting cost there is supply changes the cost of transportation and the way in which you know these are these cost pressures are playing through into the economy.
So the sort of range you know the.
Don just quoted.
Is consistent with what we're seeing in the business right. Now we do expect you know that pressure as we've we've signaled in the release to be maintained into 'twenty to 'twenty two.
But we don't see these as you know necessarily structural changes to the underlying cost of the business. They are driven by by movements in these indices and therefore to a certain extent some of this pressure will be transitory.
I know as Don said I don't know if Robyn Oceanside will not provide any particular business context.
Okay.
Maybe it's robin.
Go ahead Rob.
I, just I was going to add that.
There's no question that some of the costs are inflationary, but I think one of the things to recognize is we've had considerable success with some of our race rose 21 initiatives are they produce they reduce costs in many cases and increase their productivity, particularly in our process plants and the mine. So we're actually.
We're actually seeing some some offset to that pressure as well so you've got to kind of look at both sides of that equation.
Yes.
She is asking for that.
The majority of that.
That translates really is the energy complex with gas and and and.
Crude and steel and of course, we enjoy some of the margins from that as well in terms of the.
The amount of margin that has gone up and it's sort of all of our products as well as Robin said.
And copper as Don mentioned earlier in spite of the pressures we have been able to maintain our guidance both in copper and zinc to be within our previous guidance as we worked through efficiency gains and find new ways.
To reduce consumption when when pricing is so high and we've been fairly successful in that.
Okay.
Oh, Yeah, sorry go ahead.
It gives you some color and I had mentioned at the beginning that it isn't structural but what is structural is that we're getting the benefits from the investments we've made in the ex U.
Pension to 9 million tonnes in the Neptune Port, we're just going to the quarter, we'll see lower court costs, so actually cash costs in Canadian dollars record dollars lower this quarter than a year ago. So on balance so it getting some control from those investments and they raised 21 experience while at the same time flagging that are all these different inputs worldwide.
Or selling some.
Some increases so maybe your follow on question that I do want to highlight I've got Red Conger back so I want to get back to <unk> question is all so Greg you first.
Okay. Yeah, just I guess you touched on it was giving you got some experience now with the Neptune operating at close to full capacity, what kind of tonnage loading rates that you're seeing.
On a per ton cost basis.
Sort of a cost basis, we havent reported costs for like a full quarter running at full capacity that would be this this quarter coming like Q4 right now.
But obviously, they're going in the right direction lots 11, and 12, we all of a sudden like the thing that was shipped yet but you know.
You'll you'll be familiar with this great, but what's even more important as you know thermal coal prices are very high and you'll remember what happened the last time thermal coal prices higher if we did not have enough havent done that we would have been at the mercy of the other provider where they short changed just a million tons last time at margins of 200.
Dollars a ton if that happened again too at this time the margins are $400 a ton so just by having at the avoiding that that potential cost is huge so that's why I said the optionality to have that optionality with strategically so important and I'll also say that you know by dividing the business between CP and CN and keeping them both very compare.
That has worked really well both from a cost point of view and service point of view that where we're getting the coal delivered to the port very well. So we're looking forward to the next year or two and getting the benefit from Watson, we're very very pleased with Neptune.
Okay. Yeah. Thanks, Al if I could call on you to answer a question, which I believe you now have.
Which was about about the port.
Yeah, Thanks, Dan Good morning, Horace Mann.
Allergies to everybody from my phone dropping off.
We've had several things that we're dealing with in the third quarter are.
Starting at the ports the seaport conditions are obviously softer now where we're driving the filings and to extend the jetty out into the sea and you know initially you'd painful that's great. It's going to go faster, but to meet the structural criteria that the.
<unk> has been designed to we're actually hiring to drive those piles now deeper down into the sea floor to achieve the structural integrity. So that requires us we've already ordered.
The the pilings, they're designed legs so now.
We found him down.
And then well do an extension onto them to drive them further down into the into the ocean floor to achieve the structural integrity. So.
We burned additional effort hours in the third quarter doing that we have the material on hand now too.
Proceed in that manner.
Continues this way and you know when we think about first copper the critical path that we've talked about.
We really have a relatively short distance to connect is we're going to show more of this in detail on on Mondays are virtual.
Sure, but we put a temporary Ireland out out in the C and we're obviously driving pilings back toward the shore as well as driving part of it was from the store out.
So that that's the critical path to get the water.
From the Ocean.
And then two the desalinization plant and so that continues to remain on track as you indicated in your question, it's going to be more expensive to build that out as long as this condition.
Endures, but as far as the schedule goes we're gonna be able to accommodate that within the schedule Likewise up at the to the Tam of management.
Facility, we had a pump station, where we were just completed the earthworks towards just start doing the foundation work we discovered.
Some geotechnical instability.
On the wall, but that was remaining there.
We have.
Redesigned and rebuilt paid at the pump stations so no.
But that work is ongoing and we can accommodate that with certainly a critical paths startup schedule that we've been talking to for next year. So those are two of the biggest items that are contributing to the upward cost pressure right now and some idea of how it would be.
And with those.
Thank you.
Thank you. The next question is from Curt Woodworth from Credit Suisse. Please go ahead. Your line is now open.
Yeah. Thanks, good morning, Don and team.
First question is for real and in past cycles, where we've seen very extreme escalation of met coal oftentimes there. It was not significant liquidity at that price I know tech didn't always capture that.
For the full spot realizations can you just comment on your ability to capture the $600, China CFR price and what the netback would be for you today.
Given the ocean freight.
Yes, so thanks for the question Kurt Yes.
Yes, we are capturing those higher prices as they are occurring we've got number of pricing mechanisms are actually and we've made some sales at.
At pricing fixed pricing above $600.
And we've also got some some sales that are index sleep and reflect the average of the index in the month of shipment. So.
Yes, we are capturing those prices on the F&B side, we have a combination of sales that are either price onto quarterly on the average of the quantity indexes lagged by a month.
And those those indexes. The average is now tracking at about 370 U S. A.
As Don was saying and we're halfway through the quarter if.
If we go back to China. Your question as to what is the ETF will be equivalent to date. So trade has increased.
I mean this is one place where we are seeing inflationary pressures.
Freight rates to China are currently around 33 to $35, So where we're getting roughly between 577 to 500 in energy.
U S.
If you compare to the spot price today, which is sitting at 630 am.
<unk> per ton.
Great. Thank you and then just on QB two.
Can you frame some of the buckets I guess around the 5% increase in the contingency and what do you feel.
That beyond the 5% increase but it's fairly derisked at this point and then can you confirm I think my understanding is that bechtel was taking most of the raw material price risks with respect to steel and whatnot and in tech was more.
On the blocking and tackling operational labor.
Thank you.
Fred back to you.
Yeah.
Yeah, Curt So let me, let me talk about the material risk first.
We continue to procure all the material for this project throughout the pandemic, so even though we idled construction.
During the early onset of the pandemic, we continue to procure materials. So all of the material that we require.
To complete this project is actually procured in and most of it is on site at this point. So that's a huge advantage for us given what's going on globally today.
This issue that I, just mentioned of requiring additional hiring material and in order to relocate this pump station.
<unk> talked about we need some additional pipe runs in cable runs those materials have been procured secured and are on the way to site. So so we have a little or no risk associated with the things that are going on with global supply chain right now as far as.
Actions concern.
And the big buckets that I would put the additional contingency in the were you know that we're signaling to you today with.
With upward pressure on on the capital cost of the project itself are primarily related to geotechnical issues.
The seaport condition.
Wiring additional hiring so so you can imagine the nuclear power goes deeper just requires more and more effort hours more construction hours per year.
The progress that we have engineered and forecasts. So it's a pretty straightforward calculation and you know we're we're already have we have oh.
Six and have been and are underway.
[noise] without modification.
And then likewise just pumps.
Pump station.
She only management facility.
Same set of circumstances.
We've re engineered that the construction well underway are.
One of the advantages that we have having grown operating mine site. There are our mine team is doing a lot of that Ah report.
So there they were immediately available to respond to that.
The one other bucket we've had is weather.
Related where icy conditions that support.
For safety reasons, we don't put drivers in water win when we have part C conditions, we had an inordinate amount of that.
Exposure in the third quarter and we also had some hard wind conditions of the Delta two that kept us from making.
Some of the lifts that we needed to make them in the afternoons.
It caused us some setbacks.
Those are the categories and what we would include in that traditional contingency we're talking about today.
Great. Thanks very much.
Thank you. The next question is from Abby Adderall from Deutsche Bank. Please go ahead. Your line is now open.
Yeah. Thanks, good morning, Don and team and thanks, a lot for taking my question.
I have a couple of.
Couple of questions. So the first one is is it fair to assume that you could look to target another seven and a half million tons of met coal into China.
Depending on the premium between CFO and Fob persisting.
And also can you look to increase this as you plan for the next year. That's my first question.
Yeah.
Okay, I will turn that over to real.
Alright, thanks for the question.
Yes, we are still targeting.
It's unchanged around seven 5 million tons of sales to China.
For 2021, and as we're looking at our book for for 2022 or.
Our objective is the same to to maximize sales into China.
In mind as we do that that we have a number of long term well established and stable customers that we're continuing to deliver into it as well and demand in that market is also very strong.
And so it took a long time to develop and build those relationships acquired all those contracts and we don't know how long the import restrictions.
In China will last so we need to balance between our sales to long term customers and also to China.
Thanks, Yeah.
My next question is on Neptune.
This amp up progressing in line with expectations is the guidance to get to below I think the guidance was a lower end up 36 to $39 per tonne by 2022 does that still stand or do you think that given the inflationary pressures.
Could eat into majority of those gains thank you.
Very unreal.
Yes, so we haven't provided guidance yet for 2022 I'd be a this is something that we will be doing when we report Q for Q4 results in February.
What we're seeing for in Q3 and actually in the market currently.
Inflating the inflationary pressures that we're seeing on diesel price and therefore rail fuel surcharge.
On Ocean freight rates and also long on vessel didn't orange no those are probably the main areas.
Yeah.
The benefits and the savings that we're achieving with the increased throughput through Neptune is helping to offset those those inflationary pressures. So you can just imagine that if we did not do Neptune.
We would be impacted by the full on effect.
Those cost Inflations and keep in mind too that for Q3.
The impact from the wildfires, which time it was that we were able to divert to Ridley terminals also increased our cost because written as much AR.
Longer distance and therefore more expensive to get the coal there, but as Don explained.
Yes.
It provides the benefits of getting the go to market reliably and more importantly, realizing the benefits of the current very high prices.
Steel, making coal market.
Thank you yeah.
Thank you. The next question is from Lawson Winder from Bank of America Securities. Please go ahead. Your line is now open.
Good morning, and thank you for the update I'd like to ask about the energy business, if I might even the past suggested that that business could potentially be divested given a strong oil price environment and improve their operations. So certainly the first criteria seems to be met.
And it looks like there is scope for the operations to turn around in the fairly near future could you maybe comment on whether or not now might be the right time to divest and how would you assess the marketplace of potential buyers at this point. Thank you.
Yeah, No I agree with the way you phrased. The question, we do see a strong pricing and if if Fort Hills was running at full capacity today, it would be very profitable and the board would be able to make a decision. What we said in the past and that hasn't changed is it one support Hill's is at full production.
And then generating the kind of EBITDA, we think it Canada, particularly at these prices.
The board would assess whether we're getting paid for it and tech resources shares and if not then it would entertain a transaction to have it held differently, but still to have tech shareholders benefit. So what we mean by that is.
Possibly contributing it into a mid cap and taken back shares distributing those too.
Shareholders, we could do a direct a tech energy spin out we could sell to another party per shares in that company.
And it looks like you know that.
The ramp up will occur this quarter. So we're very pleased with that but it hasn't happened yet.
But if it does hit.
Full production by January 1st in Q1 like next quarter would be the first full quarter.
We can demonstrate financial results, where they're running at at full production so coming soon yeah, but not quite there yet.
It will be a time when the board can make a decision.
And then if I might just a follow up on QB two.
You've mentioned before and in the release today mitigation measures.
With the aim of attracting new talent and improving retention and minimizing absenteeism and.
How should we think about the costs associated with those programs.
Vis vis the offsetting costs and potentially less overtime I mean, if you're successful with those measures when.
Would you read the risk of that $600 million going much higher or would that actually help keep the $600 million of COVID-19 related costs under control.
That's it for me.
Excellent question and back to Rip.
Yeah, the way to think about it is that were you know in many ways, we're moving heaven and earth to minimize the impacts of COVID-19. So it's the right thing to do now is to not be so cautious about.
Staying away from the job that you know when you're sick, but we need everybody to come to work and we incent them to do that.
People are getting paid when they're off we need them getting paid when they're when they're on the job. So it's it's going to minimize the.
The upward pressure on these COVID-19 related capital costs and same thing with attracting.
Attracting talent and retention so those.
Any time someone leaves and go somewhere else or or we have a spot unfilled.
It's just you know.
More more pressure for us on on what it's going to cost to get all this stuff. So this is the time now to be aggressive with getting as.
Many people at site as we can we have material we have work fronts.
Got it.
Very solid work plan to get all this done and we need to get as many people on site and and you know not not.
Not laying off the board to get this thing built.
Yes. Thanks.
Thank you. The next question is from Jackie principal Lasky from BMO capital markets. Please go ahead.
Thanks, very much I don't normally ask one question, but I just wanted to ask you about the sustainability bonds that you reported the other day and if you could give us a sense on roughly what the what the cost of borrowing on those bonds would be if there's any kind of range and you know maybe a little bit of color on.
What changes in terms of text behavior, if anything to take advantage of a more favorable terms with the sustainability aspect of those bonds.
Okay, Jonathan over to you unless we have Justin on the one I'm not sure we do.
Now I'll pick it up on if you like Jackie just to be clear they they wouldn't bother me. So it was a committed revolving credit facility the the pricing.
I'll not a LIBOR.
LIBOR plus 150 basis points is exactly the same as the prior facility that we had however in this instance, what we have is you know essentially discounts or penalties.
Based on the performance of the underlying sustainability metrics that we have.
You know as I sort of said previously the intent here is to ensure that we embed sustainability in everything we do in the organization now including our financing.
There already are heavily motivated to meet the commitments and the targets that we that we've made in the market and this is just a further confirmation of Boston and shows our willingness to connect back to to the pricing.
Overall borrowing where.
We're of course, if we failed to meet those targets that would be a penalty, albeit you know not not material in terms of the cost of the organization, but you know I don't think to directly answer your question. It changes all my observation because we're already very highly much as I did but it does create that direct connection between the cost of borrowing and an outperformance.
Thank you that sounds great and and maybe another question for you Jonathan in the capital markets Day, you guys did recently.
Talked about raised 21 and.
I thought in a really really helpful way in terms of you know what that program is and the benefits that you're seeing I kind of got the sense from from the capital markets day presentation that that there may be additional phases I don't know if you're going to change the name to raise 22 or something.
Can you talk about that is there.
Additional objectives or goals for that program that you can can you kind of contemplate announcing sometime soon or or is this just maybe just more of an ongoing initiative at this point.
Don do you want me to total I'm happy to do so here go ahead go ahead, yeah, Yeah, I mean, Jacky really it's a continuum of activity that will you know will continue to be embedded in tech and through all of our operations. So whilst we coined rice 'twenty one to just sort of bring you know bring together a series.
The targets and goals for a defined period of time, which we will report on in February 2022, when we give you our fourth quarter results.
You know the works carried right on through that there are new initiatives being developed all the time inside the organization and looking for that next leg of performance and further investments of the you know the digital transformation the cultural transformation and the empowerment of the workforce essentially that comes with that so it's certainly not a.
Not a case of we hit the end of this year and we stopped we very much keep going but we will tell you in February.
Being delivered up to the end of 2021.
And sorry are you going to are you going to maybe put new targets.
Four excuse me subsequent years or not so much published.
Published targets.
I think the importance as with any program or a program of transformation like this is really to see the benefit coming through the coming through the business is coming through our production coming through our safety coming sort of all unions operating costs.
Rather than necessarily you know, creating new targets for for Rice I I think you know you increasingly every time, you'll hear from Robyn you hear from his odd that talking to the benefit that Reis is having for their operations and pull that business. That's a sign of success of the transformation program, because that's where the that's ultimately what the benefits would show.
Often and you know I think thats, probably how we can continue to communicate going forward.
Great. Thank you and am I allowed to ask one last question.
Go ahead.
Just wanted to ask.
We've heard from other companies that freight and shipping has been increasingly challenged I was wondering if you can comment on how that affects your CFR priced coal going into China is is the freight rates going up or are you having issues finding vessels.
That's that months for new rail.
Thanks, Jackie yes freight rates are going up if you compare to what they were at the beginning of 2021 day. They would've been in the mid to high teens, maybe as high as $20 U S per ton.
They are currently in the 33 to $35 range, so substantial increase but at the same time the coal price has increased so much more than that.
The margins are highly beneficial in terms of vessel availability, we have not had issues finding vessel availability.
We actually have a <unk>.
As well for part of our business our contract of Affreightment core part of our business that covers some of our sales teams. So that helps too to balance some of the increases.
Great. Thank you very much.
Oh and everybody thinks.
And Jackie just had some first to what.
Jonathan was talking about with raised 20 wanted to refresh what we said in the capital markets day in case, there's those on the line that weren't there.
<unk> 21 has already completed more than 100 projects and we will report on those in the measurement of how much EBITDA sort of game.
What's the value of that was but they've identified another 450 initiatives divided into 40 different digital squads to go after those so it truly is a transformation across the company into.
Into the digital World and we're very very excited about it and look forward to giving you the report.
In February.
Thanks, very much John it was a great presentation that I can say really enjoyed that one.
Hi, Arthur Laurie, It's Fraser Phillips I think we've reached the end of time, Don if you want to make a few closing comments.
Comments.
Well. Thank you very much once again that was a record quarter, but it will likely be repeated.
Before and if you translate what we showed you in September and it was already completed in October and recognizing that we priced two thirds of the coal for the quarter already and in fact for the benchmark. The the 90 day calculation period, we're almost two thirds of the way through that as well. So Q4 is shaping up to be pretty good we hope to see you there.
Virtual site visits or flagship QB, two copper growth project on November 1st from one P. M to two P. M. Eastern time, and the live webcast link will be available on our website and further details are also available in the October press release. So once again, thank you for joining us and we very much look forward to talking to you in February.
<unk>.
Thank you all.
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It's gonna say Hosni. Please always this thing.
No. We're good thanks, I'm going to drop.
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