Q3 2021 Teck Resources Ltd Earnings Call
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 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 conditions, resulting from COVID-19.
Explanation 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.
And Q2 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.
To see more of the latest progress on QB two I encourage you to watch a video of the project.
Our latest quarterly photo gallery, which is in the investors section of our website and as a reminder, we are hosting a virtual safe visits at QB two on November one. So please mark the date on your calendar and we hope you will join us.
Our Neptune facility continued its ramp up during the third quarter successfully demonstrating the ability to perform at design capacity and just a couple of the games grow it actually load at 91000 tons, a new all time record.
But don't get your calculators, you can't annualize that number but suffice it to say, it's going very well.
The facility is expected to achieve a run rate of it to non capacity of 18 naphthalene tons or higher in the fourth quarter.
Our steelmaking coal supply chain transformation is contributing significantly improved optionality in our liability and with record high prices for steelmaking coal. It is an excellent time to be in charge of your own destiny.
Last week.
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 doubling from single a which puts.
In the top decile of our sector in the head there.
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 to be 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 $1.53 per share.
And adjusted profit attributable to shareholders was $1 billion or $1 91 per share, which is more than seven times higher same period last year.
Slide five provides a snapshot of third quarter performance across our business units compared to last year.
Notwithstanding the effects of the wildfires on our operations in D C and some minor unplanned maintenance at Red dog solid operational performance 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.
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 Hunter 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 consumer consumable costs, a stronger Canadian dollar and profit based payments at Ams Nina.
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 in our communities.
Working closely with the Chilean government, we successfully rolled out a vaccination campaign.
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 has been key to our success in managing case rates I'd say, while effectively advancing construction.
It's not over.
And 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 on contingency and on our capital absent the $5 to 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. We're also seeing ongoing cost pressures as a result of continued absenteeism and labor inefficiencies we.
We are managing these costs and to put in place a variety of mitigation measures to counter that many adverse effects associated with construction of this environment. Many of which are aimed at attracting talent employee retention and minimizing absenteeism.
The final extended 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 startup. We continue to expect first production in the second half of 2022.
Critical path is the grinding circuit, which remains on track.
And in addition, our teams remain focused on the important port to fund 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.
Their systems such as the power Substations are also nearing completion to support overall commissioning activities.
Our operations in commissioning 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 ramp up the operations workforce.
Slide eight shows our progress in the port onshore area.
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 program.
Grinding lines currently remain the 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 look forward to sharing more of our progress with you at our QB two virtual site tour on November 1st.
Next we've summarized our 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 zinc concentrates from Red dog during the current shipping season, assuming normal weather conditions for the next few days.
However, as a result of the late start to the season and 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.
Priced at premium CFR, China prices, which increased to $402 U S per tonne from 257, you're asking in 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 solely based on the Fob, 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.
$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 to merge 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 and while this increased our transportation costs somewhat enabled market access for our steelmaking coal during this period record high prices.
These extra transportation costs.
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.
Yeah.
Looking forward, our fourth quarter, two making core sales are expected to be six 4% 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 above.
The upper end of our full year adjusted take 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.
I should note that at this point, we are price nearly two thirds of our fourth quarter sales based on Apple being CFO China prices.
Averaged $370 U S F O b.
$561 U S per ton since September purchase just to repeat those numbers since September one the Aussie <unk> price has averaged $370 U S per ton and the China's CFR prices averaged $561 per ton and you'll know what those are substantially 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.
<unk> is performing according to or exceeding plan.
As a result, we are starting to see the benefit of meaningfully lower port costs with a higher percentage of sales bonds or does it Neptune and.
And while throughput was impacted by the BC wildfires in July Neptune demonstrated its ability to perform at designed capacity during the second half of September as planned.
In the fourth quarter Neptune is expected to achieve a run rate at design 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.
Reduction 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.
And we are seeing signs of improvements in mine productivity now and forged hills 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 Jonathan for some comments on our financial results.
Thanks, Tom.
Stop by addressing our third quarter earnings adjustments on slide 15 to reconcile off profit and adjusted profit attributable to shareholders.
Most significant adjustments in the quarter is $97 million in QB, two variable consideration I mean to himself a former owner.
This is a derivative financial liability that arose from our 2018 acquisition of an additional 13, 5% interest in <unk> 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 15 apparent in each of the first three years following commercial production up to a cumulative maximum of U S $100 million its commencement of commercial production. The case prior to January 20 <unk>.
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 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 and commodity derivatives were $10 million.
After these and other minor adjustments bottom line adjusted profit attributable to shareholders was $1 billion in the quarter of $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 really striking on site 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.
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're 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.
Sustainability linked facility involves pricing adjustments that are aligned with our sustainability performance over the term of the facility measured by greenhouse gas intensity percentage of women in tech workforce and safety.
Further underlines the integration of sustainability performance into everything we do now including financing.
At the same time, we cancelled about 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.
Market 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 USD 2 billion from our U S. $2 5 billion limited recourse project financing facility for the QB, two projects of which U S $178 million withdrawn in the third quarter.
We have no significant debt 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.
The first 30% if any available cash flow was returned to shareholders and a balance of 70% can also be returned to shareholders or otherwise used for investments and gross debt reduction or a combination of these.
The board considers supplemental shareholder distributions each February when the full results of the year and done with.
Is 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 of 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.
No.
Looking ahead, we have an industry, leading copper growth profile and a very attractive copper pipeline.
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'd be happy to answer your questions.
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 you and operator over to you for 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 puts pressure as participants register for questions. Thank you for your patience and the first question is from our erstwhile Codell from Scotiabank. Please go ahead.
Hi, good morning.
Your release, you disclosed that there are 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 impact to the schedule from these issues or is it strictly a capex issue and can you catch up here.
Okay, well first congratulations tourists, who do it again.
First step so I'll turn this question over to Red Conger.
Brad 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 straight from.
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.
Kind of Fraser's team will track down Red.
Perfect on Mr. Walkabout, you'll have to re queue up one saw I cleared from the queue right now please.
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 company. The other mining companies are saying Ranger.
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 funding directly from their 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 the diesel and suppliers things related to supply chain problems that we all we all hear about it and it's not.
In terms of order of magnitude, it's not in the range that you'll be aware of some of our major competitors and coal for example, calling for 20% increase in visits.
This is something that in total takes US you know, perhaps two to $3 a ton in coal higher than where we were so the percent of the percentage would be.
In the 5% or less right now we don't.
I don't know, how it's going to evolve obviously, there's 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 I would Jonathan any additional insight from you and then let's give a rob mentioned that have a chance to give more color Jonathan.
Yeah. Thanks, John.
I think 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 upset you, 9% still up 55% now this flows through a whole range of categories of spend including diesel explosives grinding media and mobile equipment plot tires chemicals et cetera et cetera.
You know there's also of course, some pressure coming through a whole range of other our other small consumables rise across the business and one of the things that's impacting costs. There is supply chain the cost of transportation and the way in which you know these are these cost pressures are playing through into the <unk>.
<unk>, so the sort of range Don Don just quoted.
Is consistent with what we're seeing in the business right. Now we do expect you know that pressure as we we've signaled in the release to be maintained into 2022, but.
But we don't see these as you know necessarily structural changes to the underlying cost of the business day, all driven by by movements in the indices and therefore, you know to a certain extent some of this pressure will be transitory.
And I always thought inside I don't know if all the nurses that will not provide any particular business context.
Yeah.
It's robin.
Uh huh.
I just I was going to add that there's no question that some of the costs are inflationary, but let's.
I think one of the things to recognize is we've had considerable success with some of our rates rose 21 initiatives are they produce they produce costs in many cases and increase their productivity, particularly in our processing plants in the mine. So 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.
Sure.
The majority of it.
That translates really is the energy complex with gas and.
Crude and steel and of course, you know we enjoy some of the margins from that as well in terms of the amount of margin that has gone up and for all of our products as well as auto said.
And copper Don mentioned earlier in spite of the pressures we have been able to maintain our.
<unk> spoken with copper and zinc to be within our previous guidance as we work through efficiency gains and find new ways.
To reduce consumption when pricing is so high and we've been fairly successful in that.
Yeah.
Oh, great that falloff.
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 <unk> expansion to 9 million tonnes in the Neptune Court, we're just going into the quarter, we'll see lower corn costs, so actually cash costs in Canadian dollars were $4 lower this quarter than a year ago. So.
On balance, though it getting some control from those investments and they raised 21 experience while at the same time flagging that the all these different inputs worldwide are selling some.
Some increases so maybe your follow on question that I do want to highlight apart red Conger back don't want to get back to <unk> question. That's all so Greg you first okay.
Okay. Yeah, just I guess you touched on it was given you've got some experience now with the Neptune operating at close to full capacity what.
What kind of tonnage loading rates that you're seeing.
On a per ton cost basis.
It's 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 through poor right now.
But obviously, they're going in the right direction lots 11, and $12 a ton like we're playing a west Yep Yep.
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 Youll remember what happened the last time thermal coal prices. If we did not have enough havent done that.
Would have been at the Mercy of the other provider are they short changed just a million tons last time at margins of $200 a ton.
It happened again too at this time, our margins are $400 a ton so just by having at the avoiding that that potential cost is huge so that's why some of the optionality to have that optionality with strategically so important and I'll also say that by dividing the business between P. P and T N and keeping them both very competitive that is worked through.
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 that so we're very very pleased with Neptune.
Okay, Yeah, Thanks, Al if I could call on you.
Which was about about the port.
Yeah. Thanks, Don.
Apologies to everybody from my phone dropping off.
So we've had several things that we're dealing with in the third quarter.
Starting at the courts, the seaport conditions are actually softer now and where we're driving the filings and to extend the jetty out end of the CMO.
Actually you painful that's great. It's gonna go faster, but the mute.
Structural criteria that the facility has been designed to we're actually hiring to drive those piles now deeper down into the seaport to achieve the structural integrity. So that requires us we've already ordered.
So the pilings there at a designed lags so now we've found them down.
Well, there's 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 to go to.
To proceed in that manner.
<unk> continues this way and you know when we think about.
First copper the critical path that we've talked about so we really are.
Relatively short distance to come back to us and we're going to show more of this in detail.
On on Mondays virtual tour, but.
We've put a temporary island out out in the C and we're actually driving problems back toward the shore as well as driving however was from the shore out.
That's the critical path to get the water.
<unk>.
The ocean up them to the desalinization plant and so that continues to remain on track.
You indicated in your question, it's going to be more expensive to build about as long as this condition.
But as far as the schedule goes we're gonna be able to accommodate that within the schedule.
Likewise up at the other.
Tammy management.
So the we had a pump station where are we.
We have just completed the earthworks two ones to start doing the foundation work we discovered.
Some geotechnical instability use and the walls that was remaining there.
We have.
Redesigned and relocated that pump stations so no.
You know that work is ongoing and a weekend holiday.
Certainly.
Critical power 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 we're dealing with those.
Thank you.
Thank you.
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.
Past cycles, where we've seen in a very extreme escalation of met coal are oftentimes there. It was not significant liquidity at that price I know teck doesn't always capture that.
For the full spot realizations can you just comment on your ability to capture the $600 trying to CFR price of what the netback would be for you today given additional freight.
Yes, so thanks for the question Kurt.
Yes, we are capturing those higher prices as they are occurring we've got number of pricing mechanisms are actually and we've we've made some sales.
At pricing fixed pricing above $600.
And we've also got some news from sales of our index sleep and reflect the average of the index in the month of shipment. So.
Yes, we are capturing those prices on the F. O B side, we have a combination of sales that are either price onto quarterly on the average.
Quantity indexes lagged by a month.
And those those indexes. The average is now tracking at about 370 ranch.
As Don was saying and we're halfway through the quarter if.
If we go back to China. Your question as to what is D. E. F O b 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 we're we're getting roughly between 577 to $500.
She was.
You compare to the spot price today, which is sitting at 613 U S 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 would 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 Texas more.
On the blocking and tackling operational late labor.
Thank you.
Brad back to you.
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 continued to procure materials. So all of the material that we require.
Or you know to complete this project is actually procured 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 this issue that I just mentioned, they're requiring additional hiring material and in order to.
We relocate this pump station.
Just talked about we need some additional pipe runs in cable rooms, those materials have been procured secure them and are on the way to site. So so we are a little or no risk.
Associated with the things that are going on with global.
Global supply chain right now as far as construction is concerned.
What buckets that I would would.
The additional contingency in the work.
What we're signaling to you today with the board.
Upward pressure on the capital cost of the project.
<unk> are primarily related to geotechnical issues.
The seaport condition.
Requiring additional.
Hiring so so you can imagine there.
If the pound goes deeper just requires more more effort hours more construction hours per.
You would have a progress that we have engineered and forecasts. So it's a pretty straightforward calculation then.
We're already have we got globe.
And have been and are underway.
[noise] without modification.
And then likewise the pump station.
Good morning management facility.
Set of circumstances.
The construction well underway.
One of the advantages of greenhouse hunting ground 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 a hiseq conditions of support.
For safety reasons, we don't put drivers in water win when we have <unk>.
The conditions, we have an inordinate amount of that exposure in the third quarter and we also had some hard winter conditions.
Relative to that kept us from making some.
Some of the reps that we needed to make and in the afternoon.
It caused us some you know some.
Setbacks, but.
Those are the.
Categories.
What we would include in that traditional contingency we're talking about today.
Okay. 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.
Couple of a couple of questions. So the first one is is it fair to assume that you could look to target other 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 MPS. This as you plan for the next year. That's my first question.
Okay, I will turn that over to real.
Alright. Thanks for the question, Yes, we are still targeting.
It's unchanged around $7 5 million tons of sales to China.
For 2021, and as we're looking at our book for for 2022, our objective at the same two to maximize sales into China keep in mind as we do that and that we have a number of long term well established and stable.
Customers that we're continuing to deliver into them 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.
China will lives, so we need to balance.
Between our sales to long term customers and also to China.
Yeah.
Next question is on the left you with the ramp 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 ton about.
By 2022 does that still stand.
Think that given the inflationary pressures.
It could eat into majority of those games. Thank you.
Very unreal.
Yeah. So we haven't provided guidance yet for 2022 IV. It's just something that we would be doing when we report Q for Q4 results in February.
What we're seeing for Q3 and actually in the market currently.
The inflation inflationary pressures.
We're seeing on diesel price and therefore <unk> fuel surcharge.
On Ocean freight rates and also long on vessel didn't orange no those are probably the main areas.
The benefits and the savings that we're achieving with the increased throughput true Neptune is helping to offset those those inflationary pressures. So you can just imagine that if we did not do that too.
Would be impacted by the full on effect.
Those cost inflation.
Keep in mind too that for Q3.
The impact from the wildfires, which tons that we were able to divert to Ridley terminals also increased our cost because it really is a much.
Longer distance and therefore more expensive to get the coal there, but as Don explained.
Yep.
It provides the benefits of.
Getting the coal to market reliably and more importantly, realizing the benefits of that.
The current very high prices in the steelmaking coal market.
Thanks, Jeff.
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.
You asked about the energy business, if I might even the past suggested that that business could potentially be divesting 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 can 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 sport hills is at full production.
And then generating the kind of EBITDA, we think a cabinet, particularly at these prices then 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.
You know, possibly contributing it into a mid cap and taken back shares distributing those two are kept shareholders, we could do a director.
Tech energy spin out we could sell to another party for shares in that company and it looks like.
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 our pulp production by January 1st in Q1 like like next quarter would be the first full quarter where are we.
We can demonstrate financial results with it running at full production so coming soon yeah, but not quite there yet.
We'll be at 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.
Premium retention and minimizing absenteeism and.
How should we think about the costs associated with those programs vis vis the offsetting cost of potentially less overtime I mean, if you're successful with.
With those measures when was it really 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.
It for me.
Yeah excellent question and back to Rex.
Yeah on the and the way to think about it as you know.
In many ways, we're moving heaven and Earth to minimize the impacts of COVID-19. So it's.
Yeah.
The right thing to do now is to not be so cautious about.
Staying away from the job, but you know when you're sick, but we need everybody to come to work when we incent them to build out that those people are getting paid when they're off we need of getting paid when they're when they're on the job. So it's it's going to minimize the yeah.
Upward pressure on these COVID-19 related capital costs and same thing with the attracting talent in and retention so those any.
Any time someone leaves and go somewhere else or or we have a spot unfilled.
It's just more more pressure for us on on what it's going to cost to get all this stuff. So this is the time to either be aggressive we're getting.
Many people at site as we can we have material we are work fronts.
We've got a very solid work plan to get all of this done and we need to get as many people on site and.
Not laying off the board to get this thing built.
Yes. Thank you.
Thank you. The next question is from Jackie Chris Molesky 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 our sustainability aspect of those bonds.
Okay, Jonathan over to you unless we have just seen although 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 bonds. It was a committed revolving credit facility.
The the pricing.
On Lat.
LIBOR plus 150 basis points is exactly the same as the prior facility that we had.
However in this instance, what we have as 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 all financing.
We're already heavily motivated to to meet the commitments and the targets that we that we've made in the market and this is just the combination of Boston and shows our willingness to connect that to to the pricing.
All of our borrowing.
We're of course, if we fail to meet those targets that would be a penalty, albeit not not material in terms of the cost of the organization, but you know I don't think.
Did you write downs of your question that changes all my observation because we're already very highly much of it but it does create that direct connection between the cost of borrowing and an outperformance.
Thank you that sounds great.
And maybe another question for you Jonathan.
The capital markets Day, you guys did recently you talked about raised 21 and.
I thought in a really really helpful. In terms of 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.
But there may be additional phases, I don't know if you're going to change the name to raise 22 or something keep 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't you want me to talk to that 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 in through all of our operations. So whilst we coined rice 21 to sort of bring you know bring together a series of.
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 impediments of the you know the digital transformation, the cultural transformation and the empowerment of the workforce essentially that comes with that.
So it's 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 what's being delivered up to the end of 2021 and.
Sorry are you going to are you going to maybe put new targets.
Or.
Excuse me subsequent years, our or not too much published targets.
I think the importance with 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 lot safety coming through all unions operating costs.
Rather than necessarily creating new targets for for Rice 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 I'm allowed to ask one last question.
Go ahead.
Thank you al.
I just wanted to ask we've we've heard some other companies that trade 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 the freight rates going up or are you having issues finding vessels.
That runs 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 knee.
Mid to high teens, maybe as high as $20 U S per ton there.
We're currently in the 33 to $35 range, so substantial increase but at the same time the coal price has increased so much more that.
The margins are highly beneficial.
In terms of vessel availability, we have not had issues finding vessel availability.
And we actually have a coa as well for a 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 brown everybody thinks.
And Jackie just add to what.
Jonathan was talking about with reached 21 and to refresh what we said in the capital markets day in cases, those annoying that weren't there.
Raised 21 has already completed more than 100 projects.
And we will report on those in the measurement of how much EBITDA should again what.
What's the value of that was.
But they've identified another 450 initiative.
Bided 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 of the capital markets day, I really enjoy 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, it was a record quarter, but it will likely be exceeded like Q4, and if you translate what we showed you in September and have 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 90 day calculation period, we're almost two thirds of that.
Through that as well so Q4 is shaping up to be pretty good we hope to see you at the virtual site visit of our 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.
A press release once again, thank you for joining us and we very much look forward to talking to you in February.
Thank you all.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
Yeah.
Thank you for joining us this completes our events.