Teck Resources - Earnings Call - Q3 2020

Transcript

Speaker 0

and gentlemen, thank you for standing by. Welcome to Teck's Third Quarter twenty twenty Earnings Release Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. This conference call is being recorded on Tuesday, 10/27/2020.

I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead.

Speaker 1

Thanks very much, Melanie. Good morning, everyone, and thank you for joining us for Teck's third quarter twenty twenty results conference call. Before we begin, I would like to draw your attention to the caution regarding forward looking statements on Slide two. This presentation contains forward looking statements regarding our business. This slide describes the assumptions underlying those statements.

Various risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward looking statement. 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.

Speaker 2

Well, thanks very much, Fraser, and good morning, everyone.

Speaker 3

Thank you for joining us this morning.

Speaker 2

I will begin on Slide three with our third quarter highlights. I'll be followed by Ron Millos, our retiring CFO, who will provide additional color on our financial results. We will then conclude with a Q and A session, where Ron and I and several additional members of our senior management team would be happy to answer any questions. Before I start, do want to say that after twenty five years with Teck, this is expected to be Ron's last quarterly conference call. And I just want to personally, and on behalf of our whole team, thank Ron for his many outstanding contributions to Teck over his twenty five years with the company, and we wish him the very best in his retirement.

Thank you, Ron. Jonathan Price, Teck's new Senior Vice President and Chief Financial Officer, will join me in presenting our fourth quarter twenty twenty results in February. So these continue to be, what I guess, many have called unprecedented times as the world adapts to a new normal with COVID-nineteen. And despite the ongoing challenges, our financial performance recovered strongly from the second quarter that clearly was very significantly negatively impacted by COVID-nineteen. And despite the decline in realized steelmaking coal prices that you will have seen, we did post gains in profitability and operating cash flows.

We made significant progress during the quarter on the execution of our major projects, including advancing the Neptune terminals upgrade in line with the schedule and the budget and also safely ramping back up construction at our QB2 project. We've also made progress in reducing costs throughout supply chain improvements and our cost reduction program and as a result of those 21. Our adjusted site cost of sales in steelmaking coal is expected to be below CAD 60 per tonne in December or around $45 US per ton at the mine site. And across our business, our people have adapted to the new normal of operating through the pandemic, staying focused on health and safety while continuing to responsibly produce materials that are essential to the global economic recovery. Turning to our financial results on Slide four.

In the third quarter, revenues were CHF 2,300,000,000.0 and gross profit before depreciation and amortization was GBP $7.00 3,000,000. Bottom line adjusted profit attributable to shareholders was GBP 130,000,000 or GBP $0.02 4 per share on both a basic and a fully diluted basis. While these results reflect negative effect of COVID-nineteen on the prices and sales of the products compared to the third quarter last year, they also represent a strong recovery from Q2 twenty twenty, which was significantly negatively impacted by the pandemic. I'll now run through some key updates for the quarter, starting with our steelmaking coal business on Slide five. We are continuing to successfully restructure our cost base due to our planned decline in strip ratio and due to the Elkview plant expansion and due to the closure of our Cardinal River operations as well as our cost reduction program, CRP, and our RACE21 programs.

Our adjusted site cost of sales are expected to decrease over the remainder of 2020 and to be below $60 per tonne in the month of December. Our strip ratio was 11.4 to one in 2019 last year, and we expect it to decline to around ten:one throughout the fourth quarter and into 2021. We completed the major expansion of our LP operations plan in Q2 despite the challenges of the pandemic. And that plant now has the capacity to produce 9,000,000 tonnes annually, which enables us to replace higher cost production from our Kalman River operations with a higher quality coal produced at a lower cost than our Elkview operations. At the same time, we're nearing the end of the major capital deployment phase for Neptune, which will next quarter, and the water treatment facilities at both Elkview and Fort River.

So that's three capital projects that will be coming to an end by the end of next quarter. Turning to our Neptune upgrade project on Slide 6. We continue to advance the project in line with the previously announced capital estimate and schedule. The planned five month shutdown of terminal operations was successfully completed in September and all the different things that we wanted to achieve and accomplish during that five months were achieved. Major equipment deliveries are now complete with all equipment currently on-site.

A number of us went to have a a visit a week or so ago to see the new ship order now in place, and we were we were thrilled to see it arriving on the special ship called Jumbo on October 8 as it sailed into Vancouver's Lions Gate Bridge. You can see a picture here in Cutty. It was a beautiful sight. Neptune upgrade will, of course, secure for us a long term, low cost and reliable supply chain solution for our steelmaking coal business soon. We expect construction to be completed next quarter, that's 2021, and the terminal capacity to increase as the new equipment comes online, so it does start to increase before the quarter is over.

We made solid progress during the quarter at our QB2 project on Slide 7. QB2 is a key component, of course, of Teck's copper growth strategy. It's a big part of us rebalancing the portfolio, and copper will ultimately be our largest business. We currently have over 7,000 people on-site and are targeting over 9,000 people on-site by the end of the year. All major contractors have remobilized and work is progressing well across the project and it is in line with our ramp up plan.

Construction of additional plant space is being built to manage the COVID-nineteen impacts will provide additional capacity as it begins to come online in 2020 this quarter. We are aiming to achieve overall project progress of approximately 40% by year end. As a result of COVID-nineteen, we expensed $107,000,000 of costs related to the project's expansion of construction and $23,000,000 of interest that would have otherwise been capitalized for the project in the third quarter. And to the September, we've expensed total costs of $272,000,000 and $103,000,000 of interest that would have been capitalized for the project. We recommenced capitalization of borrowing costs on the CVC project in the third quarter, consistent with the return to active construction on the project.

As soon as the ramp up proceeds for the fourth quarter as currently planned, the aggregate estimated impact on the suspension is expected to be approximately US350 million to US400 million dollars excluding interest with a scheduled delay of approximately five to six months. As well, the additional camp space has an incremental cost of US45 million dollars above that. First production at QB2 is expected in the 2022. Turning to Slide eight. At Teck, our approach to safety and sustainability are core to the success of our business.

Robust COVID-nineteen protocols remain in place at all of our operations. We continue to focus on preventative measures and controls and compliance and integration into our new normal. Year to date, our high potential incident frequency is 31% lower than the same period of 2019 at 1.1 per million hours work. In September, together with the AES Corporation, we entered into a long term power purchase agreement to provide 100% renewable power for our Carmen De Andacollo operation in Chile. This agreement is expected to eliminate approximately 200,000 tons of greenhouse gas emissions each and every year.

And it is our goal to be the leading diversified mining company when it comes to sustainability and ESG rankings and performance. I'm proud to say our efforts on sustainability have been recognized by a number of organizations. In 2019, Teck was named to the Dow Jones Sustainability World Index for the tenth consecutive year, and we were the top ranked mining company in the index. We are also the top ranked diversified metals mining company on Sustainalytics and are highly ranked on MSCI in comparison to our peers. We are an ICMM member company.

I just finished three years as chair, and we've been recognized as a strong performer by ISS, Putsi for Good and others. We were proud to announce yesterday that Teck has been named to the Forbes World's Best Employers 20 '20 list, which is an employee driven ranking of multinational and large companies from 45 different countries. They looked at topics including COVID nineteen response and willingness to recommend an employer to friends or family. Now while we are, of course, we are proud of our performance, but we do know that there is more work to be done on these two issues as they become much more pertinent to many stakeholders. I will now run through highlights of our third quarter by business units starting with steelmaking coal on Slide 9.

Third quarter steelmaking coal sales were 5,100,000 tonnes, which was within our guidance range. We had planned mining and production outages at our operations in the third quarter to correspond with anticipated reduced demand related to COVID-nineteen. We reduced logistics capacity in accordance with that by using the planned five month shutdown at Neptune Terminal, and that was completed in September. And as a result, our Q3 production of 5,100,000 tonnes was 22% lower than the same period last year. And that affects costs, as you would expect, our adjusted site cost of sales of $67 per tonne reflected that lower production and lower sales volume.

Transport costs were higher than the same period a year ago, primarily due to the lower volumes through Neptune during the planned five month shutdown of terminal operations. And on August 25, we announced that we signed an agreement in principle with Westshore Terminals for the shipment of 32,250,000 tonnes starting on 04/01/2021. Together with the Neptune upgrade and our contract with Ribbey terminals, this will provide much greater flexibility and optionality for tech shipments and contribute to reduced costs and improved performance and reliability throughout our steelmaking coal supply chain. So looking forward, we expect strong sales of 5.8 to 6,200,000 tonnes in 2020, up from the 5,100,000 in Q3. We expect our adjusted site cost of sales to decrease over the remainder of the year and to be below $60 per tonne in December, supported by the restructuring of the cost base in our steelmaking coal business unit.

Turning to our copper business unit. Our third quarter results are summarized on Slide 10. Antamina performed well at full production rates in the quarter, following the temporary suspension of operations due to COVID-nineteen that happened in 2020. Production was lower than the same period last year for Highland Valley and Carmen De Vacauga. At Highland Valley, production was impacted by harder than expected ore following a change in mine sequencing earlier in the year in support of reduced waste movement as well as maintenance challenges.

Production is expected to be higher in Q4 due to increased mill throughput and higher ore grades. Decrease in the coil was primarily the result of lower ore grades, which were expected in the mine plan and also reduced mill throughput due to longer than anticipated maintenance shutdown. Notwithstanding the reduced production, where you would expect cost to go higher, we actually had significantly lower total and net cash unit costs in the same period last year, and this was supported by our cost reduction program and the contribution from RACE21. Looking forward, we've lowered our copper production guidance range for the 2020 to 01/40000 to 155,000 tonnes, which is then 5,000 tonnes than before, and that's due to the lower production at Highland Valley. Our zinc business unit results for the third quarter are summarized on Slide 11.

And as a reminder, Antamina's zinc related financial results are reported in our copper business unit. Red Dog's sales of zinc and concentrate were 175,300 tonnes, which was in line with our guidance range. Red Dog's zinc production was significantly improved from Q2 twenty twenty. Climate change, I have to say, is affecting site conditions, which limited our ability to discharge treated water. However, operating restrictions due to excess water were resolved in the third quarter, and we completed a raise of the tailings facility earlier than originally planned, which provided us with additional flexibility for water storage.

We also installed a new water treatment plant to increase the water discharge capacity when permit limitations allowed. At Trail, refined zinc production was higher than in 2019. And looking forward, we continue to expect to ship all concentrate during the Red Dog shipping season. In fact, it will complete in just a matter of days. And repair to the loading arm on one of the two shipping barges was completed by the July.

We expect sales of Red Dog zinc and concentrate of 145,000 to 155,000 tonnes in the fourth quarter, which reflects our normal seasonality. We have lowered our guidance for our net cash unit costs in the 2020 to $0.03 0 to $0.04 0 per pound from previously US0.40 dollars to US0.50 dollars per pound. So that's definitely going to be the right direction. Our energy business unit results for the third quarter are summarized on Slide 12. Our realized prices and operating results were significantly impacted by both lower production and a material decline in benchmark oil prices compared with 2019.

As previously announced, the Port Hills Partners safely and efficiently reduced operations to a single train facility in the second quarter, which helped reduce negative cash flows in the third quarter in light of COVID-nineteen and a very low Western Canadian Select prices. Production was also negatively impacted by extreme wet weather, which resulted in soft peak conditions starting in June and continuing into July. Looking forward, the Port Hills partner decided to restart the second train and to ramp up production to around a 120,000 barrels per day by the end of the year, and that was earlier than had previously been anticipated. On October 23, just five days ago, the government of Alberta announced that it will not issue monthly production limits for the December 2020 production month. And in December 2020, that means that operators will be able to produce above their previously issued production limits without having to purchase curtailment credits or to apply the special production allowances.

The curtailment rules have been extended to 12/31/2021. However, the government of Alberta will only issue ministerial orders to limit production when they feel it is needed. If required, ministerial orders will be issued with thirty to sixty days notice to allow time for producers to respond and plan accordingly. The Fort Hills Partners continue to monitor the business environment and assess plans to maximize cash flow, including the potential to increase production and lower costs. We have lowered our guidance for adjusted operating costs in the second half of the year to CAD 35 to CAD 38 per barrel of bitumen down from the previous CAD 37 to CAD 40 per barrel.

But of course, what we're all looking forward to is to gain to that level that we were in, in December 2018 when which was the last month when Fort Hills was allowed to run at full capacity. And then that month, averaged 201,000 barrels a day at a cash cost of 23 Canadian per barrel. We're looking forward to getting back there sometime in the future. And with that, I'll pass it over to Ron Mills for some comments on our financial results. Ron, over to you.

Speaker 4

Great. Thanks, Don. I'll speak to the changes in our cash position during the third quarter, and that's on Slide 13. So we received net proceeds of $540,000,000 from debt in the quarter, and that was made up of net draws of $49,000,000 on our revolver and $341,000,000 on the QB2 project financing facility. We generated $390,000,000 in cash flow from operations.

We spent $589,000,000 on capital projects, that included $246,000,000 on QB2 and $89,000,000 on the Neptune facility upgrade. Our stripping activities used $110,000,000 and that was lower than our Q3 twenty nineteen due mainly to the planned mining and production outages at our steelmaking coal operations in the quarter. We paid $104,000,000 in interest and financing charges and $54,000,000 on expenditures on investments and other assets. Lease payments totaled $41,000,000 and we paid $27,000,000 in our regular $05 quarterly base dividend. And after these and other minor items, we ended the quarter with cash and short term investments of $4.00 $3,000,000 Turning to the impact of COVID-nineteen on our business on Slide 14.

As Don mentioned earlier, while our third quarter financial results reflect the negative effect of COVID-nineteen on the prices and sales of our products compared with the same period last year, we saw a strong recovery compared with Q2 of this year, which was significantly negatively impacted by the pandemic. In the second quarter, all of our mines had recovered from COVID-nineteen production disruptions. And in the third quarter, we expensed $130,000,000 related to COVID-nineteen on a pretax basis, which is half of the amount expensed in Q2. And of course, we expensed $107,000,000 in other operating income expenses related to the temporary suspension of construction and remobilization at QB2 project and $23,000,000 in additional finance expense representing interest that would have otherwise been capitalized if construction on QB2 had not been suspended. While we have certain increased costs associated with operating our mines at full production in the new normal environment with COVID-nineteen such as medical testing, safety equipment and supplies and additional transportation and accommodation costs for social distancing, they are cost of operating in this environment and are not adjusted for an adjusted earnings calculations.

And on a year to date basis, we expensed a total of $434,000,000 related to COVID-nineteen and that included $103,000,000 of interest that would otherwise have been capitalized. And we recommenced capitalization of borrowing costs in the QB2 project in the third quarter and that was consistent with our return to active construction on the project. And barring any further negative developments around COVID-nineteen, we do not expect significant COVID-nineteen specific costs on a go forward basis. Slide 15 summarizes the latest results of our cost reduction program. To the September, we've achieved approximately $270,000,000 of operating cost reductions and $500,000,000 of capital cost reductions.

These reductions are against what we were expecting to spend back at the June 2019 when we started looking for cost reduction opportunities. So we've made pretty good progress against our targeted reductions of $1,000,000,000 The reductions are spread throughout the company with the majority of the operating business units and it also includes satellite projects, the exploration projects, our IT systems and our admin and marketing costs throughout the company. And the realized and remaining targeted cost reductions from our cost reduction program have been included in our guidance since we announced the program in October and are reflected in our current guidance as well. Turning to our financial position on Slide 16. We have a strong financial position with current liquidity of CAD6.8 billion.

And this includes our cash balance and the amount available on our US5 billion dollars of committed revolving credit facilities. US3.8 billion dollars is available on our US4 billion dollars facility that matures in the 2024, and our US1 billion dollars sidecar that matures in the 2022 is undrawn. Importantly, both of these facilities do not have any earnings or cash flow based financial covenants, do not include a credit rating trigger and do not include a general material adverse effect borrowing condition. The only financial covenant is a net debt to capitalization ratio that cannot exceed 60%, and at September 30, that ratio was 23%. And for our $2,500,000,000 limited recourse project financing facility QB2, we've currently drawn about US860 billion dollars of which $3,000,000 $341,000,000 sorry, was drawn in the third quarter.

Going forward, project funding will be from the project financing until the project reaches a specific ratio of project financing to total shareholders funding. And Tex Mex contributions to project capital for QB2 are not expected until the 2021. And we have no significant note maturities prior to 2030, investment grade ratings from all four of the credit rating agencies. So overall, our financial position is in good shape to allow us to continue to weather the challenges around COVID-nineteen and to complete the Neptune facility upgrade and the QB2 project. And with that, I will turn it back over to Don for his closing comments.

Speaker 2

Thank you, Ron. And to wrap up on Slide 17, despite the ongoing challenges, our financial performance did recover strongly in Q3 following the second quarter that was obviously negatively impacted by COVID-nineteen. We believe that Teck has quality operating assets in stable jurisdictions, and we are advancing a corporate growth strategy that is funded and is being implemented. We continue to progress our four key priorities to create shareholder value and position Teck for decades to come. Those are the QB2 project, RACE21, Neptune and our company wide CRP cost reduction program.

We believe Teck is well positioned to generate shareholder value as the world adapts to the new normal with COVID-nineteen. And with that, we would be happy to answer your questions. I should say, like many of you, most of us are on phone lines from home, so please bear with us if there is a delay while we sort out who will answer each question. So now operator, over to you for questions.

Speaker 0

Thank you. Thank you. First question is from Orest Wowkodaw of Scotiabank.

Speaker 4

Don, I was hoping we could get a bit more color on the cost guidance in coal. I find the languaging in the MD and A fairly confusing because it on one hand, you say that you expect on-site costs in coal to exit this year sub-sixty dollars a tonne. But then in the disclosure, it also talks about kind of preliminary 2021 site cash guidance to be in line with H2 levels, which are $60 to 64 Can you help explain how we should interpret that?

Speaker 5

I'll turn

Speaker 2

it over to Robin in just a minute, but you should have the context. So we haven't finished our budgeting for 2021 yet, so didn't wanna put out formal numbers very specifically until we've done that. And, you know, that that process is ongoing. There are always a number of different factors with any operation that come at you, you know, throughout the course of the year. So we wanna make sure that we've examined all those things before we put out very specific guidance.

But for sure, the cost structure of the business has been materially reduced. And while it'll be plus or minus a couple bucks going forward, we are at a level that's substantially lower than it was before. And the starting point going into 2021 is pretty good. So with that, Robin, over to you.

Speaker 6

You bet. Thanks, Horace. As Don said, we're going through a budget process right now. So there's a lot of things like haul distance, plant maintenance outages that normally occur in Q2 and Q3 that we have to take into account. And we've also got two new water treatment facilities coming online this year with Fording River South going to be completed in at the end of Q1 as well as the Elkview saturated Rockville, which is just going online now.

So those things all have to be rolled into a budget. But I want to give you I'll give you a few important data points that will help you kind of frame a view around this. So our strip ratio, and this is a key cost driver, is going to be we're coming down to around ten:one through this last quarter. We will go through 2021 at that ten:one, and we see ourselves over the next few years staying at ten:one. And again, that's an extremely important cost driver for us.

You remember our strip ratio through 2019 was 11.4:one. It's going to be around 11.1:one through 2020. So now that we've got the expansion in Elkview behind us, we see that strip ratio stabilizing. So that's one really important data point. Don also mentioned the closure of Cardinal River.

From a structural point of view, that was our highest cost operation, lower quality coal, and that tonnage and more actually has been created through the Elkview expansion, which is now successfully executed, and we're running at a pace of $9,000,000 per year at that operation. And that's our lowest one of our lowest cost operations in the business and at a higher quality coal. So that's another factor you have to take into account because it's both cost and it gives us greater value on the product side. The other thing that we probably haven't talked much about, but through this time, through the COVID time, we've maintained our mine plans and the key assets. So we've got healthy rock coal inventories now going into 2021.

And if you remember, that was one of the constraints that we actually suffered through here over the last couple of years when we were driving to produce into the high price market. So that's behind us. So we now have healthy rock coal inventories. Our mine plans are very stable. That's why we're able to maintain the ten:one.

And the other piece of the puzzle is we've had trouble with full clinical inventories as well. And that's three of the four operations now are pretty much down to stable levels, and that means that's no longer a constraint for us. So another reason we've got a pretty strong base going into 2021. And then I guess I'll end on one last positive note. We're driving RACE21, that strategy through coal, and we're seeing significant value right now.

And I kind of just to illustrate it, we saw record high mine productivities in Q3, above anything we've seen previously. So there's that will be sustained forward, and that's the kind of structural change that's occurring that supports a very strong cost base going into 2021. So again, I don't want to get specific numbers out at this point as we go through the budget. But suffice to say, we're operating off a much, much better cost base than we have through this two year transition phase.

Speaker 4

Robin, just on that, I mean, for all the reasons you cite here, I guess I'm not understanding why costs are not going to remain below $60 a tonne in 2021.

Speaker 6

Well, Q4 I mean, one aspect about Q4 is we don't have plant shutdowns in that quarter. It's typically a quarter where that's all behind us. And we, on average, will operate at a lower cost normally in Q4 than we do over a full year. So quarter

Speaker 2

to

Speaker 6

quarter, you're going to have different impacts on your cost base. So that's why we're confident we'll end the year below $60 but that doesn't mean that every quarter forward in 2021 will be at that same level.

Speaker 7

Or Thank you very

Speaker 2

as you can assume, it is certainly our objective to stay below $60 if we can, if it's at all possible, but we don't want

Speaker 8

to overrepresent right now until we finish the budgeting process. Okay. Thanks, Todd.

Speaker 2

I might add just on that haul truck productivity's comment that Robin made, but we actually had really high record haul truck productivity during spring runoff. For those of you who've ever been a former in the pit and seeing what the road conditions are like at that time of year, that's an incredible statement to be able to make. So race twenty one is certainly helping us a lot. Next question, please.

Speaker 0

Thank you. The next question is from Carlos De Alba of Morgan Stanley. Please go ahead.

Speaker 9

Hi, good morning. Thank you. My question maybe, Don, is on Highland Valley Copper. Just on two points there. First, given the guidance for the fourth quarter, is it expected then that the hard ore that you processed in Q3 and that resulted in lower output, if I think of the past and moving forward going forward, that is normalized and production should stabilize beyond the fourth quarter guidance that was provided?

And also on that operation, the molybdenum production in the third quarter declined significantly year on year due to particularly lower grades. What can you comment in terms of the moly grade going forward at Highland Valley? Thank you.

Speaker 2

Okay. I think both of those questions can go to Dale Anders, please.

Speaker 7

Yes. Thanks, Carlos. Just to start on the first question with hardness. Basically, there's two factors that led us to change the mine plan and the sequence for the year. One due to reduced stripping around COVID in the second quarter, where we focused more in on the valley pit, and as well as some geotechnical constraints that limited flexibility for the various ore sources that we feed to the mill.

So we found ourselves in a particular area in the pit that was harder than expected, an area that we didn't quite have as much hardness data around. And that's the reason for the lower guidance for the quarter. We do expect higher production and throughput going into the fourth quarter into 2021 as well. So while we won't completely be out of that area in 2021, we do have other areas that will blend and mix with softer ores. So we don't anticipate to have the same kind of issues as Q3 going forward.

Just on moly, again, it's due to the change in mine sequence. Originally, more was planned from other areas in the mine. And when we changed the mine sequence, that directly affects the moly production and grades. So again, we don't anticipate that as low as we've had for moly. We do anticipate that strengthening going forward as well.

We'll issue updated guidance for 2021 on Q4 as we finish the budgeting process

Speaker 2

as well.

Speaker 9

Excellent. Thank you very much. Good luck.

Speaker 8

Thanks.

Speaker 0

Thank you. The next question is from Curt Woodworth of Credit Suisse. Please go ahead.

Speaker 3

Thank you. Good morning. Question on coking coal. Curious what you're seeing on the demand side given some of the port restrictions announced in China. It seems like if you look at the domestic price in China, it's up about $15 a ton to $200 yet the Australian price has done a quick U-turn given they're out of the market.

So it seems like the ARP is extremely wide and potentially India is coming back to the market. So just curious what you're seeing with respect to that? And do you have any sense at consumer level how you're viewing coking coal inventories? Because obviously, there's limited data for

Speaker 8

us to look at. Thank you.

Speaker 2

Thank you for your question. I thought this would actually be our first question of the day. There are some exciting developments there, but I'll turn it over to Real for a few.

Speaker 9

All right. Thanks, Kurt. So maybe I'll start with your second question with respect to inventories. So you'll recall that steel production was actually turned down and blast furnaces were shut down a lot quicker with the pandemic. And as a result of that, inventories of steelmaking coal were also brought down very quickly.

So going into this quarter and from the second half of of the second quarter of of the third quarter, really, we've seen blast furnaces restart again. And as those blast furnaces are restarting, the steelmakers are trying to replenish inventories as well. So orders have been trending up, and that is reflected in our q four sales guidance. But just a note of caution on that, demand is not yet back to pre COVID levels. So just want to qualify that also.

Now your first question on what is happening with the coal market overall and the impact of heightened seaborne import restrictions. The first thing, I guess, to say is there has been no official announcement on those restrictions, but they appear to be mainly directed toward industrial and coal. And we're continuing to see China's steel production run at record high levels. So you're quite right, the steelmakers require steelmaking coal. And we are starting to see a few sales to China above original expectations, and that is coinciding well with our operations ramping up through the quarter as Robin was just explaining.

Now when we look at China per se, there's three sources of steelmaking coal for China. Seaborne market is one, Mongolia is another, and, of course, domestic coal where where the majority of the coal comes from. And so on the seaborne side, the impact of the pandemic has reduced supply from the main supply areas, Australia, US, Canada, and Mozambique, are all down, and it's total of around 20,000,000 tons August year to date. Australia alone is down around 10,000,000 tons August year to date. So that annualizes roughly at 15.

And when we look at IHS Markit data for October, steel making coal vessel loadings are actually trending down somewhere around four and a half million tons month over month. So there is likely an impact from that reported ban. The other point to make is that there is vessel queues at the China ports. Around 6,000,000 tons of coal is sitting in queues right now at the port, but we have not seen any Australian cargoes are waiting at Chinese ports being diverted to other ports. And as as you mentioned, with the the coal prices having come down quite a bit, actually close to $30 since the October, it's quite difficult to resell some of those cargoes as the loss would be quite large on top of the extra cost to move the coal.

But there is also another part to this. If we look at December 2019, the stats were showing that only around 120,000 tons were imported into China from the seaborne market at that time. However, again, IHS market data shows that around 4,800,000 tons of coal was offloaded in December 2019, but did not make it into the stats until early twenty twenty. And that that could happen again, and we we are hearing in the market that there's been at least one Australian coking coal vessel that was discharged after the ban. So how long will the ban last?

We we don't know. But back when Mongolia imports were banned in 2016 and 2017, they lasted less than one month. Another point to keep in mind is, of course, there is inventory in China. We're estimating that there is somewhere around 45,000,000 to 50,000,000 tons of coking coal and coking coal equivalent in the supply chain in China right now that is equivalent to about four weeks at the rate that China is is running right now. So they are, of course, consuming some of that inventory as time goes.

Now the other two areas for supply of steelmaking coal into China are Mongolia. So it's logical for Mongolia to benefit from the possible loss of Australian coal imports. And the market is expecting that Mongolia is trying to recover the lost exports during the early months of the pandemic when the China border was shut. Mongolia exports were down 10,000,000 tons September year to date, but they also reached a new record high in September, just around 3,900,000 tons in the month. And if Mongolia can keep running at record high levels for the remaining three months of the year, imports from Mongolia in 2020 would still be down somewhere around 6,000,000 tonnes year over year.

The other point is that Mongolia imports have never run at this kind of level for three consecutive months. The previous record was in August 2019, and it was one month at around 3,750,000 tons. Then ending with domestic, China domestic production is virtually flat September year to date. Expectations are that China domestic production will be flat for the full year 2020 compared to 2019. Their production in 2019 was right around four eighty million tonnes, and we're seeing more aggressive safety and environmental inspections ongoing in China.

So hence, the belief in the market that supply production of coking coal from Australia will be flat for the full year. So eventually, we're expecting that the global demand will be unaffected by those trade restrictions. And we're also expecting that the improved sentiment and the potential disruptions related to weather in Australia in the fourth quarter and also in early twenty twenty one should support increased activity in the steelmaking coal market. And we are seeing that as shown with our guidance for Q4. So it's a long answer, I know, but there's a lot of moving parts.

And as I said right at the outset, there has been no official announcements about this. There is also expectations that quotas, port and port quotas will reset at the 2021. But same thing again, the quotas are talked about a lot in the market, but there is really no official announcement about that.

Speaker 2

Real, any further color on the Chinese domestic price and the spread between that and the seaborne price and whether any of that will find its way to a non Australian seaborne supplier?

Speaker 9

Yeah. Good question, Don. We the the current arbitrage is somewhere around $70 or just under that, actually. And we're starting to see a few sales to China above original expectations. And, there if if Chinese steelmakers become pinched for steelmaking coal, they could very well continue looking to the seaborne market for more supply from regions other than Australia, and that could very well continue to push price up.

Speaker 2

Thank you. I appreciate all

Speaker 3

the granular data. That's very fascinating. And maybe a quick one for you, Don. As we're kind of coming out of COVID, obviously, the base metal performance, I think, has been pretty remarkable, certainly within both copper and zinc. With respect to portfolio construction, can give us an update on kind of project satellite?

Has there been any more traction there with regards to divestiture potential? And then I guess similarly with Fort Hills, as you see some additional capacity coming on, is there and there's been some consolidation in energy. Is there any potential for looking at monetizing the asset potentially ahead of when you would get back to your more baseline level of the 200 barrels a day and 23 cost structure? Thank you.

Speaker 2

Yes. So first on Project Satellite, we continue to add value where we can on the five different assets. As you know, there's still travel restrictions. So whether you wanted to do a sales process or not, it would be difficult for people to do site due diligence and so on. But we certainly like the way the direction the market is taking.

And as you point out, copper and zinc have performed pretty well. So the market looks stronger than it was when we had launched the Zafranil sale process before. So that should be a benefit. We're not in a rush because we can't really do everything we'd want to do until you have much freer travel than we have today. But certainly, the assets are getting more valuable.

And at some point, we'll engage in some sort of a transaction to get that for shareholders. In terms of Fort Hills, I think the partners will have to come up with a plan on how to ramp up Fort Hills to the next level. As I said in my comments, that will be looking at different market conditions and operating parameters, but the objective would be to get back to full production and thereby lower the cost per barrel quite significantly as it goes up. So I think you'll see some version of that. Suncor is the managing partner, obviously, you'll see announcements from them on on that in due course.

And in terms of of where it stands within the tech portfolio, portfolio construction, I think you called it, we have said for more than a year now that if we get through some of these these issues in the market in terms of getting it back running at full capacity and and people have better visibility on the pipelines, and it's clear that we're not going be paid for it in tech resources, we will engage in a transaction where it gets owned differently, whether it's an outright sale for cash, whether it's contributed into another company taking back shares and some sort of consolidation play. It's it's not lost unless there's some consolidation going on in the sector. So you can assume conversations are taking place, but, I wouldn't anticipate you'd see anything in the near term, not not until we've been able to ramp up and demonstrate what the asset can do. I mean, when the when when Fort Hills first started up, that first, eighty nine months, it was absolutely a terrific operating performance for the start up and got to a point where it was running above capacity. And as as I've been told, 80% of projects of that scope never hit design capacity at all, and this this one got there pretty quickly and had had room for debottlenecking on top of that.

So I think we wanna be sure we can demonstrate that value before we engage in a transaction. But Alberta has removed the caps sooner than people expected and we've started up the second train now, so it's heading the right direction.

Speaker 3

Great. Thanks very much for your time.

Speaker 0

Thank you. The next question is from Greg Barnes of TD Securities. Please go ahead.

Speaker 8

Yes, thank you. Just a question for Don or Real. Do you have the ability to meet additional demand from China for Canadian coal? You said they're coming to you. Does guidance imply that you are meeting some of that demand?

Or is there upside to that number, the guidance number?

Speaker 2

Real, I'll turn it over to you. But Greg, as you might expect, I'm putting a lot of pressure on Real.

Speaker 9

Yes. Thanks, Greg. So yes, we are starting to see some of that demand. We are making a few sales into that demand. But as we look at the full quarter, keep in mind that the guidance that we've provided is based on the fact that overall demand for steelmaking coal in the world, not only China, but in the world is not back to pre COVID levels.

So the guidance is we feel is appropriate. And let's keep in mind too that there remains a risk to the recovery with the second wave that we're seeing with the pandemic in a number of places in the world getting hit pretty hard right now.

Speaker 8

Sure. So I just want to go back to Orest's question on the costs for 2021. Does that also include some, I guess, conservatism on what volumes could be next year? And obviously, you don't have any guidance out there yet, but it does look challenging into 2021 still. And that would obviously have an impact on the unit costs if volumes aren't back up that 26,000,000, 27,000,000 tonne level.

Speaker 2

I'll let Robin talk about initial production plans. But directionally, Greg, we want to be going into 2021 at full production or very close to it. Go ahead, Ron.

Speaker 6

Yes. Not much to add to that, Don. That's the plan. So like I said, we go into 2021 quite strong with healthy raw coal inventories, a stable mine plan, record productivities, all those things set us up. So if the market supports full production, the plan obviously is to meet that demand.

Speaker 8

Okay. Just a follow-up question finally for you, Robin. In the MD and A, it says something about regulatory changes coming shortly that will increase water management costs over and above the $350,000,000 to $400,000,000 that's planned for 2021 through 2024. What is that all about?

Speaker 6

Yes. I'd probably defer to Peter for that one. Yes. Unfortunately, Greg, there's not much more we can say on that in light of the ongoing prosecution, but we do expect some additional regulatory requirements in the near future that will complement measures that we're already taking under the Elk Valley Water Quality Plan. And to the extent that those represent a significant change in our spending plans, we'd probably make an announcement when those are finalized.

Speaker 8

Okay. Fair enough. Thank you.

Speaker 0

Thank you. The next question is from Jackie Przybylowski of BMO Capital Markets. Please go ahead.

Speaker 5

Hi, thanks very much. I have a couple of questions, I guess, I just want to ask them. First, your dividend policy, I know when you initiated the formula, the dividend formula last summer. You had mentioned for last year, you would either provide an update on your dividend in November or in February. And in fact, guess it came in February or this year.

Do you have a sense of what the policy is going be on that going forward? Can we expect a dividend announcement next month? Or are you more likely to update the market in February on that?

Speaker 2

No. It would be February. The decision was made to wait until the year is complete before determining any supplementary capital returns. We have the capital allocation model that's published. I believe we keep it in the IR appendix in every presentation so you can see how the decision making flows on that one.

If there's capital available for further returns above the base dividend, then we have in the past surveyed shareholders to determine whether buybacks or cash dividends are preferred, and then the Board makes a decision at that stage. Basically nothing has changed from what's been Okay. What's

Speaker 5

Thanks. And to follow-up on Greg's question about coal and if you do see and I know you mentioned that there's still some risks to the volumes and outlook. But if you do see higher demand for coal, say, from China through Q4 or through 2021, are there still mechanisms like you've had in the past to push the mines to raise volumes? Could you bring in contract labor or something like that to sort of produce more than what you normally would for a short period to take advantage of that high demand? Is that still possible?

Speaker 2

Robin?

Speaker 6

Yes. Well, it's less possible than it might have been when we had six operating lines. We're down to four now. So flexibility around that is incrementally less, I guess, than it was before. There's still opportunity, I think.

There's some latent capacity in the one mine right now, but it's pretty marginal.

Speaker 5

That's why I was asking with the change to the number of mines. That makes sense. Thanks. And maybe just one final question. I know it's difficult for you guys to comment on the water treatment costs.

If We've seen some press releases, press reports recently about some more stringent water treatment protocols, whether it's through Canada or in some of The U. S. States like Montana. Is there potentially more that Teck would have to do to keep selenium levels under control beyond what you guys have already envisioned in the water treatment plan? Is there something you can talk to on that?

Speaker 2

Yes. I think we start with Peter on that one and then maybe Ryan.

Speaker 6

Yes. So I think what we have to do over the long term is going to depend very much on the results of our current program and ongoing environmental monitoring. We're obviously committed to protecting our water quality as far down the transboundary impacts of our operations, including Lake Koocanusa. And there is Montana rulemaking that's still ongoing. We're primarily regulated in BC, and the BC government hasn't yet announced a recommended water quality objective for Lake Koocanusa.

And they recently announced that they remain committed to a science based process and that BC will only commit to a standard once that science based process has been fulfilled. And obviously, there's ongoing consultation with the Tanaha Nation Council. We're participating in the regulatory process on both sides of the border. From a good news perspective, annual average saline levels in Lake Cucamusta have been stable since 2014, and we expect to see reductions in those levels as treatment capacity comes online. And as Robin said earlier, the Elk Valley saturated rock pool is being commissioned in the Fording active water treatment facility is coming online very shortly.

So kind of difficult to say, Jackie, what the future holds, but I think we believe that our current spending estimates are reasonable subject to the additional regulatory actions that Greg spoke about, which may require some additional spending.

Speaker 2

So that's And the good news, Jackie, is in the next three or four months, our capacity to treat water is about to go up dramatically from seven and a half million liters a day currently to 47 and a half million liters. So that's the LPU SRF. We'll be finished shortly and ramping up, but we finished under budget and ahead of schedule. And then the Fording River active water treatment plant will be coming online in in the next quarter. And so that'll really increase the capacity for water treatment, and we'll demonstrate how the other plants are SRFs no.

Not plants. SRFs are coming. We'll continue to help that. So we're looking forward to getting that capital deployment, which makes the company a better company behind us. So we're past nine now, so I'm going to call a close and just make a couple of final comments.

First, I do wanna say how exciting October 8 was. And, for those of us in the company, because in the morning, we had pictures sent to us from Chile where we saw ball mill number one being being almost rolled into place, and and that's just a significant threshold of of of construction. We've seen things lot large piece of equipment to to get in there. And that afternoon, we saw the ship order coming in from Vietnam, you know, arriving into the harbor, sailing underneath the landscape bridge. And these are two big pieces of equipment and two two, initiatives that we have that are really gonna make the company that much stronger for decades to come.

On the coal side, the Neptune initiative is going to lower costs by by quite a few dollars for decades to come on a lot of times and just make us a stronger, more competitive steelmaking coal business. And of course, QB2, when finished, is going to double on a consolidated basis of copper production and change the look of our portfolio. And this is what we're looking towards, making the company a much stronger company. Commodity prices will be what they will be, but certainly the underlying assets will be much stronger. And then final comment, I do want to say thank you to Ron Mills once again for tremendous twenty five years of contribution to making this company what it is today.

We very much wish you all the best in your time, Ron. Thank you for your tremendous service. And with that, operator, we'll close the meeting.

Speaker 0

The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.