Teck Resources - Earnings Call - Q4 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by. Welcome to the Teck's Fourth 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 is being recorded on Thursday, February 18, I 2020 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, Eric, and good morning, everyone. Thank you for joining us for Teck's fourth 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.

Thank you for participating. I will begin on Slide three with highlights from 2020, and then Jonathan Preston who will join me in presenting our fourth quarter twenty twenty results. We will conclude with a Q and A session where Jonathan and I and several additional members of our senior management team would be happy to answer any questions. So without question, 2020 was one of the most challenging years any of us has experienced as we worked to manage through the global pandemic and its impacts on our people, our communities, and the economy. And the tech team, I believe, rose to meet that challenge, putting in place comprehensive measures to protect health and safety and to ensure we could continue to operate responsibly and progress the strategy to grow copper and optimize productivity and cost structures at our existing operations.

In the fourth quarter, we delivered the strongest quarterly financial results in 2020, while also outperforming the same period last year.

Speaker 2

As of the end of

Speaker 1

the year, we achieved our target of 40% overall completion of QB2, which is expected to double our consolidated copper production by 2023. This, in conjunction with our ongoing focus on reducing costs and deploying Phase 21 for operations, we'll ensure that we are well positioned as the rollout of vaccines and broad based economic stimulus drive global economic recovery and associated commodity demand. Our steelmaking coal sales increased to an average $58 per tonne in the fourth quarter. This was ahead of plan and reflects our structural shift in lower phosphate. I just suggest that everybody goes on on until we open for quest We exceeded our target for our cost reduction program with more than a billion dollars in savings as of the '20.

We did reporting our safest year on record. So in spite of our performance in health and safety in 2020, it is with regret that I report that we did have a fatality in our Red Dog operation in January 2021. Detailed investigation into the incident is underway, and our condolences go out to the family and friends and the entire Red Turning to an overview of our financial results on Slide four. As I said earlier, we delivered the strongest quarterly financial results of 2020 in the fourth quarter. Revenues were $2.40 and adjusted EBITDA was $839,000,000 Bottom line adjusted profit attributable to shareholders was EUR $248,000,000, which is EUR $0.04 7 per share or EUR $0.04 6 per share on a diluted basis.

Our fourth quarter profitability improved from a year ago, reflecting significant increases in zinc prices. This was partially offset by a substantial decline in the steelmaking coal price compared with the same period last year. The average of the FOB Australia price assessments declined from approximately 138 per tonne in early October to approximately USD 102 per tonne by the end. For the full year, we generated GBP 8,900,000,000.0 in revenue and GBP 2,600,000,000.0 in adjusted EBITDA. Bottom line adjusted profit attributable to shareholders was $551,000,000 which is 1.05 per share or 1.4 per share.

And once again, if we could all go on mute, that would be appreciated. I'll now run through some key updates for the quarter, starting with QB2 on Slide five. At QB2, we continue to execute on our copper growth strategy. QB2, as most of you know, is a very long life, low cost operation with major expansion potential, and it is expected to double our consolidated copper production by 2023. Construction is progressing well across all areas of the project and is in line with our baseline schedule that we developed last May as a result of COVID-nineteen.

Since our suspension of 2020, we gradually ramped back up over the year, and we're now at pre COVID nineteen levels in accordance with the plan. I'm very happy to say that in spite of the significant COVID nineteen challenges, we have achieved our targets through the 2020 with an overall completion of the year of forty percent. Projects came to track to the capital estimate of USD 5,200,000,000.0 before COVID-nineteen impact and first production Q2 is still expected in the 2022. The go forward capital cost of Standard and Poor's is estimated at US3.2 billion and again, that is before the COVID-nineteen impacts. We have updated our estimate of COVID-nineteen impacts, which now stands at US450 million dollars to US500 million which represents an increase of around US50 million dollars from our previous guidance range, but in line with expectation.

This includes the additional space that we have constructed to prevent transmission of COVID-nineteen. And so we now have adequate, camp space on-site, and approximately £200,000,000 of these costs have been expensed. I want to spend a few moments taking you through some of the construction progress at QB2. Slide six shows an aerial view of the concentrator's grinding area, which remains the critical or the longest scheduled path for the project, and I have to say it's going very well. In the photo, you can see where we have significantly advanced the construction with the SAG mill and two ball mills for grinding line one already in place.

And the concrete for the line two SAG mill and ball mills is complete, and we began installation of ball mill number three earlier this month. We are well advanced with the steel erection in the area as you can see. And in the very bottom left, you can just see three of the 14 flotation tanks that have been erected with the internal installations already underway. Slide seven shows the starter dam area of the dam at tailings facility. We have completed the construction of the copper dam, the undercone drains and lining of the upstream face of the starter dam.

We're now working on hauling and compacting the fill to complete the starter dam, which utilizes some of the current mine fleet and also several of the Cat seven ninety four trucks of the new fleet, which are now being commissioned. In the background, you can see the excavation and the preparation works on the East Of Buffum, which is nearing completion. The pipeline right of way and platform development is over 95% complete, and we continue with bending, stringing, welding, lowering, and covering of the MWS pipeline on eight now. And you'll see that it shows a section of the water pipeline being lowered into place. This is the pipeline that, of course, will bring desalinated water from the port up to the site.

On slide nine, you can see a photo from earlier in January showing one of our marine work fronts. We're piling it on the jetty from the shore. You have to be aware that in addition to the works that are thrown right here, we are also pile driving offshore from a temporary island, which supports sort of two additional work fronts for the jetty eventually they'll then join together. You will see on slide 10, an e milestone with the completion and opening of our integrated operations center in Santiago, where our team is working on operational readiness and training on the simulator. The team is carefully designed and built facilities so that the multidisciplinary operations team, which comprises integrated planning, value chain optimization, process control, and reliability, They'll all have real time and tools to manage our t v two operation.

And as you might expect, there's several jobs, hundreds of jobs that had been high at the mine site at 14,000 feet elevation will now actually be in this area in Santiago. Turning to Slide 11. Despite ongoing challenges associated with COVID-nineteen and thanks to the tireless efforts of our employees and contractors, our operations, build resilience and performed in line with the plan in the second half twenty twenty and without significant impacts carrying over to our 2021 operating plans. We achieved unit level guidance for production, sales and unit costs for the second half of twenty twenty. As I've already noted, 2020 was our safest year on record.

Our safety performance metrics were at their lowest for the full year with a significant reduction in incident frequency. Health and safety, of course, is a core value for Teck and stringent COVID-nineteen prevention protocols remain in place at all sites at all times. On Slide 12, we continue to focus on increasing margins, not volumes, in our steelmaking coal business, maximize cash flow from operations. We completed construction and pre commissioning of the Elkview saturated rock drill expansion in the fourth quarter on schedule and below budget and commissioning is now underway. The Elkview SRF has been achieving your complete removal of selenium and nitrate from up to 10,000,000 liters of water per day since 2018.

It is part of our ongoing work to implement the Elk Valley Water Quality Plant to maintain the health of the water boundaries to nickel coal operations. The ElkUSRF expansion doubles the water treatment facility water treatment facility's capacity to use 20,000,000 tonnes of water per day. As I mentioned earlier, our adjusted site cash cost of sales decreased to an average of $58 per tonne in the fourth quarter, so below the $60 per tonne target that we had, and that represents a $9 per tonne decline from the third quarter, and that was better than planned. This substantial reduction in our cost of sales reflects a structural shift to lower cost base, which was driven by five factors: first, our LP plant expansion from 7,000,000 to 9,000,000 tonnes of capacity, so an incremental 2,000,000 tonnes of low cost, high quality coal and the closure of our higher cost Cardinal River operations, which is now complete. We have declining strip ratios, which we piloted in as part of the plan.

We have the benefits of our cost reduction program and then also Release 21 in innovation. Sales were top end of the Q4 twenty twenty guidance range at 6,100,000 tonnes with nearly 20% of sales to Chinese customers, which benefited our fourth quarter realized price. We are continuing to prioritize available spot volumes in China, which is expected to benefit our price realizations in Q1 in 2021. Importantly, steelmaking coal prices have increased significantly since the start of the year in response to improving demand in markets outside China and trade flows rebalancing. FOB Australia pricing levels increased significantly over a three week period and are currently approximately US40 dollars per ton higher than they were at the start of 2021 and CFR China prices have increased to above US220 dollars per ton.

Since 01/01/2011, I do want to remind you that the FOB Australia price has averaged around US170 dollars a tonne normally or US180 dollars per tonne on an inflation adjusted basis. Our public activities, a US50 dollars per ton increase in the FOB Australia's steelmaking coal price would increase our annualized by around $5,500,000,000 So that $40 increase that we currently have would be an increase in EBITDA of about $1,200,000,000 versus where it was running at before. Moving to Slide 13. At Neptune, we are nearing completion of the upgrades and expansion to secure a long term low cost and reliable supply chain for steelmaking coal, which will structurally leave our costs lower for decades to come and will ensure that we can capture high prices when they are We achieved 90% of our completion and look forward to completing this in the next ten to seven. All major equipment has been installed in significant new facility, including the new overpack, hitch loader, jack hanger, single power damper, and

Speaker 3

construction

Speaker 1

completion of the remaining inbound facilities associated with the new double railcar dumper is expected around the end of first quarter. Significant effort has been put into maintaining the schedule though through additional labor and multiple shifts and overtime and we take that together with an already congested site, which has of course seen impacts from COVID-nineteen as well. We have seen very significant impacts on worker productivity. And this has increased costs, which are expected to come in approximately 10% above our prior estimate before COVID-nineteen impacts of about eight hundred million. Now if you go back to, the beginning of the pandemic and since since the onset of pandemic, COVID nineteen has impacted project costs by an estimated additional 80 to 100,000,000.

Pandemic has caused delays in some equipment delivery, which has driven work resequencing and schedule extension of certain systems as well as reduced the productivity of the construction workforce as they manage through the many COVID-nineteen protocols. However, first coal through the upgrade facility is still expected early in the second quarter. On Slide 14, our strong sustainability performance continues to place Teck at the top of ESG rankings by the major ratings firms. We are the top ranked mining and metals company on both the S and P Dow Jones Sustainability World Index and Sustainalytics. We have an A rating and the top quartile for mining on MSCI, and we were recently named to the Global 100 Most Sustainable Corporations list by Corporate Knights.

And earlier this month, Teck was named for the fourth consecutive year to the Bloomberg Gender Equality Index. And while these third party rankings of ESG performance are definitely encouraging, we know that we still need to remain focused on continuing to build on our strong ESG track record to ensure that we meet the expectations of our society more broadly. I'll now run through highlights of our fourth quarter by business units, starting with copper on Slide 15. Our copper unit had a strong fourth quarter supported by an increase in copper prices. Copper production in the quarter was 78,100 tonnes with a net cash unit cost of USD 1.27 per pound sold.

Production continued to be impacted by harder than expected ores following a change in mine sequencing in 2020 in support of reduced waste movement as well as maintenance challenges. At the same time, production at Antamina was higher than a year ago due to higher mill throughput. Significantly lower net cash unit costs than in the same period last year were driven by higher cash margins for byproducts, supported by, of course, our cost reduction and RACE21. Now looking forward to 2021, we expect higher production at Highland Valley and Antamina to offset declines at Farm To Andacollo and at the end of the mine life. Net cash unit costs are expected to be slightly higher than in 2020.

Our zinc business unit results for the fourth quarter are summarized on Slide 16. And as a reminder, Antamina zinc related financial results are reported in our copper business unit. Red Dog sales of zinc and concentrate were 149,000 tonnes, which was in line with our guidance. Red Dog zinc production was for 2019 due to higher mill throughput and improved recoveries. At rail operations, refined zinc and lead production was higher than the same quarter in 2019, which back then was impacted by an electrical equipment failure in the zinc refinery.

Looking forward to 2021, we expect sales of Red Dog zinc and concentrate to be lower than normal in the first half of the year, particularly in this This reflects in 2020 due to water constraints. Net cash unit costs are expected to increase in 2021 due primarily again to lower production volumes in 2020 to prior years. And net cash unit costs are expected to vary significantly on a quarterly basis throughout the year and that is in line with our normal seasonal sales patterns. Looking at steelmaking coal on Slide 17. Despite the challenges in 2020, the steelmaking coal business unit achieved a substantial ramp up in production and sales in the fourth quarter.

As I mentioned earlier, sales were near the top end of our guidance range and our average price reflected sales to Chinese customers increased nearly 20% of total sales and that's a higher CFR type price. Our adjusted price cost of to an average of $58 per ton in the fourth quarter, reflecting a structural shift to a lower cost. Looking forward, the recent severe winter weather, which you all experienced, has impacted our production and logistics service providers over the past two weeks. And if we include these adverse weather impacts, we expect sales of 5,000,000 to six 300,000.0 tonnes in the 2021. We will continue to prioritize available spot sales volumes to China, which is expected to result in favorable price realizations.

We expect our realized price in q one twenty twenty one to be higher than the ten year average of our realized savings, which is normally around 92% of the benchmark, and we expect it to be higher than that Q1 twenty twenty one by a reasonable amount. For the full year, we are transitioning to full production rates to meet anticipated demand. Our adjusted site cash cost of sales between $59 per tonne and $54 per tonne with the first and fourth quarters near the lower end of guidance range and the second and third quarters near the higher end of the year as a result of our outages. Transportation costs are expected to decrease to $36 to $39 per ton for the full year with the completion of our Neptune upgrade and enhanced rail network flexibility. Costs are expected to exceed the upper end of annual range in the first half of the year during the final stages of the Neptune production commissioning, and then they will be at the lower end of the range in the second half once Neptune is up and running.

Our energy business unit results for the quarter are summarized on Slide 18. Our realized prices and operating results were significantly impacted by a material decline in benchmark oil prices and the decision to reduce production compared with Q4 twenty nineteen. As previously announced, Fort Hills Partners safely and efficiently restarted the second train facility and ramped up production in the fourth quarter to approximately 120,000 barrels per day. As I noted earlier, during the fourth quarter, we recorded a noncash pretax asset impairment for our interest in Fort Hills of GBP $597,000,000 or GBP $438,000,000 after tax, in part due to lower market expectations for long term Western Canada Select heavy oil prices. Looking forward to 2021, we expect our share of Fort Hills annual production to increase approximately 25% from 2020 levels and our adjusted operating costs to decrease by approximately 20% compared to 2020.

We expect production to be lower and costs to be higher in the 2021 and then improve in the second half as production is ramped up. We'll be pushing hard to get Fort Hills back to full production along with our partners as soon as we can. The Fort Hills partners continue to also focus on cost discipline and on maintaining the operating and capital cost savings that were achieved in 2020 while assessing plans to further increase production back to nameplate capacity. We are encouraged by the recent significant improvement in benchmark oil prices with West Texas Intermediate over US61 dollars although it was off just a touch today and spot Western Canada Canadian Select close to US50 dollars per barrel. And with that, I will pass it over to Jonathan Price for some comments on our financial results.

Speaker 2

Thanks, Don. And if I could just ask everyone again to mute their mics, if they're not already, please. So I'll start by addressing the detail of the quarter's and the year's earnings adjustments on Slide 19. In Q4 twenty twenty, we recorded a noncash after tax impairment of €438,000,000 on our interest in Fort Hills. Environmental costs were $2.00 €1,000,000 after tax, primarily relating to a decrease in the rates used to discount our decommissioning and restoration provisions and increased expected remediation costs.

After these and other minor adjustments, bottom line adjusted profit attributable to shareholders was $248,000,000 in the quarter, which is $0.47 per share or $0.46 per share on a diluted basis. The changes in our cash position during the fourth quarter are on Slide 20. We generated $594,000,000 in cash flow from operations. We spent $930,000,000 on sustaining and growth capital, including $483,000,000 on QB2 and $150,000,000 on the Neptune facility upgrade. Stripping activities were $120,000,000 which was lower than a year ago, primarily due to the decrease in strip ratios at our steelmaking coal operations.

We paid $55,000,000 on expenditures on investments and other assets. We received net proceeds of $540,000,000 from debt in the quarter, which included a drawdown of $474,000,000 on the QB2 project finance facility. Redemption or repurchase and repayment of debt totaled $30,000,000 We drew a net $174,000,000 of our revolving credit facilities. Lease payments totaled $39,000,000 and we paid $64,000,000 in interest and finance charges and $26,000,000 in our regular €05 aired quarterly base dividend. After these and other minor items, we ended the quarter with a cash and short term investments of $450,000,000 Now turning to our financial position on Slide 21.

We have a strong financial position with current liquidity of CAD6.5 billion. This includes our current cash and the amounts available on our USD5 billion of committed revolving credit facilities. Dollars 3,700,000,000.0 is available on our $4,000,000,000 facility that matures in Q4 twenty twenty four and our $1,000,000,000 sidecar that matures in Q2 twenty twenty two remains undrawn. Importantly, both facilities do not have any earnings or cash flow based financial covenants, do not include a credit rating trigger and do not include a general material adverse effect borrowing condition. The only financial covenant is a net debt to capitalization ratio that cannot exceed 60%.

And at December 31, that ratio was 24%. Of our US2.5 billion dollars limited recourse project financing facility for QB2, we have drawn US1.1 billion dollars of which US368 million dollars was in the fourth quarter. Going forward, project funding will be from the project financing facility until the project reaches a specific ratio of project financing to total shareholders' funding. Teck's next contributions to project capital for QB2 are expected in the first half of this year, subject to the impact of COVID-nineteen on the project schedule and timing of capital spending. We have no significant note maturities prior to 2030 and investment grade credit ratings from all four credit rating agencies.

Now as Don mentioned earlier, we exceeded our target for our cost reduction program, realizing more than $1,000,000,000 in savings as of the 2020. During the period from 10/01/2019 through to 12/31/2020, efforts from our cost reduction program reduced our planned spending at the June 2019 by €1,065,000,000 of which €355,000,000 were operating cost reductions and €710,000,000 were capital reductions. Of this, $210,000,000 of the total was realized in 2019 and €855,000,000 was realized in 2020. As noted, our cost reduction program is now complete and reductions are included in our operating plans and guidance going forward. Finally, as shown on the slide and as Don has mentioned, we have significant leverage to increasing copper and steelmaking coal prices.

Overall, we have a strong financial position 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 pass it back to Don for closing comments. Thanks, Jonathan. I wanted

Speaker 1

to close with taking a quick look at Teck's proven growth strategy and what many people are calling green metals these days. Teck is one of the best positioned companies globally to capitalize on the strong demand growth that we see for green metals, particularly copper, which is being driven by the global trend of decarbonization and the associated electrification. We're already a decent sized copper producer from our four existing mines. But more importantly, as shown on Slide 22, we have perhaps the best one of the very best copper production growth in the industry and in pretty good jurisdictions as well. By 2023, Teck will have doubled our consolidated copper production as we complete construction of QB2.

This compares to average copper production growth of just 21% for our diversified mining peers and only 11% growth for copper companies, and these numbers are according to Wood Mackenzie. So Teck does provide investors with strong copper growth exposure at a time when copper demand is set to expand significantly. Moving to Slide 23. That accelerated copper growth is the cornerstone of our strategy. By growing our copper production, we will rebalance our portfolio to become a major green metals producer.

At the same time, it makes carbon, including steelmaking coal, a much smaller overall proportion of our business. We're also continuing to strengthen our existing high quality assets through RACE21 innovation program, which is harnessing cutting edge technologies, including artificial intelligence and automation to drive step change improvements in productivity, efficiency, safety, and sustainability. And everything we do is underpinned by a focus on disciplined capital allocation. We will rigorously assess and balance future opportunities for growth with providing cash returns to shareholders. And of course, we remain committed to strong environmental, social and governance performance, including setting ambitious targets to reduce our carbon intensity and be carbon neutral across all our operations by 2050.

Wrapping up on Slide 24, this is indeed a very exciting time for our industry and for Teck. There are opportunities ahead of global growth and the transition to lower carbon economy drives a new green metal demand. We're strengthening how we operate both through cutting edge innovation and to improve productivity as well as leading ESG performance. And we have a leadership team with the right mix of skills and experience to deliver on our strategy. And with that, we'd be happy to answer your questions.

And like many of you, most of us are on phone lines from home. So please bear with us if there's a delay while we sort out who will answer your questions. Operator, back to you for questions.

Speaker 0

Thank you. And the first question is from Emily Chang with Goldman Sachs. Please go ahead. Your line is open.

Speaker 4

Maybe coming back to your last point there on the copper growth and positioning the company for green metals. As you look beyond the start up of QB2 and Square, what appears to be a very attractive supply demand outlook for copper and a very currently a very supportive commodity price environment, can you perhaps discuss what the pecking order for developing some of your longer term growth projects, including Zafaranal and QB3 and some of the other satellite projects there? And maybe a potential timeline before we could see capital being directed towards these?

Speaker 1

Yeah. No. Excellent question because as you know, we are rich in copper resources. We have about seven projects, but, not all of them will necessarily be built by Teck. So, there's a few obvious ones that we're looking at very closely.

Everyone knows about QB three. The fact is QB as a resource has grown enormously, and, you know, we're crossing the 8,000,000,000 tonne threshold and and headed to 10 and beyond. So at some point in time, QB3 will just be a natural deployment of capital. But whether that is sort of a 50% expansion, a doubling of capacity, or something larger like what our chief operating officer Ray Conger directed when he was at Freeport, Cerro Verde and Gru, is yet to be determined and won't be determined for some time. We're still at the you know, we're completing the scope of study, heading to pre feasibility.

So in terms of the question on timeline, that one wouldn't be ready for sanction probably till early twenty twenty five. I should note that Teck itself wouldn't necessarily be putting up the initial equity capital because of our ideal with senior promo and then project finance. So capital from Teck wouldn't come up for quite some time, maybe as long as 2027. So that leaves us open to other things if we chose. The Zafranal project, of course, has already completed its feasibility study and the initial stages of environmental permitting.

We had started the sales process on that before COVID, and finished the first round, very happy with the first round bids and then selected the second round participants. But then COVID hit and nobody was able to visit site until we put the process on the shelf. We won't be restarting that again until midyear at the earliest. We wanna get through the elections in Peru and then take a look at what the world looks like. But the one thing we know for sure is it's worth more today than it was pre COVID, and we have a good indication of that from the different inbound calls we get.

And the reason for that and and and so would Saint Nicholas or or any of our other projects, not only is the spot copper price that much higher, but the perception of copper demand growth because of the electrification, that's going on in the world, COVID has actually accelerated decarbonization around the world. So, people have shifted, more positively their view on copper outlook. And then, the copper companies, including the mid caps, you know, they have real access to capital now, and they look around for opportunities and they're very scarce and tech has a lot of them. So they've approached us and we'll take their time, but there's clearly things we could do there. The really exciting one is St.

Nicholas. We'll be publishing the results of the prefeasibility fairly soon, but suffice it to say that it is a very high IRR, reasonably short construction schedule, lower capital costs, and they run about the $800,000,000 range, so very manageable. We own 100% of it. We've had inbound calls from several about this and actual offers from people that haven't even done any site due diligence or that sort of thing. So we know it's hot commodity, so to speak, but we won't be deciding again until after midyear sometime what direction we go on that, whether we partner with someone else or, keep it ourselves or something else.

That'll give us a feel for it, but we do have a rich array of options to work through.

Speaker 4

Great. That's really helpful color. And one more, if I may. Just around the latest on tech fees on the met coal outlook there. I know you guys typically provide some really great color.

But what are you seeing as associated with the Australian import ban to China essentially? And what maybe

Speaker 5

are your views of

Speaker 4

the latest on the global supply demand for seaborne met coal and how does good tech fit into all of that?

Speaker 1

Okay. That's a key question. I'm sure everybody wants to hear the answer. And I'm going to turn it over to Rayle Foley in a minute. But I just want to finish a thought from your previous question that people may not have gleaned from my answer, but we should note that in terms of returning capital to shareholders, when QB2 finishes 2022, which is just next year, and we get a complete reversal in our free cash flow position.

Right now, putting out a couple billion dollars a year to build it, but once it's built, the whole thing reverses to putting out money, a billion something starts coming back in. It's more than $3,000,000,000 reversal in a good way, and there won't be a project ready to build for a couple of years in between. So we see a lot of free cash flow for a couple of years in the at least a couple of years in the 2023 and 2024, 2025 kind of range before any other project could be built. I wanna make sure people understood that. And we have our capital allocation framework in in the IR presentation.

You can see how the board has approved capital to flow. And at the end of that calculation, a minimum of 30% is returned to shareholders through dividends or buybacks, but it could be 100% of the surplus if that's what the Board decided to do. And with that, Real, over to you on the key coal question.

Speaker 3

All right. Thanks, Don. Thanks, Emily, for the question. There's quite a bit in your question. So I'll start and talk about the ban, the China ban on Australian coal, and I'll talk about what we're seeing in demand and end up with a bit of a summary on the supply side.

So as far as the ban is concerned, from what we're seeing and hearing in the market from our customers and also our two offices in China, there is no set date or clarity as to when the ban might end. So in the meantime, what we are seeing and taking advantage of is the price premium for sales into China. If you look at pricing today, the FOB Australia price is around a $140 currently, and the CFR China price is at $220 US. So once you deduct ocean freight, which for us is somewhere around $15.16 dollars currently, that still leaves a premium above $60 per ton. Hence, our focus on trying to maximize sales into China to capture that benefit.

Now if we look on the demand side, in China, as a result of the ban, we've seen a large increase in seaborne coking coal imports in 2020 to the second highest level on record at 49,000,000 tonnes. That compares to 60,000,000 tonnes in 2013, which was the highest level, and that was an increase of 8,000,000 tonnes year over year. Inventory at China ports are currently very low. They're sitting at somewhere around 2,400,000 tonnes. The record low was around 1,200,000, the record high was 13,800,000 tonnes.

So when you look at this, with port inventories solo right now and around half these tons being Australian coal that have not cleared customs due to the ban, the port stocks are indeed very low and the China CFR price is is continuing to to be high. On February 7, just ahead of the Lunar New Year holiday, it was sitting at somewhere around US230 dollars per ton on a CFR China equivalent basis. And China domestic production in 2020 only went up somewhere around 4,000,000 tonnes or less than 1% at four eighty five million tonnes. So there is ongoing challenges to increase that production in relation to continuing safety and environmental inspections at the mines. The other source of coal for China is Mongolia.

Those exports were down 10,000,000 tonnes to 24,000,000 tonnes in 2020. And when we look at the beginning of 2021 to date, the number of truck movements through the border with China is still somewhere around 50% of where it was at the same time in 2020. And as a result of this, the Mongolian prices have also increased. And again, same date around February 7, prices started Lunar New Year. They were sitting at $218 CFR China equivalent.

And then when we look at demand in other market areas, we're seeing demand improve. We've seen that improvement start from around April, that is ex China market. And in December, the hot metal production increased for an eighth consecutive month with the primary increases actually coming from Japan, Korea, Taiwan markets, nearly 10% increase. And India was up close to 2%. That is in response to around 80% of the blast furnaces that were closed at the start of the pandemic, 80% of those have already been announced to restart or restarted.

That includes somewhere around 75,000,000 tonnes of capacity that has been restarted out of around a 100,000,000 tons that was shut down at the start of the pandemic. And then last lastly, on the supply side, so for seaborne supply, we're seeing that 2020 supply was reduced somewhere around 27,000,000 tons. That includes Australia that was down around 15,000,000 tons. US supply somewhere around six to 8,000,000 tons. Canada and Mozambique down each 3,000,000 to 4,000,000 tons.

And when we're looking at the mines, the existing mines, the reality is that WoodMac is estimating the breakeven price is around USD 125 per tonne. For a large portion of 2020, the FOB Australia price was below that. So that put a lot of pressure on mines. We've seen a number of mines shut down, both in relation to economics, but also COVID impact. And the combined export capacity that was shut down was 45,000,000 tonnes on an annualized basis.

And there we're estimating that there's currently still around 15,000,000 tonnes or so that is shut down currently. And as we're looking into 2021, it is early days yet, but it is, like I said at the start with the ongoing ban on Australian coal in China, it seems that there will be a continuing impact to Australian production. So I'll leave it at that. I trust that answers.

Speaker 4

That's super helpful.

Speaker 0

Thank you. The next question is from Carlos De Alba with Morgan Stanley. Please go ahead. Your line is open.

Speaker 6

Yes. Thank you very much, everyone. And just on QB2, if I may ask, are you guys planning on another update on CapEx? You're considering the Chilean peso where it is today a little bit stronger than what you had baked into your estimates. And I know you have provided a guidance on the impact on the move on the currency, but just wondering if you are planning on announcing any an update.

Also, when you consider the new impact from COVID related expenses, one off €50,000,000 are the assumptions around that? When do you expect the cases will or the pandemic will be coming under control in Chile? Or what can you tell us around your assumptions behind that number, so we can feel more comfortable that the upper end of that range is probably not going to increase too much? And then finally, just very quickly also on QB2. Is it fair to assume that the contribution this year to the QB2 CapEx from Teck will be around $630,000,000 to CAD $650,000,000?

Thank you very much.

Speaker 1

Okay. I think there's three questions within there. I'm going to take the first one about when we go updating the investment, then I'll turn it over to Ed Conger on the second one on the COVID expenses, components going forward, and then either, Red or Alex on the third one. So, when we did the investment that we announced on 04/01/2020, that was a very detailed, from the ground up, every single contract, reviewed by Bechtel, to build up the the total cost, looking at all the contingencies and the rest of it. So that was a very, very detailed exercise.

It takes a lot of time and resources. We don't intend to do another version of that as such. But in terms of updating the numbers that we're managing to, that $5,260,000,000 we would likely give you a more detailed update in Q2 after

Speaker 3

we've got a

Speaker 1

few more months running at, you know, re building building to even a higher peak of workforce that is in the plan as we go towards the middle of the year. So the update we've given you today is it remains on track with what we had published on the April 1 definitive estimate, excluding the COVID costs, and then we gave you the COVID cost estimate there. Red, over to you on on QB two COVID how it's doing with COVID and and costs.

Speaker 7

Thanks, Carlos. We we are assuming that that we continue to manage the work force with all of the protocols in place that we're practicing and executing very well. Right now, we've been very pleased with, you know, essentially no workplace passing of of the virus so far. We we are testing people before they come up, keeping them from, you know, from coming onto the property if people test positive with PCR testing. So that we've been very pleased with all of that.

And our workforce is doing a great job self reporting and just, you know, staying off work if if they're even suspicious that they that they might be ill. So the assumptions that we have going forward, we as you may recall, we expanded the the housing accommodations that we have at the site. The man camp was expanded so that we could maintain social distancing. That that all is working well, and all all of the assumptions now are are are based on current experience that we are gonna continue to to ramp up our headcount. We have space to do that as work fronts develop And as the, you know, the construction plans get executed, there there will be more employees on-site and and the the assumption still put us in the second half of next year for completion.

Speaker 1

Jonathan, I see you put your hand up to take the third question on capital.

Speaker 2

Sure. Look, just to say briefly, I think the assumption around CAD 600,000,000 or so tech share for QB2 this year is about right if you look at what we've said with respect to the project finance facility and obviously the share between ourselves and the Sumitomo Group, then yes, about $600,000,000 is about the right number.

Speaker 6

All right. Excellent. Thank you very much and good luck.

Speaker 1

Thank you.

Speaker 0

Thank you. The next question is from Jackie Prezbilewski with BMO Capital Markets. Please go ahead.

Speaker 5

Thanks very much. I guess I'll just start by asking just a clarification following on Carlos' question. You said in the release that your COVID related costs for QB2 are US50 million higher than they used to be, so US450 million to US500 million dollars You had previously given another number on top of that, I think it's $45,000,000 for camp expenses. So is it still another $45,000,000 in addition to that $450,000,000 to $500,000,000 range? Or are you just sort of adding the two numbers together?

Speaker 1

As we noted in the disclosure, we've added it together, so it's just the one number.

Speaker 5

Got it.

Speaker 1

And it's a 50 is sort of what was expected by adding another quarter worth of operating with COVID. And there was a bit of a second or third wave, if you might call it, that occurred during the

Speaker 5

Thanks. Yes, that's helpful. I was just wanted to clarify on that. And then the other similar question, I guess, Neptune, just for clarification, because there's a few different numbers, I think, on the CapEx there as well. So am I thinking about this right that you had CAD 800,000,000 roughly was your budget?

You're saying now it's 10% higher. So let's say, $880,000,000 and then another CAD 80,000,000 to CAD 100,000,000 on top of that. So you're kind of in the $9.60 to $980,000,000 range Canadian. Is that am I adding that up correctly? Is that all additive?

Speaker 1

Yes. That's correct. What we're doing with all the projects, and it would be whether it's QB or water treatment plants or making sure that people can identify what the actual cost of COVID was that's that's not gonna be around, hopefully, one day with vaccines and the rest of it, and then what cost measured against the actual direct production costs would be. So that's why it's broken out that way, and that's how Pricewaterhouse, our auditors, would want us to manage the report.

Speaker 5

Okay. No. That's great. I just want to make sure that I'm not double counting anything. And then maybe just finally one other question.

On the Highland Valley, it looks like your guidance has come down for 2021 and then maybe a little bit in the future as well. You maybe give us some sense as to is it still the ore hardness that's causing you problems there? And do you see maybe an opportunity to kind of go back to your previous guidance range if you are able to get more manpower on-site or work through those hardness issues?

Speaker 1

Red, I'll turn it over to you or to Pisad if you like.

Speaker 7

Yeah. Thanks, Don. Yeah. Jackie, we've we've identified a a rock type that's in this particular pushback. It hasn't been encountered for a long time.

It was not included in our mineral model. We've now done that work. We've mapped it. We've done some drilling, and we now have it identified in our mineral model. And it's it's gonna be with us for another year or so as we as we work through that.

So now well known, accurately modeled, and, of course, the the team's working every day to, you know, optimize the the performance given the work types that we have, blending schemes that we can do. They're being very creative with sending certain types to different primary pressures, which provide opportunities for us to optimize given, you know, that we now know the the work types that we're presented with. So we'll keep you updated on that progress. But for now, it's known and mapped and modeled, and that's the difference.

Speaker 5

Okay. Thanks very much, Fred. And I realize I've asked a number of questions already, but if I could just ask one more. Going back to the Coal Division, the transportation cost guidance that you've given is obviously down a little bit, and that reflects the expansion at Neptune. But recognizing that the Neptune Terminal isn't going to be running at full strength for the entire year, Can can you maybe give us an idea of when you expect to get to its full run rate?

And then, by extension, sort of at that full run rate, what what we might expect that transportation cost might come down to going forward, like, 2022?

Speaker 1

Okay. I'll turn that to either Real or Ian Anderson.

Speaker 3

Yep. I can take that. I can take that, Don. So, Jackie, yeah, you're right. We we've indicated lower transportation cost for 2021.

And we've also said that we're expecting the first half to exceed the higher end of guidance as we're finalizing the last stages of the Neptune upgrade. And then the lower end of the range in the second half. So that reduction, a lot of it is associated actually to increasing the Neptune usage. We said also that first call is expected to go through the new dumper early in q two, and then we will be ramping up with wet commissioning beyond that. With Neptune expected to reach capacity, the nameplate capacity is 18,500,000 tonnes, but we're expecting Neptune to be able to increase beyond that.

And we're expecting to exceed that 18,500,000 tonnes somewhere around the

Speaker 0

end of

Speaker 3

the third quarter or into the fourth quarter this year. Then for 2021, of course, we'll be running Neptune to maximize utilization and reduce our logistics cost.

Speaker 5

So if we're modeling transportation cost in 2022, it should be, like, around $35.36 dollars a ton. Would that be reasonable?

Speaker 1

Jackie, it's a little bit because there's more than just the port cost. There's the rail cost as well. There are negotiations on that one. But we can't give you a really accurate That's probably the third quarter when we see what the ultimate capacity will be because we are optimistic that it'll be, you know, a reasonable amount above the 18 and a half plus the rail cost. So there's two two factors that we don't know yet when we do.

Speaker 5

Okay. I appreciate that. That's it for me. Thanks very much, everybody.

Speaker 0

Thank you. The next question is from Tinner Tanners with Bank of America. Please go ahead.

Speaker 8

Yes. Hey, good morning. Just want a couple of things I wanted to follow-up on. On the not the transportation, but on the coal cost side, the range is between 59,000,000 and 64,000,000 And I just wanted to understand a little bit more what could drive the high end of the range and the low end just to get a little more color around that.

Speaker 1

Robin, over to you. Yes, you bet. I'll try

Speaker 3

and give you a fair

Speaker 1

bit of context just so you can tell why they changed. But probably the most important thing is that our costs are typically higher. They'll be towards the higher end of the range through Q2 and Q3. And that's really because we do our annual maintenance outages through that period of time. And so you'll see those costs be closer to the top end.

Q1, Q4, typically, they'd be closer to the bottom end because we'd be running pretty much flat out. We have made our structural changes. So the operating costs that we saw through the 2020 are roughly what's giving us a sense of range of about 59,000,000 to 64,000,000 There are three things I do want to point out that are cost pressures that we do have to recognize this year. So one of them is a onetime cost, which is we've got a mining we're mining through some old legacy waste type material in one of the operations in it. We have to bring a contractor to handle the material.

It's fine. It's difficult to handle. So that's a onetime cost that's putting a bit of pressure on overall costs. The other one is we enjoyed some pretty low oil pricing through 2020. We expect, as you see lately, that, that cost is likely going be a little bit higher.

And then just ongoing water management. We're going to bring on two of our water treatment facilities this year. So we've got the LP Saturated Rock Fill, which actually just started pumping water here three days ago. So pretty excited about that. That will cost us some operating.

And then the Fording River South after water treatment facility comes on midyear. So that will also start to produce and generate some operating costs. So when you put those three factors together, they collectively represent about 2 to $3 a tonne over what we would have seen, say, in 2020. I guess on the flip side, like I think there's some really positive work obviously being done on the RACE21 side. We saw tremendous productivity improvements through last year.

We're continuing to advance our strategy, and we do see significant value being generated. That value comes online in time, so it's difficult to kind of pin down what happens. Some of that will offset some of the cost pressures, but that hopefully gives you an idea of why we range somewhere between that 59,000,000 and 64,000,000 through the year.

Speaker 8

Okay. That's helpful. And then my only other question I wanted to highlight was just on the coal side. I think you've also given guidance that about twothree, if I recall, of your coal sales had been kind of locked into contracts that are tied to the Aussie price, and then about one third would be available for the Chinese benchmark, if you will.

Speaker 5

Is that is that the right numbers?

Speaker 8

Is there more complications around that thinking that I'm missing, or is that roughly the way to think about the opportunity with the divergence of pricing this year?

Speaker 1

A little less than one third, real, over to you.

Speaker 3

Yeah. Thanks, Don. Thanks, Tim. Yeah. I what we said is our target is to sell seven and a half million tons into China this year.

But of course, that depends how long the ban will last and if there is import restrictions or other policy decisions. So with our guidance between twenty five point five million and twenty six million tonnes, it's somewhere north of the 25% of our sales if we achieve that 7,500,000 tonne target. Now when when we're looking at at q one, for for instance, we're we're actually keep in mind that with Lunar New Year, this is there's usually a bit of seasonality in Q1, but we're moving sales into China, kind of reflecting our target to maximize sales over there to capture a very significant premium. And we've said that we're expecting to realize materially higher prices than our our ten year average realized price versus average of the three keys has been flat by one month.

Speaker 8

Okay. So the 7 and a half million, though, that's that's a pretty finite amount. There's there's not much flexibility there. Right? I mean, you have fixed contracts, and and the ability to move things around is limited other than that amount?

Speaker 3

Yes, that's correct. We have long term contracts with long term, highly stable, reliable customers that we are delivering into and not knowing how long the China ban would last and the efforts that it took to develop those very long term relationships. We are a long term supplier. We have reserves and resources for decades to come. So we need to balance our sales book to to take full advantage, but not only one of pinpoint, I mean, this is also looking at multiyear.

Speaker 8

Got it. Okay. Thank you.

Speaker 1

Operator, Eric, I think we've gone over time. I think we should hand it back to Don for closing remarks. Thanks. Okay. Thanks, Greg.

Just want to say that the team we're all feeling pretty good about how the company looks right now. QV two is on track. Chile is doing a great job on vaccines, by the way. While we're testing everybody, we will actually be vaccinating on-site within a week, so that's another positive for maintaining control over COVID and getting good productivity. Neptune will be finished real soon, so that structure lowers our cost for decades to come and gives us the ability to capture high prices when you're there.

The cost at the mine site and our coal business, have come down significantly, and the cost and logistics will be coming down, throughout the the year towards the second half of this year. So that's good. RACE21 is certainly having its impact. We're all excited about that. And the market looks pretty strong.

Our transition to more green metals, as they're called, more copper, reweighting the portfolio is well underway, and QB2 will be starting up next year, so coming soon. Thanks all for being here today, and we look forward to the next quarterly call in July. Bye now.

Speaker 0

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