Teck Resources Ltd (TECK) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Teck's Third Quarter 2020 Earnings Release Conference Call.

(Operator Instructions) This conference call is being recorded on Tuesday, October 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.

Thanks very much, Melanie.

Good morning, everyone, and thank you for joining us for Teck's Third Quarter 2020 Results Conference Call.

Before we begin, I would like to draw your attention to the caution regarding forward-looking statements on Slide 2. 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.

We'd 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.

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

Thank you for joining us this morning.

I will begin on Slide 3 with our third quarter highlights, and 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&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, I do want to say that after 25 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 25 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 2020 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-19.

And despite the ongoing challenges, our financial performance recovered strongly from the second quarter that clearly was very significantly negatively impacted by COVID-19.

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 through supply chain improvements and our cost reduction program and as a result of RACE21.

Our adjusted site cost of sales in steelmaking coal is expected to be below CAD 60 per tonne in December or around USD 45 per tonne 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 4. In the third quarter, revenues were $2.3 billion and gross profit before depreciation and amortization was $703 million.

Bottom line adjusted profit attributable to shareholders was $130 million or $0.24 per share on both a basic and a fully diluted basis.

And while these results reflect the negative effect of COVID-19 on the prices and sales of the products compared to the third quarter last year, they also represent a strong recovery from Q2 2020, 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 5. 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 11.4:1 in 2019, last year.

We expect it to decline to around 10:1 throughout the fourth quarter and into 2021.

We completed the major expansion of our Elkview operations plan in Q2 despite the challenges of the pandemic.

And that plant now has the capacity to produce 9 million tonnes annually, which enables us to replace higher cost production from our Cardinal River operations with a higher quality coal produced at a lower cost than our Elkview operations.

And at the same time, we're nearing the end of the major capital deployment phase for Neptune, which will be next quarter, and the water treatment facilities at both Elkview and Fort Hills and Fording Rivers.

We have 3 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.

And the planned 5-month shutdown of terminal operations was successfully completed in September and all the different things that we wanted to achieve and accomplish during that 5 months were achieved.

Major equipment deliveries are now complete with all equipment currently on site.

A number of us went to have a visit with the sole goal to see the new shiploader now in place, and 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 and you see a picture here, and I tell you it was a beautiful sight.

The Neptune upgrade will, of course, secure for us a long-term, low-cost and reliable supply chain solution for our steelmaking coal business unit.

We expect construction to be completed next quarter, that's Q1 of 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 of our QB2 project on Slide 7. QB2 is a key component, of course, of the 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 camp space is being built to manage the COVID-19 impact, and will provide additional capacity as it begins to come online in Q4 of 2020 this quarter.

We are aiming to achieve overall project progress of approximately 40% by year-end.

As a result of COVID-19, we expensed $107 million of costs related to the project suspension of construction and $23 million of interest that would have otherwise been capitalized for the project in the third quarter.

And to the end of September, we have expensed total costs of $272 million and $103 million of interest that would have been capitalized for the project.

We recommenced capitalization of borrowing costs on the QB2 project in the third quarter, consistent with the return to active construction on the project.

And assuming the ramp-up proceeds for the fourth quarter as currently planned, the aggregate estimated impact from the suspension is expected to be approximately USD 350 million to USD 400 million, excluding interest, with a scheduled delay of approximately 5 to 6 months.

As well, the additional camp space has an incremental cost of USD 45 million above that.

First production at QB2 is expected in the second half of 2022.

Turning to Slide 8. At Teck, our approach to safety and sustainability are core to the success of our business.

Robust COVID-19 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 was 31% lower than the same period in 2019 at 1.1 per million hours worked.

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 tonnes 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 3 years as Chair.

And we have been recognized as a strong performer by ISS, FTSE4Good and others.

We were proud to announce yesterday that Teck has been named to the Forbes World's Best Employers 2020 list, which is an employee-driven ranking of multinational and large companies from 45 different countries that looked at topics, including COVID-19 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 ESG issues as they become much more important to many stakeholders.

I'll now run through highlights of our third quarter by business units starting with steelmaking coal on Slide 9. Third quarter steelmaking coal sales were 5.1 million 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-19.

We reduced logistics capacity in accordance with that by using the planned 5-month shutdown at Neptune Terminal, and that was completed in September.

And as a result, our Q3 production of 5.1 million 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 5-month shutdown of terminal operations.

And on August 25, we announced that we signed an agreement with principle with Westshore Terminals for the shipment of 32.25 million tonnes starting on April 1, 2021.

Together with the Neptune update and our contract with Ridley Terminals, this will provide much greater flexibility and optionality for Teck 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 million tonnes to 6.2 million tonnes in Q4 of 2020, up from the 5.1 million tonnes in Q3.

We expect our adjusted site cash 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 a temporary suspension of operations due to COVID-19 that happened in Q2 of 2020.

Production was lower than the same period last year, both at Highland Valley and Carmen de Andacollo.

At Highland Valley, production was impacted by harder-than-expected ore, following the 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.

The decrease in Andacollo 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, we would expect costs to go higher, we actually had significantly lower total and net cash unit costs than in the same period last year, and this was supported by our cost reduction program and the contribution from RACE21.

Looking forward, we lowered our copper production guidance range for the second half of 2020 to 140,000 to 155,000 tonnes, which is lower by 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.

As a reminder, Antamina's zinc-related financial results are reported in our copper business unit.

Red Dog sales of zinc and concentrate were 175,300 tonnes, which was in line with our guidance range.

Red Dog zinc production significantly improved from Q2 2020.

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 longer storage.

We also installed a new water treatment plant to increase the water discharge capacity when permit limitations allow.

At Trail, refined zinc and lead production was higher than in Q3 of 2019.

And looking forward, we continue to expect to ship all concentrates 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 2 shipping barges was completed by the end of July.

We expect sales of Red Dog zinc in concentrate of 145,000 tonnes to 155,000 tonnes in the fourth quarter, which reflects our normal seasonality.

And we have lowered our guidance for our net cash unit costs in the second half of 2020 to USD 0.30 to USD 0.40 per pound from previously USD 0.40 to USD 0.50 per pound.

So that's definitely going in 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 Q3 of 2019.

As previously announced, the Fort 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-19 and the very low Western Canada Select prices.

Production was also negatively impacted by extreme wet weather, which resulted in soft pit conditions that started in June and continuing into July.

Looking forward, the Fort Hills partner decided to restart the second train and to ramp up production to around 120,000 barrels per day by the end of the year, and that was earlier than had previously been anticipated.

On October 23, just 5 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 acquire special production allowances.

The curtailment rules have been extended to December 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 30 to 60 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 $37 to $40 per barrel.

But of course, what we're all looking forward to is to get into that level that we were in, in December of 2018 when -- which was the last month when Fort Hills was allowed to run at full capacity.

And in that month, that averaged 201,000 barrels a day at a cash cost of CAD 23 per barrel.

We're looking forward to getting back there sometime in the future.

Now with that, I'll pass it over to Ron Millos for some comments on our financial results.

Ron, over to you.

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 million from debt in the quarter, and that was made up of net draws of USD 49 million on our revolver and USD 341 million on the QB2 project financing facility.

We generated $390 million in cash flow from operations.

We spent $589 million on capital projects, and that included $246 million on QB2 and $89 million on the Neptune facility upgrade.

Our stripping activities used $110 million.

That was lower than our Q3 2019 due mainly to the planned mining and production outages at our steelmaking coal operations in the quarter.

We paid $104 million in interest and financing charges and $54 million on expenditures on investments and other assets.

Lease payments totaled $41 million, and we paid $27 million in our regular $0.05 quarterly base dividend.

And after these and other minor items, we ended the quarter with cash and short-term investments of $403 million.

Turning to the impact of COVID-19 on our business on Slide 14.

As Don mentioned earlier, while our third quarter financial results reflect the negative effect of COVID-19 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 have recovered from COVID-19 production disruptions.

And in the third quarter, we expensed $130 million related to COVID-19 on a pretax basis, which is half of the amount expensed in Q2.

And of course, we expensed $107 million in other operating income expenses related to the temporary suspension of construction and remobilization at QB2 project and $23 million 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-19, such as medical testing, safety, equipment, 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 million related to COVID-19, and that included $103 million of interest that would otherwise have been capitalized.

And we recommenced capitalization of borrowing costs on 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-19, we do not expect significant COVID-19 specific costs on a go-forward basis.

Slide 15 summarizes the latest results of our cost reduction program.

To the end of September, we've achieved approximately $270 million of operating cost reductions and $500 million of capital cost reductions.

And these reductions are against what we were expecting to spend back at the end of June 2019 when we started looking for cost reduction opportunities.

So we've made pretty good progress against our targeted reductions of $1 billion.

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 reduction from our cost reduction program have been included in our guidance since we announced the program in October last year 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 CAD 6.8 billion.

And this includes our cash balance and the amounts available on our USD 5 billion of committed revolving credit facilities.

USD 3.8 billion is available on our $4 billion facility that matures in the fourth quarter of 2024, and our USD 1 billion sidecar that matures in the second quarter of 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 USD 2.5 billion limited recourse project financing facility for QB2, we've currently drawn about USD 860 million.

Of which, $340 million -- $341 million, sorry, was drawn in the third quarter.

Going forward, our project funding will be from the project financing until the project that reaches a specific ratio of project financing to total shareholders' funding and Teck's next contributions to project capital for QB2 are not expected until the first half of 2021.

And we have no significant note maturities prior to 2030.

Investment-grade ratings from all 4 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-19 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.

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-19.

We believe that Teck has quality operating assets in stable jurisdictions, and we are advancing our copper growth strategy that is funded and is being implemented.

We continue to progress our 4 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-19.

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.

(Operator Instructions) The first question is from Orest Wowkodaw of Scotiabank.

Don, I was hoping we could get a bit more color on the cost guidance in coal.

I find the languaging in the MD&A fairly confusing because it -- on one hand, you say that you expect on-site cost in coal to exit this year sub $60 a ton.

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?

Yes.

I'll turn it over to Robin in just a minute, but you should have the context that we haven't finished our budgeting for 2021 yet.

So we didn't want to put out formal numbers very specifically until we've done that.

And that process is ongoing.

There are always a number of different factors within the operation that come at you throughout the course of the year.

So we want to make sure that we've examined all those things before we put a very specific guidance.

But for sure, the cost structure of the business has been materially reduced.

And while it would be plus or minus a couple of 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.

You bet.

Thanks.

And thanks, Orest.

As Don said, we're going through a budget process right now.

So there's a lot of things like all this and those plant maintenance outages that normally occur in Q2 and Q3 that we have to take into account.

And we've also got 2 new water treatment facilities coming online this year with Fording River South is going to be completed at the end of Q1 as well as the Elkview saturated rock fill, 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 10:1 through this last quarter.

We will go through 2021 at that 10:1, and we see ourselves over the next few years staying at 10:1.

And again, that's an extremely important cost driver for us.

You remember, our strip ratio through 2019 was 11.4:1.

It's going to be around 11.1:1 through 2020.

So now that we've got the expansion of 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 million 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 plants 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 plants are very stable.

That's why we're able to maintain a 10:1.

And the other piece of the puzzle is we've had trouble with full clean coal inventories as well.

And that's -- 3 of the 4 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 that will be sustained for, and that's the kind of structural change that's occurring that supports a very strong cost base going into '21.

So again, I don't want to give 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 2-year transition pace.

But 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.

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-to-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 '21 will be at that same level.

Okay.

Or as you can assume, it is certainly our objective to stable the $60, if we can -- if it's at all possible, but we don't want to overrepresent right now until we're finished with the budgeting process.

Yes.

Okay.

I might add just on the haul truck productivity's comment that Robin made that we actually had a really high record haul truck productivity during spring runoff.

For those of you who have never been at (inaudible) and haven't seen what the real conditions are like at that time of year, that's an incredible statement to be able to make.

So RACE21 is certainly helping us a lot.

The next question is from Carlos de Alba of Morgan Stanley.

My question, Don, is on Highland Valley copper, just 2 points there.

First, given the guidance for the fourth quarter, is it expected then that the hard ore that you will process in Q3 and that resulted in lower output, if I think of the past and moving -- 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 moly grade going forward at Highland Valley?

Okay.

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

Yes.

Thanks, Carlos.

Just to start on the first question with hardness.

Basically, there's 2 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 our 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 and 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,as to the change in mine sequence, originally more ores planned from other areas in the mine.

And when we changed the mine sequence, that directly affects the moly production in 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 as well.

Next question is from Curt Woodworth of Crédit Suisse.

A question on coking coal.

Curious what you're seeing on the demand side given some of the coal restrictions announced in China.

It seems like if you look at the domestic price in China, it's up about $15 a tonne to $200.

Yet the Australian price has done a quick U-turn given they're out of the market.

So it seems like the ARB is extremely wide.

And potentially, India is coming back to the market.

So just curious your -- what you're seeing with respect to that.

And do you have any sense at a consumer level how you're viewing coking coal inventories?

Because obviously, it's -- there's no available data for us to look at.

Thank you for your question.

I thought this would actually be the first question of the day.

There are some exciting developments there, but I'll turn it over to Réal Foley, please.

All right.

Thanks, Curt.

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 the second quarter -- 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 Q4 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 like with the coal market overall and the impact of the heightened seaborne import restrictions.

The first thing I guess to say is there's been no official announcement on those restrictions, but they appear to be mainly directed to our industrial in coal.

And we're continuing to see China 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 3 sources of steelmaking coal for China, seaborne market is one, Mongolia is another and of course, domestic coal where the majority of the coal comes from.

So on the seaborne side, the impact of the pandemic has reduced supply from the main supply areas, Australia, U.S., Canada and Mozambique are all down, and it's a total of around 20 million tonnes August year-to-date.

Australia alone is down around 10 million tonnes August year-to-date.

So that annualizes roughly at 15 million tonnes.

And when we look at IHS Markit data for October, steelmaking coal vessel loadings are actually trending down somewhere around 4.5 million tonnes month-over-month.

So there is likely an impact from that reported ban.

The other point to make is there is vessel queues at the China ports.

Around 6 million tonnes 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 you mentioned, with the coal prices having come down quite a bit, actually close to $30 since the beginning of 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 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 tonnes were imported into China from the seaborne market at that time.

However, again, IHS Markit data shows that around 4.8 million tonnes of coal was offloaded in December of 2019, but did not make it into the stats until early 2020.

And that could happen again, and we are hearing in the market that there has been at least 1 Australian coking coal vessel that was discharged after the ban.

So how long will the ban last?

We don't know.

But back when Mongolia imports were banned in 2016 and '17, they lasted less than 1 month.

Another point to keep in mind is, of course, there is inventory in China.

We're estimating that there is somewhere around 45 million to 50 million tonnes of coking coal and coking coal equivalent in the supply chain in China right now that is equivalent to about 4 weeks at the rate that China is running right now.

So they are, of course, consuming some of that inventory as time goes.

Now the other 2 areas for supply of steelmaking coal into China or Mongolia.

So it's logical from Mongolia to benefit from the possible loss of Australian coal imports.

And the market is expecting that Mongolia is trying to recover the loss exports during the early months of the pandemic when the China border was shut.

Mongolia exports were down 10 million tonnes September year-to-date.

But they also reached a new record high in September, just around 3.9 million tonnes in the month.

And if Mongolia can keep running at record high levels for the remaining 3 months of the year, imports from Mongolia in 2020 would still be down somewhere around 6 million tonnes year-over-year.

The other point is that Mongolia imports have never run at this kind of level for 3 consecutive months.

The previous record was in August 2019, and it was 1 month at around 3.75 million tonnes.

And 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 480 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 2021 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 beginning of 2021.

But same thing, again, the quotas are talked about a lot in the market, but there's been no official announcement about that.

Réal, 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?

Yes.

Good question, Don.

We -- 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 yes, 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.

I appreciate all 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 you 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 that asset potentially ahead of when you would get back to your more baseline level of the 200 barrels a day and $23 million cost structure?

Yes.

So first on project satellite, we continue to add value where we can on the 5 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 that that's the direction the market is taking.

And as I pointed out, copper and zinc have performed pretty well.

So the market looks stronger than it was when we had launched the Zafranal sale process before.

So that should be a benefit.

We're not in 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 the plan on how to ramp up Fort Hills to the next level.

As I said in my comments, that we'll be looking at different market conditions and operating parameters, but the objective would be to get back to full production and thereby lower their 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, and you'll see announcements from them on that in due course.

And in terms of where it stands within the Teck portfolio or portfolio construction, I think you called it, we have said for more than a year now that if we get through some of these issues in the market in terms of getting it back running at full capacity and people have better visibility on pipelines and it's clear that we're not going to be paid for it in Teck Resources, then we will engage in a transaction where it gets done differently, whether it's not right sale for cash, whether it's contributing to another company taking back shares in some sort of consolidation play, it's not lost on us.

There's some consolidation going on in the sector.

So you can assume conversations are taking place.

But I wouldn't anticipate we'd see anything in the near term, not until we've been able to ramp up and demonstrate what the asset can do.

I mean when Fort Hills first started out, first 8 to 9 months, it was absolutely a terrific operating performance for a start-up and got to a point where it was running above capacity.

And as I've been told, 80% of projects of that scope never hit design capacity at all.

And this one got there pretty quickly and has been for debottlenecking on top of that.

So I think we want to be sure we can demonstrate that value before we engage in a transaction.

But Alberta has removed the cap sooner than people expected, and we've started that for the second train now.

So it's heading in the right direction.

The next question is from Greg Barnes with TD Securities.

Just a question for Don or Réal.

Do you have the ability to meet additional demand from China for Canadian coal?

You said they're coming to you.

Does the guidance imply that you are leading some of that demand?

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

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

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 in 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 and a number of places in the world getting hit pretty hard right now.

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 cost if volumes aren't back up to that 26 million, 27 million tonne level.

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, Robin.

Yes.

Not much to add to that, Don.

That's the plan.

So like I said, we go into '21 quite strong with healthy rock 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.

Okay.

Just a follow-up question finally for you, Robin.

In the MD&A, it says something about regulatory changes coming shortly that will increase water management costs over and above the 350 million to 400 million as planned for 2021 through 2024.

What is that whole amount?

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.

The next question is from Jackie Przybylowski of BMO Capital Markets.

I have a couple of questions, I guess, I just want to ask.

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, I guess, it came in February last year or year.

Do you have a sense of what the policy is going to 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?

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, and 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 and 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.

So basically, nothing has changed from what was [happening before].

Okay.

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, 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?

Robin?

Yes.

It's less possible, and it might have been when we had 6 operating mines.

We're down to 4 now.

So the 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 marginal.

So...

That's why I was asking with the change to the number of ideas.

That makes sense.

And maybe just one final question.

I know it's difficult for you guys to comment on low water treatment costs.

We've seen some press releases 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?

Yes.

I think we start with Peter on that one, and then maybe Ron.

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 water quality as far down as the transboundary impacts of our operations, including Lake Koocanusa.

And there's 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 Ktunaxa Nation Council.

We're participating in the regulatory process on both sides of the border.

And from a good news perspective, annual average saline levels in Lake Koocanusa 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 Elkview saturated rock fill is being commissioned and 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.

Okay.

So that's helpful.

And the good news, Jackie, is in the next 3 or 4 months, our capacity to treat water is about to go up dramatically, from 7.5 million liters a day currently to 47.5 million liters.

So that's the Elkview SRF will be finished shortly and ramping up, it'd be finish under budget and ahead of schedule.

And then the Fording River active water treatment plant will be coming online in the next quarter.

And so that will really increase the capacity for water treatment and will demonstrate how the other plants or SRFs -- not plants, SRFs are coming will 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 9:00 now, so I'm going to call it close and just make a couple of final comments.

First, I do want to 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 #1 being almost rolled into place, and that's just a significant threshold of construction, seeing things, a lot large piece of equipment to be in there.

And that afternoon, we saw the ship order coming in from Vietnam, arriving into the harbor, sailing underneath the Lions Gate Bridge.

And these are 2 big pieces of equipment and 2 initiatives that we have that are really going to make the company that much stronger for decades to come.

On the coal side, the Neptune initiative is going to lower costs 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 a 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 a final comment, I do want to say thank you to Ron Millos once again for tremendous 25 years of contribution to making this company what it is today.

We very much wish you all the best.

Ron, thank you for your tremendous service.

And with that, operator, we'll close in.

The conference has now ended.

Please disconnect your lines at this time.

We thank you for your participation.