Teck Resources Ltd (TECK) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Teck Resources Q1 2020 Earnings Call. (Operator Instructions) This conference call is being recorded on Tuesday, April 21, 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, Elena, and good morning, everyone, and thank you for joining us for Teck's First 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.

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, Fraser, and good morning, everyone.

Well, these certainly continue to be difficult times, not just in the mining sector, but for all of us, as we navigate the evolving COVID-19 challenge both personally and professionally. Like you, we are continuing to work from home, and so the entire senior management team has dialed in remotely this morning. So please bear with us in the event there are any hiccups.

We last spoke during our Investor and Analyst Day conference call on April 1, just about 3 weeks ago, and that included a summary of our COVID-19 response measures, some initial highlights from our first quarter results and of course, our QB2 project update. Today, we will focus on updates from the full results from our first quarter as well as some additional detail on our COVID-19 protocols and the impact of COVID-19 on our operations.

I'll begin on Slide 3 with first quarter highlights, followed by Ron Millos, our CFO, who will provide additional color on our financial results. We will conclude with a Q&A session, where Ron and I and additional members of our senior management team would be happy to answer any questions.

Our focus is on managing the risks around COVID-19, ensuring that we have the necessary measures in place to safeguard our people and our local communities. The global health situation posed by COVID-19 is unlike anything previously faced by companies, by families and by communities. The scope and severity of this pandemic requires all of us to step up and do our part. And we are proud to have announced last week the creation of a $20 million fund to support the COVID-19 response and future recovery efforts. Nothing is more important than the health and safety of our employees, our contractors and the communities where we operate.

While our COVID-19 response has temporarily reduced production at some of our operations, all of our managed sites are currently operating. There has been no material impact on sales or shipments of Teck products due to COVID-19 to date, but there is a risk that sales volumes could decline significantly in Q2, following the dramatic slowdown that we have seen in global economic activity. It is clearly still a very fluid situation with COVID-19, and the overall impact on our business will depend on the progression of the pandemic and on the success of measures in place to combat it. And as such, we have suspended all previously issued 2020 annual guidance.

Now despite the emergence of COVID-19, there were a number of positives in the first quarter. Steelmaking coal had a very strong finish to the quarter with sales exceeding our quarterly guidance; adjusted site cost of sales coming in well below previous expectations; reduced finished coal inventories at our mine sites, and that provides greater operational flexibility; and the logistics supply chain performed very well in March, including Westshore.

We completed the Elkview plant expansion in mid-April. This is a very important milestone because it increases annual capacity at Elkview from 7 million tonnes to 9 million tonnes. And this is important because it will enable us to replace higher cost production from Cardinal River, which produced 1.4 million tonnes in 2019, with much lower cost production from Elkview when Cardinal River closes later this year. And taking into account both the cost savings and the higher average pricing for Elkview coal, because it is higher quality, and then assuming USD 150 per tonne of coal pricing and current exchange rates, this strategic move should translate to an annual increase in our EBITDA of approximately $160 million. The initial investment was just $135 million, so that is a rapid payback on an asset that will provide significant long-term value to our business literally for decades to come.

At the same time, we continue to advance our 4 key priorities. On March 31, we issued an updated capital cost estimate for our QB2 project with the to-go capital estimated at USD 3.9 billion before considering any impacts of the current suspension as a result of the COVID-19 situation. This estimate is based on an average exchange rate over the remainder of the build of CLP 775 per U.S. dollar. At the current exchange rate of around CLP 850 to the dollar, capital expenditure would be USD 240 million lower than that $5.2 billion.

We are consolidating the improvements that we implemented in 2019 under our RACE21 initiative, which is now focused on transforming the company for the future. We continue to advance the strategically important Neptune Terminal upgrade, which will secure a long term, low-cost and reliable supply chain solution for our steelmaking coal business unit. Preparations are underway for the suspension of terminal operations for 5 months, we're starting on May 1, and you will recall that we made the decision to proceed with the extended shutdown of Neptune in order to match port capacity with reduced production and to improve productivity and safety as we advance construction.

We have increased our target for total reductions under our cost reduction program to $1 billion from previously planned spending through the end of 2020. And we have achieved $375 million in capital operating cost reductions to date since starting the program in the fourth quarter of 2019. And importantly, we have maintained a strong financial position with current liquidity of $5.8 billion.

Turning to our financial results on Slide 4. In the first quarter, revenues were $2.4 billion and gross profit before depreciation and amortization was $776 million. Profitability was impacted by the significant negative effect of COVID-19 on commodity prices. Our unadjusted EBITDA also reflects a noncash pretax impairment charge of $647 million related to our interest in Fort Hills. Bottom line adjusted profit attributable to shareholders was $94 million or $0.17 per share on both a basic and a fully diluted basis.

Details of the quarter's earnings adjustments are on Slide 5. With effect from January 1, 2020, we have made changes to how we present adjusted profit attributable to shareholders and adjusted EBITDA. So going forward, we will include additional items that we have not previously included in our adjustments, and comparative figures have been restated. And this is really based on feedback that we've had directly from our shareholders.

We now include adjustments for environmental costs, including changes related to decommissioning and restoration costs for our closed operations, also share-based compensation costs, inventory write-downs and reversals and commodity derivatives. And we believe that these changes, our adjusted profit attributable -- with these changes, our adjusted profit attributable to shareholders and adjusted EBITDA will better reflect the results of our core operating activities and will help readers to understand the ongoing cash-generating performance of our business and bring us more in line with practice at our peer group.

In the first quarter, the most significant adjustment was the noncash impairment charge related to our interest in Fort Hills, which was $474 million this time on an after-tax basis. There were also $22 million of COVID-19 expenses in the first quarter on an after-tax basis, and Ron will speak to this in greater detail shortly.

Environmental costs and share-based compensation reduced our adjusted profit attributable to shareholders by $87 million and $22 million, respectively. And this was partially offset by $27 million in inventory write-downs and $15 million in commodity derivatives. So with these and other minor adjustments, bottom line adjusted profit was $94 million or $0.17 per share, again, on both a basic and a fully diluted basis. Please note that we continue to not adjust for settlement pricing adjustments, which were negative $64 million or negative $0.12 per share in the first quarter on an after-tax basis. And again, that is based on feedback from analysts and shareholders.

Turning to our response to COVID-19 on Slide 6. As I've said many times, nothing is more important than the health and the safety of our employees, contractors and the communities where we operate. And so we have put in place comprehensive preventative measures at every one of our sites. And these measures include reducing on-site crew sizes, enhanced cleaning and disinfecting protocols, eliminating group meetings and promoting physical distancing and also requiring anyone with symptoms not to come to work and promoting preventative measures like frequent hand washing. We're also being diligent in assuring those preventative measures are being followed, and we are working closely in collaboration with employee unions such as the United Steelworkers.

In the last 3 weeks alone, this is very important, our health and safety teams have conducted over 5,000 individual audits to ensure that COVID-19 protocols are being implemented and that they are effective. And earlier this month, the regional health authority conducted an audit of COVID-19 prevention measures at our steelmaking coal operations, which confirm that we -- and I quote, "Have strong protocols in place with regards to COVID-19."

As I mentioned earlier, we've also created a $20 million fund to provide direct support to critical services in areas where we operate. And this includes procuring and donating essential medical supplies, such as the 1 million KN95 masks that support local health and social services affected by COVID-19 and contributing to relief efforts.

I will now run through highlights by business units, starting with steelmaking coal on Slide 7. As I mentioned at the start, steelmaking coal had a strong finish to the quarter with sales of 5.7 million tonnes, which exceeded our previously issued guidance; also adjusted site cost of sales coming in well below previously expectations at $63 per tonne. And finished coal inventories have been reduced to the mine site, enhancing operational flexibility, and I can tell you we're very pleased about that. And then the logistics supply chains performed very well in March.

We also completed the Elkview plant expansion to 9 million tonnes of capacity in mid-April. And this, again, is a very important milestone.

We commenced the temporary slowdown of our steelmaking coal operations on March 25, which lasted approximately 2 weeks. And we had reduced our crews by up to 50% of regular levels in the period, which reduced production to between 80% and 85% of normal levels. But because we now have greater confidence, we're further up the learning curve in dealing with COVID-19, beginning a week ago, operating crews were returned to 75% of normal levels. So that's a step in the right direction.

We are currently at stable levels of production across all operations and subject to market demand, we are planning to increase production further in Q4 of 2020 when the Neptune extended outage and our annual major plant outages are scheduled to be completed.

In terms of sales, our second quarter sales volumes could decrease significantly from first quarter 2020 level as COVID-19 is expected to continue to impact global economic activity and steelmaking coal demand and supply. We are starting to receive notifications from customers that they may delay purchases in response to reduced demand for their steel products as their own customers are reducing or suspending production of their products.

Turning to our copper business unit. Our Q1 results are summarized on Slide 8. Copper production of 70,600 tonnes in the quarter was similar to a year ago. Higher production at Carmen de Andacollo and Highland Valley Copper offset decreases at Antamina and QB.

Net cash unit costs, after the cash margin for byproducts of USD 1.27 per pound were $0.28 lower than the same period a year ago, reflecting our CRP, our cost reduction program, and also favorable exchange rates.

As you know, we announced a temporary suspension of construction activities at our QB2 project on March 18. That impacts a total of approximately 15,000 workers. Demobilization was essentially complete by March 23, so pretty quick execution on that. And while this was initially planned for a 2-week period, project construction activities still remain on hold today. We continue to reassess the status of the suspension in light of the rapidly evolving COVID-19 situation. Our priorities continue to be the safety of our workforce and supporting Chilean efforts to limit transmission of COVID-19. We cannot predict when the temporary suspension of the project will be lifted. If full construction activities are restarted in the second quarter, the soonest we would expect first production would be mid-2022.

Similar to the actions we took at our steelmaking coal operations, we commenced a temporary slowdown of operations at Highland Valley Copper on March 25, which lasted approximately 2 weeks. We initially reduced our on-site crews by up to 50% of regular levels in that period, and we reduced production to approximately 85% of normal levels. But beginning a week ago, again, because we're further up the learning curve and people have more confidence in our operating practices and protocols, operating crews were returned to 75% of normal levels, and opportunities are being evaluated to increase production back up to normal operating levels while maintaining social distance measures.

Antamina temporarily suspended operations on April 13 to support proving COVID-19 response efforts and to facilitate a change in workforce. Antamina has implemented protocols to ensure the health and safety of all workers, and it is coordinating its response with public health authorities. Safe demobilization of the workforce has been completed, including implemented COVID-19 testing of employees and contractors. Antamina is working towards a restart, but timing on resuming operations is uncertain at this time. At our Chilean operations, Carmen de Andacollo and Quebrada Blanca, we continue to operate at normal production levels with reduced workforce levels on site.

Our zinc business units results are summarized on Slide 9. And as a reminder, Antamina's zinc-related financial results are reported in our copper business unit. Red Dog sales of zinc, zinc and concentrate, of 134,000 tonnes were within our quarterly guidance range. Red Dog zinc production increased compared to a year ago, primarily due to substantially higher mill throughput, which was offset by lower grades and recoveries -- which offset lower grades and recoveries.

In the first quarter last year, mill operations were negatively affected by a 20-day shutdown due to the effects of severe winter weather. At Trail operations, production of refined zinc was higher than in the first quarter last year. We recorded an inventory write-down of $19 million related to Trail operations in the quarter.

Looking forward, the unique fly-in, fly-out circumstances at our Red Dog operations in Northwest Alaska has necessitated significant travel restrictions and modified schedules to maintain safe operations. But to date, normal production levels have been maintained. Sales of Red Dog zinc concentrate are normally lower in the second quarter than the first quarter, ahead of the start of the new shipping season. This year, our second quarter sales could decrease significantly compared to Q2 2019 as COVID-19 is expected to continue to impact global economic activity and zinc demand and supply. At our Trail operations, we have maintained production levels while reducing the workforce on-site on weekdays by over 40%, resulting from restructured shift schedules and people working from home. Sales volumes of refined zinc from Trail could decrease significantly again from Q1 2020 due to COVID-19.

Our energy business unit results are summarized on Slide 10. And as you are aware, global crude markets are in a period of unprecedented volatility. Now this script was written a few days before yesterday but that, of course, is an understatement.

Prices declined dramatically in the first quarter as a result of the unparalleled collapse in demand following the measures taken to combat COVID-19 across all major economies and exacerbated by an increase in supply from both Saudi Arabia and Russia. Our realized prices and operating results were hit hard by the drop in oil prices. The gross loss before depreciation and amortization from our energy business was $90 million in the first quarter, and included in the loss was an inventory write-down of $23 million. In addition, we recorded a noncash pretax impairment charge of $647 million in the quarter related to Fort Hills.

Looking forward, Fort Hills is temporarily operating as a single train facility in light of COVID-19 and in light of depressed Western Canada select prices as previously announced. This should significantly reduce variable operating costs and mitigate losses.

Assuming Fort Hills is operated as a single train facility through the balance of 2020, we expect our share of Fort Hills production will be 8 million to 9 million barrels of bitumen, and our unit operating cost will be between CAD 37 and CAD 40 per barrel for the full year. The Fort Hills partners continue to monitor market conditions and may adjust the operating plan for Fort Hills accordingly.

For the full year, we have reduced our planned 2020 capital spending in our energy business unit, now down to $85 million from previously $175 million.

And with that, I will pass over to Ron Millos for some comments on our financial results. Ron, over to you.

Great. Thanks, Don. I'll start by addressing the changes in our cash position during the first quarter on Slide 12.

We generated $279 million in cash flow from operations. The net change in debt was $220 million, and we received $61 million in proceeds from investments and other assets.

We spent $818 million on capital projects and $172 million on our stripping activities and repurchased approximately 16.3 million Class B shares under our normal course issuer bid for $207 million in the quarter. And that completes the $1 billion share buybacks previously authorized by our Board.

We paid $109 million in interest and finance charges. We paid $43 million of lease liabilities. And we paid $27 million in the regular base dividends. After these and other minor items, we ended the quarter with cash and short-term investments of $219 million.

One other note about our quarterly financial results, not on the slide. But after adjusting for the Fort Hills impairment, our overall effective tax rate on profit before taxes was 39% in the quarter. And that's above our longer-term general expectation of 35% to 37%. And that's primarily due to the losses at Fort Hills and Trail, which are not subject to mining taxes.

If we remain in the lower operating margin environment and continue to experience losses at Fort Hills, we would expect our effective tax rate on profit before taxes to remain a little bit elevated above those normal expected levels.

Turning to COVID-19 expenditures on Slide 12. We previously mentioned that we were reviewing the accounting treatment of these expenditures that are incremental in nature and incurred specifically because of COVID-19. So no COVID-19 specific expenditures will be charged against our capital projects as they really don't add any value to those projects. COVID costs related to the production of products will be expensed as incurred in our cost of sales rather than being charged to inventories and then flowing through to our future earnings when the products are ultimately sold. COVID-19 expenditures, not related to the production of products, will be expensed as incurred in our other operating expenses. And to assist readers in analyzing, understanding our more normal operating results, we have deducted all COVID-19 related costs that were expensed from our profit attributable to shareholders in our adjusted earnings table.

In the first quarter, our COVID-19 expenditures were $44 million on a pretax basis. And that included that $32 million related to the temporary suspension of construction at our QB2 project. $5 million of finance expenses were included in the adjusted items. And that was due to us not allowing to capitalize the interest expenses while QB2 was -- is in suspension on the construction. And in addition to that, there was $7 million related to incremental COVID expenditures at -- throughout our various operations. Our COVID expenditures in the second quarter will depend on the trajectory of this pandemic, but they are expected to be higher than what we expensed in the first quarter of this year.

Slide 13 summarizes our cost reduction program. As Don mentioned, we've intensified the focus on our cost reduction program across the organization in the context of COVID-19. On April 1, we announced our targeted reductions were increased to $1 million of previously planned spending from the launch of the program in the beginning of Q4 2019 through to the end of 2020. And until the end of March, we've received -- achieved approximately $375 million of capital operating cost reductions since we announced the program last year.

Turning to Slide 14. Our financial position remains strong with about CAD 5.8 billion of liquidity, and that includes $525 million of cash. We maintain a USD 4 billion revolving credit facility, of which $3.75 billion is currently available. And importantly, this facility is committed out to the fourth quarter of 2024. It does not have any earnings or cash flow-based financial covenants, does not include a credit rating trigger and does 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 March 31, that ratio is 20%. We only have $500 million of notes maturing in the next 4 years with nothing due in 2020. No significant debt maturities prior to 2035, and we have investment-grade credit ratings from all 4 credit rating agencies.

And for our QB2 projects, the funds from the QB2 partnering transaction with Sumitomo Metal Mining and Sumitomo Corporation, and the USD 2.5 billion limited recourse project financing facility dramatically reduces our funding requirements for the project.

During the first quarter, we drew $50 million on the USD 2.5 billion on the recourse financing facility. Going forward, project spending will be from the project financing and until it reaches a specific ratio of project financing to total shareholder funding. Teck's next contribution to the project capital are not expected until Q1 2021. That, of course, is subject to the impact of COVID-19 on the projected schedule and timing of capital spending.

We do not expect COVID-19 impacts to prevent us from drawing on the project financing facility. And overall, our financial position is in good shape to allow us to weather the challenges around COVID-19.

And with that, I will turn it back to Don for his closing comments.

Well, thanks, Ron. As I said at the outset, these continue to be unprecedented times that we're living in. The COVID-19 pandemic has had a significant negative impact on the global economy and commodity markets, and the outlook remains uncertain. Our focus is on managing the risks around COVID-19 and ensuring that we have the necessary measures in place to safeguard our people and our local communities.

While our COVID-19 response has temporarily reduced production at some of our operations, all of our managed sites are currently operating, and that is acknowledging that Antamina is a joint venture with BHP, Glencore and Mitsubishi. There has been no material impact on sales or shipments of Teck products due to COVID-19 so far, but there is a risk that sales volumes could decline significantly in Q2 following the dramatic slowdown that we've seen in global economic activity. And despite the emergence of COVID-19, there were a number of positives, including a very strong finish to the quarter in steelmaking coal and very importantly, the completion of the Elkview plant expansion, which sets us up in a really good position for decades to come.

At the same time, we continue to progress our 4 key priorities. And those are the QB2 project, which will help rebalance our portfolio; RACE21, which will set us up, transform the company for the long-term and improve productivity and reduce costs; Neptune, which will secure a long term, low-cost and reliable supply chain solution for our steelmaking coal business and lower costs for decades to come; and finally, our CRP, the company-wide cost reduction program with an increased target of $1 billion.

We have a very strong financial position, and we are well positioned to weather the storm and the challenges around COVID-19.

And with that, we'd be happy to answer any questions. And as a reminder, we are all on phone lines from home. So please bear with us if there's a delay while we sort out who will answer your question.

So back to you, operator.

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

Don, I'm wondering if you can give us some more color on your comments about significantly lower potential coal sales in Q2 and that you're seeing customers defer delivery of volume. Can you give us a sense of, a, how many customers? Are you just seeing the beginning of that or are you seeing a substantial amount? And the language here, obviously, seems a lot different than what we heard 3 weeks ago. And I'm curious how much of that might be related to the India being closed as well?

Yes. No, that's an important question. And you are correct that it has changed a fair bit in the last 3 weeks, particularly in the last 2 weeks. And the conversations are ongoing. I'm going to turn it over to Réal Foley in a minute. But just a perspective on this, it does feel similar to one of the quarters that we had during 2008, 2009. And it lasted for a while, where the customers went through the dip of demand for their own products. It came back quite quickly. We don't know how much volume might be deferred. Let's not talk about cancellations, really is deferral to the next quarter. But it all kind of cascades to -- for the subsequent quarters. And we won't know for certain exactly which ships will come when for a few weeks, really it'll happen throughout the quarter. So unfortunately, we can't give guidance on it. I know you're looking for a better sense for the volumes involved. And at this stage, it's very difficult to answer that. But Réal, over to you for a little bit more color on the discussions.

All right. Thanks, Don. So Orest, we are seeing hot metal capacity cuts around 2/3 of what has been announced to date. It's concentrated in Europe, the U.S. and India. So as you said, India is definitely part of this. But also with the rapid spread of COVID-19, there's more countries that have implemented lockdown measures. And as Don said, during the presentation, the global economic activity has slowed, with lower demand for a number of products that steel goes into. Recently, we've seen announcement of BF, blast furnace, closures or reduced hot metal production in other countries that include Japan, Brazil and South Africa as well. And so far, the total hot metal cuts represent somewhere around 78 million to 80 million tonnes on an annualized basis. So that is around 15% or so of the blast furnace capacity outside of China and Russia.

And Don, when you see, it feels like 2008, 2009. When I go back and look, it looks like in Q1 '09, your coal sales bottomed at 3.7 million tonnes. Is that -- I realize you can't give guidance, but is that the sort of goalpost on one end of the spectrum might be realistic?

Yes. I'd say yes. I mean it's possible. I don't think so. But the way you phrased it, is goal post on one end of the spectrum, yes. Those kind of things are possible. And it doesn't mean that those sales are lost forever, they tend to come back. But in terms of the timing of deliveries, that kind of stuff can happen, yes.

The next question is from Carlos De Alba with Morgan Stanley.

So a question if maybe, Don, can you give us some qualitative comments on the cost performance that you expected in Q2? You discussed the impact on sales volumes, both in zinc and coal in the press release. But suppose -- or presumably, your cost also will come down. How do you see that part of the equation with less volumes by the impact on fixed cost potentially offset by progress in CRP and RACE21 progress?

Yes. So there are different parts to that question. So what I'm going to suggest is Robin Sheremeta, why don't you start with cost and coal? And then, Dale, you follow-up on copper and zinc? So Robin, over to you first.

Sure. It's -- I guess, in one sense, we're fortunate that we spent the last few years structurally changing the coal business units. So there's a number of things that will play out through 2020, and not the least of which is the declining strip ratio. So if you remember back, 2019, we were operating around 11.4:1. We'll be lower this year, around 10.7:1. And as we go into 2021, we're going to be around 10:1. So we're setting the business unit up to have an improved cost structure around the strip ratio itself.

Don mentioned the closure of Cardinal River. We're actually closing that early, so it's going to be shut down around the end of June. We've got the 9 million complete at Elkview, so you've got a structural change around the operating costs within the business unit as well that's kicking in.

And then with RACE21, you've mentioned that as well. That strategy will be focused on some of the shortest-term, highest-value big projects, which will likely be focused in on the plant operations. So we'll see pretty good payback on that. And then just around CRP, this is what we're good at. In coal mining, we go through ups and downs. And we've demonstrated in the past, we get into a little cycle like this, we're able to cut spending. And that was reflected in a large part in Q1 when we saw the spending or the cost actually quite a bit lower than we anticipated or had signaled earlier in the year. So we're pretty well set up to take this on right now.

And Dale? So Dale can make a couple of quick comments on copper and zinc. I think the question was specific to zinc. But I just want to remind that our quarterly zinc costs do depend on our lead sales. And typically, that -- those are stronger as the year progresses in start of Q2, and particularly stronger in Q3 and Q4. Although we have suspended guidance as we talked about previously.

But CRP and RACE21 are also being driven throughout the copper and zinc operations. And I was quite pleased with both copper and zinc for the cost performance in Q1. We're going to continue to drive as we go forward.

Great. And just a follow up or, I guess, an additional question on the disbursements of QB2 financing. Has there been any alterations to the schedule that was presented earlier for the remaining of the $3.9 billion that -- the projection you need to spend?

So I just want to be clear on the question. Any changes to the schedule on our project finance? Is that what you're referring to?

Right. Exactly. The disbursement of those -- of that...

Oh, disbursement. Okay, Ron Millos or Scott Wilson, over to you.

Scott, do you want to take that one?

Yes, sure. Scott Wilson. The spending profile on QB2 will be somewhat impacted by the construction suspension. We updated the project finance lenders on this a couple of weeks ago. And over the balance of 2020, we think that there will be something like $200 million less drawn on the project finance facility than pre-suspension. So that reflects procurement activities continuing and payments for commitments that have already been made. But other than that, we will continue to utilize the project finance facility as intended.

Okay. And I just want to go back to Orest's question earlier. And while we talked about the tonnage sales in Q1 of 2009, the equivalent quarter, if you like, to upcoming Q2, and that number is possible, the most important number to watch is really the hot metal production that Réal Foley talked about. And that, at this stage, is down about 15% outside of China. China, of course, is back basically to 100% of steel production. And we do sell to China as well, though not as much as we used to. We could choose to sell more there. So I think those are the more important driving factors in trying to make an educated guess on what will happen in Q2.

And one thing maybe I could add also, Don, is we also need to look on the supply side for steelmaking coal. So currently, the supply disruption, reduction or closures that have been announced add up to somewhere around 38 million to 40 million tonnes. So that is, again, outside of China. If you factor in China, the Mongolian exports into China are down 5 million tonnes year-to-date, March. And the domestic China production for coking coal is also down 5 million tonnes year-to-date.

And the next question is from Curt Woodworth with Crédit Suisse.

A question on the coal side. I wonder if you could comment a little bit about sort of tactically how you're managing the volume flow. So my understanding is that you don't have a lot of spot market sales, is there an opportunity to try to divert some of your traditional contract customer base into China or other avenues? And then can you give us a sense for kind of what your year-on-year shipment rates look like today? Or kind of what April is at?

Okay. Réal, over to you.

All right. So of course, we are in the market every day. As you can imagine, Curt, with global economic activity slowing, there is less demand on the spot market as well. Now we continue to talk to customers. We have customers in all markets, including China, India, Eastern Europe, Western Europe, pretty much in all areas of the world, the Americas also. So it is a challenging time. It is difficult right now specifically with respect to Q2, when we look at volume, April is looking pretty good. But as we start to receive notification from customers, we could see the impact later on in the quarter, maybe in May or June, but it is too early to say, is when you look at how the shipping world works for coal, denominations for vessels are somewhere around 2 weeks or so prior to vessel loading. So it is uncertain and a little bit unclear right now.

The next question is from Gordon Lawson with Paradigm Capital.

Could you talk about the timing expected for the remaining permits for the water treatment facilities at Fording River and what work remains for Elkview's Phase 2 SRF?

Robin Sheremeta, over to you.

I just have to ask you to repeat the first one. Just on the Elkview SRF, that project will -- it's under construction now, and it will be completed by the fourth quarter of 2020. But I didn't quite understand the first question.

You talk about there's remaining permits for the treatment facilities at Fording River. Is there any guidance you can provide with respect to timing?

Well, on the permits, they're just going through stages. So there's the construction permit, and then there's an operating permit. So the timing on those are really just staged around the progression of the project itself. So presumably, the timing on the actual operation permits will occur in 2021. So we're just working through construction now.

Okay. And as a follow-up, the strip ratio was quite high this quarter. When can we expect this to come down to the 10x range?

Yes. Well, through 2020, the current mine plan has us around 10.7, so that would be the average across the year. So you saw a higher strip ratio in the first quarter simply because of the logistic challenges we had through January and February. And so our production levels were quite a bit lower than what we had anticipated. So that affected strip ratio in the short term, and that will balance out over the next 3 quarters. So if you think about it in a sense, we got ahead of stripping in the first quarter, and that's moved out for the rest of the year. But you can expect the average for the year to be around that 10.7 range. And then following that, as we -- just as we progress into 2021, the strip ratio does drop down to around 10:1 on average.

And Robin, that 10.7 compares to -- is it 11.4 last year?

It was 11.4 in 2019. You bet.

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

Just wanted to dig into a little bit the comments that you've got in your MD&A on the Elk Valley water quality. So maybe following up a little bit on Gordon's questions. You've got a note in the MD&A about fish population, to be specific, kind of trout being affected. And maybe a little bit of a scary sentence at the end, where it says that you may face delays in permitting or restrictions on mining activities. Can you give us a little bit more color in terms of like what kind of studies are required to determine the causes of this population decline? And what actually the risks would be to your operations? Like what would we need to see, I guess, in terms of the study results for your operations to be impacted?

Okay. Robin, why don't you start? And then you can throw it to whoever you like for the balance.

Sure. Just as far as the causation study, that -- there is a considerable amount of work that has to be done in that area. So it's not a simple process to land on a cause. And because we haven't got a sense of what the outcome of that's going to be, it would be pretty tough to speculate on how we'd respond to it. So that work continues. There's a incredibly competent team that is working through that. And by the middle of the year, probably closer in the second half, we should have some outcome on those results. I wouldn't want to speculate on what -- how that impacts -- how that's going to impact the operations.

So if I could just ask a follow-up on that. If we determine that hypothetically, let's say, some activity at the mine or the sea saturated rock fill treatment or something like that was contributing to this issue, would that be -- cause the government to require you to slow mining down or slow processing down?

I think all that's just speculation, to be honest. Until we have an actual cause, some combination of causes, there's no real way of knowing what the response would be.

Okay. And then if I can just ask one other question on Antamina. The previous release that you put out had basically said that you're doing a shift change, sanitizing all the work services and bringing the crews back. This MD&A that you put out today was a little bit more vague on timing. Has there been a change in terms of the activities that are required for the miners to return to work? Are you now sort of looped in with the state of emergency legislation in the country? Or are you still able to return to work as soon as it's sanitized and the crews are ready to go?

Dale Andres, over to you.

Yes. Thanks, Jackie. It is -- we basically said it's uncertain at this time because it is going to take a little bit longer. It did take a little bit longer to demobilize the crews. There still is the state of emergency in effect, and that does limit transportation of workers between regions. We have now demobilized all the crews, except for, we'll call it, a care and maintenance crew or core essential services crew. And we currently have about 400 to 500 people on site. So we moved about 2,000 people off after initially moving 4,000 people before the original state of emergency. So we're working through the details of how regional movement of crews. We're still cleaning the facilities. And we do expect it to take a little bit longer, but the exact timing is uncertain.

The next question is from Timna Tanners with Bank of America.

Just wanted to ask a little bit more. I know you suspended guidance, and we've been talking about some specific projects. But if you could talk a little bit on the high level, on CapEx. On what amount or percent, if you will, could be flexible or could be reassessed if conditions continue to remain depressed? And along those same lines, if you could provide some more color about what you and your partners at Fort Hills are discussing in terms of when and how to make a decision on any further cuts?

Okay. On CapEx, and I may turn it over to Ron Millos a bit in a minute. But really, the reductions in CapEx are included in our CRP targets and -- because they have both CapEx and OpEx. And so we're going through business by business, right? I meet with the leaders of each division. And we go through what the trade-offs are in sustaining capital or actual enhancement projects, so whether they can be stopped, deferred, reduced. And then the total reductions will show up in that CRP number. And Ron Millos is managing that.

I'll just talk to the Fort Hills question first then turn it to you, Ron. At Fort Hills, we are having an ongoing dialogue with the partners, Suncor, the operator, of course, and Total and looking at different options. There are a lot of factors to consider. It's a complicated decision. And the starting point is you have to take a view on what you think oil prices and WCS prices are likely to be and when because if you're looking at reducing production further or going to shut down, then you have to look at the winterization costs that would be quite substantial if you were all the way into sort of the November, December period. So if you're going to do that, you'd want to make sure that you were going to be shut down for a long enough period to justify that versus sustaining operating losses on fewer barrels operating. So those are the trade-offs. And if you think that the oil price is coming back a year or 2 from now, then you clearly wouldn't do that because there's lots of risk associated with it as well. So Suncor is going through the different iterations of studies, and we'll be looking at that with them, I think, towards the end of this month. And you'll hear more in due course. But it is a very complex decision for sure.

Ron, back to you on CRP and CapEx.

Sure, Don. The -- of the $1 billion target, about 2/3 of that is CapEx reductions, and that's spread amongst the various sites. Just the total program itself, of the $1 billion, about 80 -- a little over 80% of it is at the operating sites being coal, base metals and energy. And the balance is split amongst the -- our IT systems, satellite projects, corporate costs and exploration and other project type expenditures. So that gives a sense of where the cost reductions are currently coming from. And that's full -- based on the full target.

Okay. Great. And just to complete the thought then, can you remind us, QB2, that decision was made because of COVID-19, is my understanding. But is there any decision that you would make with regard to the copper price on any of your projects given the depressed level, how do you think about that? And with the buybacks, it sounds like -- I just want to confirm, it sounds like that was completing an authorization and you don't have anything set up further?

On the first question, there's no change in our outlook and long-term for the copper price. In fact, if anything, COVID-19 has probably made that more positive. I think most people know about the antimicrobial properties of copper and the COVID-19 virus dies within 4 hours on a copper surface, but it lives for days and days on stainless steel or other services. So we would hope that in the long-term that various public transit infrastructure and health care hospital facilities would be using more copper. So no change in that at all. And yes, we completed the authorized buyback, and the Board would review that again as we go through and have a better understanding of when QB2 has started and how COVID-19 is shaping out. But we clearly believe that it's good value -- at these levels, it's very good value. And we do want to make sure, Timna, that you and everybody at BAM did see the Elkview plant was completed, and that's a very important investment, some could even say a milestone or catalyst related to our coal business for the long term.

Sorry. Just Robin's going to jump back in here.

Okay. I appreciate that. I just want to come back to a question that Jackie had, and I might have misunderstood that question and the particular part of the MD&A that was being referred to. But that qualifier that's in the MD&A about the Elk Valley permitting, it's not specific to the missing trout. Just generally, we need to show progress in managing water quality issues in order to keep permitting on track. We're doing that and working closely with the regulators. This is a really complex problem with numerous stakeholders, and there's always a chance that something I expect, it comes up. But that's -- but we are making progress, and that's really what that statement was meant to highlight.

And the next question is from Chris Terry with Deutsche Bank.

Don and team, first question from me just in terms of the oil FX declines should be benefiting your operations. I think you've provided sensitivities in the past. But just wondered if you could go through those. And then as a follow-on to that, I think you talked about it on the call at the start of April around the Investor Day that you wouldn't hedge anything related to QB2. But I just wondered if you could just talk about any hedging policies, not on the revenue side, but on cost side for FX or oil for the broader business?

Don? Are you on?

Sorry. I was on mute, I apologize. Ron, if you could take the first question on FX, but I'll start by addressing the overall hedging question. And so our hedging policy, broadly speaking, is we don't hedge the specific commodities that we produce because we know our shareholders are buying us for exposure to those commodities. Historically, when we used to have annual benchmark pricing in coal and the quarterly benchmarking, we hedge at Canadian dollar currency, we locked in our cost base once we've known we'd locked in the tonnage and the sales price. But since so much more business is done on a spot that we don't do that anymore. For sources of supply in places like Red Dog when we're buying diesel, we can hedge that. We also do smooth out the zinc price received at Red Dog because there's so much seasonality to its shipping. But it ends up net sort of average zinc price for the year. But we don't end up in a position where we're long or short commodity or the exchange rate because we don't want to build that risk into our business for our shareholders.

Ron, and on sensitivities to FX, over to you.

You might be on mute as well, Ron.

Sorry. Here I am. My apologies. Sorry. If I heard the question properly, I thought it was related to the asset impairment. And the details on the sensitivities, we've not provided a note for -- to the financial statements. But the USD 0.01 strengthening in the Canadian dollar would affect the impairment by about $50 million. And a $1 change in the WCS price, it would be about $140-something-million.

I was more asking about the operations. So just how it actually translates through on a real-time basis on falling FX in some of your operations right now?

Yes. Ron, just our main sensitivity chart.

Yes. So the main sensitivity chart, we obviously withdrew that because the sensitivities are based on our estimates of production volumes. And we -- we're pulling back the guidance, it's -- we're a little concerned that providing any sort of sensitivity information could be -- result in numbers that are not correct. And that's -- the sensitivities are disclosed in our annual report. I don't have the number handy. My recollection was it's around $60 million for every $0.01. And that was based on the guidance that we previously gave them and withdrawn. So I would be -- I would caution people to be very, very careful on using those sensitivities now because they are impacted by volumes, they are impacted by prices and improvements. And they're probably no longer accurate.

Okay. And then the follow-on for me, just you talked a bit about the water treatment on -- and coal and given some color on that, I think, in Jackie's question earlier. But there's also a comment on Red Dog in the release around tailings and water-related projects in 2020. I just wondered if you could give some more details on that and any CapEx associated with it?

Dale, I guess?

Yes, I'll take that, Don. Yes, we have over the last couple of years experienced higher than normal water precipitation and water inflow. And so we're just flagging that, in 2020, there's a higher than normal amount of projects associated with water and tailings to manage that situation to set ourselves up well for the longer term. As far as the specifics, I think, we did have originally capital guidance in our Q4 release. We've now withdrawn that guidance due to COVID. But those are the kind of projects. I think there was a question earlier about what's our potential to reduce sustaining capital going forward. That's one area that we will not be able to reduce, and it will be higher than normal for 2020 we thought.

Elena, I think we've come to the end of our time. We should hand it back here to Don for his closing remarks. Thanks.

Okay. Well, thank you, Fraser, and thank you all for joining us today. I just want to sort of give an overview or summary, if you like, on how we see things.

If you look back at the last 6 or 7 weeks, I sort of think of that as the operational phase of dealing with the effects of COVID-19 where all of us, both in our work and personal lives, have had to go up the learning curve and figure out what protocols need to be in place and how to deal with it, physical distancing and the rest. But I'm encouraged because we've got through that operational phase, and we are well up the learning curve now. And we're able to operate at close to capacity levels. We now have taken the step to go from 50% of our employees on-site back up to 75% with the full support of the Interior Health Authority. And we see a lot more confidence amongst employees and their families, the communities, the mayors of the towns, the president of the Steelworkers Union and a lot of support, people working very hard to get through this, and they have been successful. So now we have confidence that we are able to operate, and even logistics chain has been performing extremely well, too.

So now we're going to the next phase, and that's where the market is going to be reduced to somewhat as all the things that the world had to do in the global economy take hold. But we look at the length of that, we know it's 1 quarter, it's probably 2. But is it 3 or 4? I don't think so. It doesn't look like it because we see the results in China where industrial production base is back up to 98.5%. There's still industries that are 100%. We see what Korea is doing. We see countries all over the world getting their arms around this issue, and the world will fix itself. It always does. So at some point, there is the other side of the valley, which we kind of think looks pretty green and lush when you figure that $8 trillion of stimulus monetary and fiscal has been announced around the world.

So yes, we have cautioned about our sales volumes in Q2. And I think that should be expected. But no way this makes us think that the long-term prospects for the business have changed radically. And in fact, we think the comeback could be pretty interesting once we get through this next quarter or 2.

So I do want to thank all of my team that have performed at an extraordinary level. These last 6 or 7 weeks, as we were dealt with a challenge and challenge after challenge, we will have other cases of COVID-19. There's no question about that. There's the inevitability of that, but we know how to deal with that and we will.

Thank you to all the shareholders and the analysts who have joined the call today, and we look forward to updating you again after Q2. Thanks very much. The call is adjourned -- or , I should say, at the end of every meeting at Teck, I always say this. Stay healthy, keep the faith, this too shall pass and all will be well. Thanks very much, everyone. Bye now.