Teck Resources Ltd (TECK) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Teck Resources' Q3 2019 Earnings Call.

(Operator Instructions) This conference call is being recorded on Thursday, October 24, 2019.

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, Elana.

Good morning, everyone, and thank you for joining us for Teck's Third Quarter 2019 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.

I will begin on Slide 3 with highlights from our third Quarter, And I Will Be followed by Ron Millos, our CFO, who'll 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 will be happy to answer any questions.

But before we get into the quarter, I wanted to touch for a moment on the recent civil unrest in Chile.

Chile is very important to Teck, not only for our business, but also because of the strong connection through our employees and communities and stakeholders.

This is clearly a very difficult time for the Chilean people, and our thoughts are with all of those impacted.

We have taken steps early on to ensure that Teck employees are accounted for and safe.

We've had no issues to date at any of our sites, and work at the QB2 project is continuing.

We will continue to closely monitor events as they develop with our top priority being the safety of our people.

Turning to the highlights from our third quarter.

We continue to execute our straightforward strategy of running our operations safely, efficiently and sustainably to generate cash, successfully execute on our QB2 project and return excess cash to shareholders.

QB2 construction is moving forward with over 5,000 people actively working on site across the 6 major construction areas.

We are building considerable value for shareholders through the development of this world-class copper project.

First production is targeted for the fourth quarter of 2021.

We continue to advance our RACE21, an innovation-driven efficiency program, to generate an initial $150 million in annualized EBITDA improvements by the end of 2019 and significant additional improvements beyond that year.

We were also pleased to be named to the Dow Jones Sustainability World Index for the 10th straight year.

This indicates that our sustainability practices are in the top 10% of the 2,500 largest companies in the S&P Global Broad Market Index.

And in fact, Teck was the top-ranked mining company on both the world and the North American indices.

Our financial position remained strong with around $6.8 billion in liquidity currently.

On Tuesday, we extended the maturity date of our USD 4 billion committed credit facility to November of 2024.

And in the third quarter, we achieved a number of operating records in steelmaking coal, and we continue to generate solid operating results in both our copper and zinc business units.

Over the past few years, we have been focused on maximizing production to capture margin during periods of higher commodity prices.

However, current global economic uncertainties are having a significant negative effect on the prices of our products, particularly steelmaking coal.

And as a result, we are focusing our attention on our RACE21 program to improve efficiency and productivity all across our business, and also the execution of our priority project at Neptune Terminals and the development of the QB2 project, which is, of course, a key component of Teck's future growth.

We've also implemented a company-wide cost reduction program to reduce spending on our capital and operating cost through 2020.

We have targeted reductions of approximately $500 million in spending through to the end of 2020.

Our target cost reductions do not include initiatives that would result in a reduction in the production volumes of our commodities or that could adversely affect the health and safety of our people.

And Ron will speak to our cost reduction program in further detail a little later.

Turning to our financial results on Slide 4. The decline in commodity prices in the second quarter of 2019, and particularly in steelmaking coal, had a significant negative impact on third quarter profitability.

Benchmark steelmaking coal prices declined from about USD 210 per tonne in the first quarter of the year to USD 178 in the third quarter, and then current spot market prices are just under $150 per tonne having been as low as USD 128 per tonne in the third quarter.

Our gross profit in the third quarter declined by $222 million compared with a year ago almost entirely due to lower prices and a decrease in sales volumes in our steelmaking coal business unit of around 600,000 tonnes.

Bottom line adjusted profit attributable to the shareholders was $403 million or $0.72 per share on both a basic and a fully diluted basis.

Details of the quarter's earnings adjustments are on Slide 5. And as you can see, there were no individually significant adjustment items in the third quarter.

There were also a number of additional charges that we do not adjust for, which totaled $12 million on an after tax basis or $0.02 per share on a diluted basis.

I will now run through highlights by business unit starting with steelmaking coal on Slide 6. In the third quarter, sales came in below guidance due to material handling issues and planned construction outages at Neptune Terminals.

Efforts have been focused on overcoming the materials handling issues and significant progress has been made.

Importantly, demand remained strong in the quarter.

Q3 sales could have exceeded the high end of our guidance range had there been no logistical issues.

Production was higher than last year supported by production records at our Line Creek and Greenhills operations and also strong processing throughput at other operations.

Looking forward, we expect sales of approximately 6.2 million to 6.4 million tonnes in Q4.

Planned outages at both Ridley terminals and Neptune Terminals will result in approximately 40 lost train dumping or berthing days in the quarter and that will, of course, affect our sales volumes.

We expect adjusted site costs of sales to be lower in Q4, which is in line with our annual guidance.

However, given the current economic uncertainty, pressurized steelmaking -- steelmaker's margins and weakness in steelmaking coal prices, we have decided to complete the majority of our major planned outages early in 2020, reducing our steelmaking coal production in the first half of the year and then increasing production in Q3 and Q4.

And as a result, we expect our cost of sales to be significantly higher in Q1 2020 than in Q4 2019 and then to decrease significantly in the second half of 2020 when we are back at full production levels.

However, overall, we expect our cost of sales to be lower in 2020 than in 2019.

Now I think this is a very important point because we're moving the maintenance shutdowns to the first part of the year while coal prices are reasonably weak, but it also accelerates our ability to increase the production at Elkview by 2 million tonnes, and that 2 million tonnes will be much lower cost than Cardinal River that will be headed towards shutdown, which is a higher-cost operation.

So the lower production at the beginning of the year and consequently higher cost is actually a good news story because it means that we get to the longer-term, higher production, lower cost sooner.

Turning to our copper business unit, our Q3 results are summarized on Slide 7. Copper production was up 10% year-over-year primarily due to higher copper grades and the mill throughput and recoveries at Highland Valley, which is in line with guidance.

Total cash unit cost before byproduct credits were USD 1.62 in Q3 down from $1.75 a year ago.

However, net cash unit costs after byproduct credits were slightly higher than last year due to the lower zinc sales volumes and zinc prices.

In August, we signed a new 3-year collective agreement with the supervisory union at Carmen de Andacollo.

Thereafter, a regulated bargaining process with the workers' union commenced in September, but even after mediation did not result in an agreement and the workers' union commenced strike action on October 14.

Going forward, we expect continued improvements in throughput grades and recoveries at Highland Valley.

Our full year copper production guidance is unchanged despite the strike at Carmen de Andacollo.

And our full year operating cost guidance is also unchanged.

Moving on to Slide 8. I'd like to provide a quick snapshot of our progress of QB2 over the last quarter.

Construction at QB2 continues with over 5,000 people actively working across the 6 major construction areas on project with all major contractors mobilized.

Earth works are all well advanced in all areas, including construction of the tailings dam facility.

Concrete installation is progressing very well in both the concentrator and the pouring areas with approximately 20,000 cubic meters placed to date.

The project continues to target construction completion in the fourth quarter of 2021 with ramp-up to full production expected during 2022.

As of the end of September, we'd expended approximately USD 650 million and approximately 65% of the total budget is committed under contracts and purchase orders to date.

Engineering, contracting and procurement activities are all well over 90% complete and a definitive capital estimate is planned for Q1 2020.

The photo on the right shows progress of concrete and rebar for the mill foundations and the grinding area of the concentrator.

Slide 9 shows the concentrator area.

This photo shows the progress we've made in the grinding area of the concentrator, where we've been pouring concrete for the 2 SAG and 4 ball mills since May.

The mills have arrived in country, and we will commence initial installation in the fourth quarter.

And in the background, you can see works related to the core source stockpile and the reclaim tunnel where we are mobilized from commencing initial concrete placement.

And we expect to start structural steel erection in the concentrator area this quarter.

Moving to the floatation area of the concentrator on Slide 10.

You can see the foundations for the 14 650 cubic meter floatation cells.

Chemical components are arriving at site shortly in preparation for the start of installation.

We are also advancing concrete placement for the thicker tanks and other components of the mill.

And on Slide 11, you can see the port site, where we are progressing both onshore and offshore activities following some delays as we were awaiting local permits.

The area in the center of the photo shows progress in the desalination plant with rebar and concrete placement for the foundations.

And overall, the project team is working effectively with EPCM contractors and major contractors to advance construction across all areas of the project.

Our zinc business unit's results are summarized on Slide 12.

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

Red Dog sales of zinc and concentrate were 171,000 tonnes, which is above the guidance of 165,000 to 170,000 tonnes.

Our net cash unit costs in the quarter reflect the benefit of lead and concentrate sales from Red Dog partially offset by the higher 2019 benchmark terms for treatment and refining charges.

Looking forward, we have lowered our full year guidance for refined zinc production at trail operations to 275,000 to 285,000 tonnes.

We expect Red Dog shipping season to be complete in early November with all available concentrate shipped from site.

And in Q4, we expect Red Dog's contained zinc sales to be 160,000 to 165,000 tonnes reflecting the normal seasonal pattern.

Our energy business unit results are summarized on Slide 13.

Gross profit declined in Q3 from Q2, primarily reflecting the decline in the West Texas intermediate price and the widening of heavy differentials.

Production in unit operating costs continue to reflect the Government of Alberta's production curtailments, partially offset through our purchase of curtailment credits.

The production curtailments have been extended through December 2020 with an option to terminate earlier.

And despite the announced extension of curtailments, we continue to expect to be at the low end of our annual production guidance and the high end of our unit operating cost guidance for the full year.

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

Thanks, Don.

I'll start with a summary of changes in our cash position during the third quarter disclosed on Slide 14.

So we generated approximately $1.1 billion in cash flow from operations, and we also received CAD 406 million in equity contributions from Sumitomo Metal Mining and Sumitomo Corporation in the quarter.

And that was the final payment of their USD 1.2 billion investment in QB2.

We spent $824 million on capital projects, and we purchased 180 million Class B shares, which were canceled.

Our capitalized stripping costs were $159 million, and we paid $104 million in interest and finance charges.

And we also paid $28 million in our regular base dividends during the quarter.

After these and other minor items, we ended the quarter with cash and short-term investments of about $1.6 billion.

Turning to Slide 15.

Our financial position remained strong with around CAD 6.8 billion of liquidity currently, and that includes $1.6 billion in cash, $1 billion of that is in Chile for the development of QB2.

And on Tuesday, as Don mentioned, we extended the maturity by 1 year on our USD 4 billion uncommitted credit facility out to November 2024.

We have no significant debt maturities prior to 2035, and we have investment-grade credit ratings from the 4 major credit rating agencies.

We expect to close the USD 2.5 billion limited recourse project financing facility to fund the development of QB2 in the fourth quarter with first borrowing not expected until early 2020.

And as we've mentioned many times, the QB2 partnering transaction and the financing plan dramatically reduce our funding requirements for the project to approximately $700 million, excluding escalation.

And no cash contributions are expected from Teck until early 2021.

Moving on to the next slide.

As Don mentioned earlier, we have implemented a company-wide cost reduction program to reduce our spending on capital and operating costs through 2020.

As detailed on Slide 16, we are targeting total reductions of approximately $500 million from previously planned spending through to the end of 2020.

The target for the balance of 2019 is $170 million, and that includes $120 million in capital reductions and deferrals and $50 million in various other costs.

For 2020, we are targeting $330 million.

That includes $130 million in planned capital spending reductions and deferrals and $200 million in our other costs.

Of the $500 million total, approximately 30% relates to the deferral of capital projects, which will be required sometime after 2020.

The targeted reductions for the remainder of 2019 are included in our updated 2019 guidance, and the reductions in 2020 will be included in our 2020 guidance when we release our Q4 results in February.

And to achieve our targeted cost reductions, we expect to eliminate approximately 500 full-time equivalent positions.

Some of those are expected to come from attrition, the expiry of temporary and contract positions and current job vacancies.

And as Don stated upfront, our target cost reductions do not include initiatives that would result in a reduction in the production volumes of our commodities or that would adversely affect the health and safety of our people, including our contractors working on sites.

With that, I'll turn it back over to Don for his closing comments.

Thank you, Ron.

As I said at the outset, given the current global economic uncertainty, we are focusing our attention on the RACE21 program to improve efficiency and productivity across all our business.

We're also focused on the execution of our priority project at Neptune Terminals and, of course, the development of the QB2 project, which is a key component of Teck's future growth.

While our financial position remained strong, we have implemented a company-wide cost reduction program with reduced spending, targeting approximately $500 million of reductions through the end of 2020.

These actions are consistent with executing our straightforward strategy of running our operations safely, efficiently and sustainably to generate cash, successfully executing our QB2 project and returning additional cash to shareholders.

And with that, we will be happy to answer your questions.

And I should note that some of our management team members are calling in from different locations, so there may be a brief pause after you ask your question while we sort out who's going to be answering it from whatnot.

So back to you, operator.

(Operator Instructions) The first question is from Matthew Korn with Goldman Sachs.

The first, I just want to understand a little bit more the spending of the cost reduction program.

As I see it, and please correct me if I'm wrong, but this is essentially comprising $250 million reduction in capital, $150 million of that is deferred and another $250 million of this is OpEx, it's permanent and it's largely headcount and you expect to reach that OpEx run rate improvement by the end of year 2020.

Is that -- am I understanding it correctly?

That sounds generally in line there.

Yes.

Okay.

All right.

On the operational side, in coal, in particular, could you explain the material handling problems a little bit more there?

Why they've proven to be so persistent?

What you're doing now to help solve them?

And should we expect this to persist really until Neptune reduces pressure?

Or are there other variables here that we're not appreciating?

Just before I turn over to Robin Sheremeta on that question, I just want to add one comment.

In your summary of the cost reduction program, it implied that the time line for getting to the lower operating expense goes right to the end of the year.

In fact, the OpEx will have achieved quite soon.

We are implementing the CRP immediately.

And we'll get a lot of the operating costs out quite quickly.

Robin?

I'll start it off by saying, we don't expect this to persist any longer.

And I'll kind of give you a bit of an explanation of why that is.

We discovered at one of the sites we're experiencing longer than average train dump times.

And we did have intermittent excessive train dump times associated with coal coming from that particular site.

We had a task force that looked into this from a number of different perspectives, both from the material handling at port and site.

And really what they discovered was a process condition at the plant at that site that was introducing higher moisture levels in small parcels into the product.

And so when we understood what that process condition was we were able to address it.

And what we've seen since addressing it's now is that we're having much more consistent train offloading at all port facilities.

So I'm pretty confident, I guess, at this stage, certainly, that we've addressed the particular issue that was affecting us.

We did isolate it to a particular process within one site.

So I think that's behind us now.

And the next question is from Orest Wowkodaw with Scotiabank.

Just pressing a bit more on the cost reductions.

You disclosed that you expect operating cost in coal to be lower next year versus this year.

Is the right way to sort of think about the potential magnitude here -- I think I heard you say this could potentially be $200 million of OpEx savings.

I assume most of that's in the coal division.

And so that could be kind of $7, $8 a tonne plus you should be saving, I think, on a lower strip ratio next year.

I'm just curious if you can magnitude -- give us some kind of order of magnitude of how much lower coal cost could be next year versus this year?

Over to Robin.

I would like to walk you through just some of the factors because the cost reduction program is one aspect of it, and you touched on another pretty key one, which was the strip ratio.

And I know we've talked about this in the past a few times, but we have been mining at a higher strip ratio for the last couple of years.

And this is really to get our operations aligned after Coal Mountain closure and in anticipation of the Cardinal River operation closing down here later in 2020.

So if you look back in 2018, our strip ratio was around 11.1:1.

It's now peaking to about 11.4:1.

And in 2020, our strip ratio is going to be close to about 10.5:1.

So that's a substantial decline from what we've had in the last couple of years.

And our strip ratio over the next 5 years goes from that 10.5 in 2020 down to about the long-term run average of 10:1.

So that's a major, obviously, cost factor in the cooperations.

And it's one that's improving next year and forward into 2020.

The other piece around costs, and it does slip into CRP to some extent, but the first 3 quarters of this year, we focused a lot, obviously, on producing as much coal as we could into a market that was paying substantial amount for it.

So we did incur additional costs.

And I use this example several times where we would haul coal from the Elkview operation, where we had additional rock coal available.

We hauled it all the way to our Coal Mountain operation, which is 30 kilometers south that had the plant available to us.

So that cost, more money.

It increased our operating cost, but we gained by far on the revenue side.

We, obviously, will not be doing that going into a more constrained cost environment.

So there are dollars to be saved just in terms of our operating strategy in this kind of market.

And again, the third factor is really -- that's affected our costs over the last year particularly, and as much in the last 2 years is Cardinal River.

It is a high cost operation.

We did choose to not advance Redcap for that reason.

And as we closed down Cardinal through 2020 and replaced it with tonnage out of one of our lowest cost operations, as Don mentioned at Elkview, that's going to essentially bring our cost down, both from a strip ratio point of view and purely from an operating point of view.

Elkview is a very strong operation with a very large cost base.

And then there are a few costs that have been out of our control like pricing gas and things like that.

So if you would layer all those things together, as Don mentioned, and certainly we have to go through the work of pulling together the budget and getting all our work done ahead of that into Q1, we do anticipate our costs in 2020 to be lower than they've been in 2019.

It's just -- unfortunately, with the timing around planned outages, we're going to take those outages early in the year, take advantage of where we sit in the market right now and be well set up for the second half of the year.

Okay but with just those components -- sorry, go ahead, Don.

No, you go ahead.

I was going to say, do all those components kind of add up to a ballpark number that could be in the order of $10 a tonne?

Is that what we're talking about here?

I wouldn't speculate on a ballpark number at this state.

I'd like to see us pull together the budget, all the different components into a plan that we would be able to speak to in terms of guidance.

So just to remind everybody, we will be giving our year -- our full year guidance in the February quarterly call after we release our annual results, and that would give you a better answer, Orest, at that time.

And then, Orest, just for you, we noted in the report this morning that you referred to the CRP as deferrals.

While there are some deferrals that may come in after 2021, most of the program is actual cost reductions that will be in place soon.

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

I just want to start, maybe, by circling back to what you were talking about earlier, the civil unrest that is being experienced in Chile right now.

Recognizing that you are in the midst of negotiations with your workers at Andacollo.

And so I just wondering if there's any sort of impact of the unrest and so the local dissatisfaction with wages and working conditions and those things that have been protested against.

And if there's any kind of trickle into your union negotiations there?

Okay.

I'm going to turn that one over to Dale Andres who's just returned from Chile a few hours ago.

Jackie, just to reiterate what Don said, we haven't had any material impacts on our operations or projects.

Our QB cathode operation is continuing as you pointed out.

CDA remains on strike.

And that operation was suspended before these protests started.

And our QB2 project remains in full construction, and we do have still 5,000 people working on the site.

We're basically managing some minor impacts around logistics and shift changes.

And we're really focused on the safety and security of all our employees and contractors.

We do have curfews in place.

Obviously, the situation we're monitoring very closely.

It is quite dynamic and volatile.

But to date, we've had no major or material impacts.

I don't really want to get into any details on comments on the negotiation specifically with the CDA.

But all our employees and contractors are accounted for and safe.

All right.

That's fair.

And maybe if I could ask about the NCIB that you announced a couple of days ago.

When we were at site at the Highland Valley tour, I know you guys made the point that the existing or the previous, I guess, NCIB satisfied at least the minimum obligation or commitment that you had made to capital returns under the capital allocation framework that you rolled out in the summer.

So I was a little bit surprised to see this new NCIB.

And I was wondering if you could maybe speak a little bit to your strategy for how you're going to be buying back shares, maybe for the rest of this year.

If you are going to be buying back shares or if this is more in place as something that is a longer-term program that you're thinking of maybe more for 2020?

So the announcement that came out just recently is normal regulatory announcement.

Once a year, we have to formally renew the program and get approval from the regulators.

So that's all that announcement was.

The NCIB that we discussed before is still in place, and we will continue with it watching market conditions as we go.

And the next question is from Greg Barnes with TD Securities.

Don, I just want to investigate the planned outages in half 1 2020, the co-operations, obviously lower production.

You said demand in Q3 remained strong.

I don't know what conditions look like in Q4.

I know prices are weak.

But is it purely just a reflection of your expectation of a weaker coal market through at least the first half of 2020?

No.

This is an operating strategy.

I'll go back to Robin on this.

Yes.

We plan to take the -- we plan every year to take the plants down for maintenance outages.

That combined with upgrades that we're doing at the Elkview plant, we've chosen to schedule those earlier in the year simply to take advantage of what potentially might be a weaker market.

The other side of it is as we do the upgrades at Elkview, the sooner we can do those upgrades, the better.

Because every day after the upgrades, obviously, we're able to produce more coal.

So it really is just a timing issue around that.

And in terms of production next year, can you give us some idea first half versus second half percentage wise?

I really -- I'd like to, I guess, wait certainly for the Q1.

It was roughly the same as...

We're going to do that with our guidance.

I mean, I know, Greg, you know this but these are very short-term questions.

We're doing something that's a net positive, gets us to a stronger coal division sooner at lower cost.

And we are able to get it done a little sooner, so we're going to do that.

But to sort of really focus on this quarter and next quarter, I think that's premature.

The next question is from Chris Terry with Deutsche Bank.

In terms of the coal congestion at port, I just wondered if you could talk specifically around when the Neptune just will be complete.

And also just to -- in the answer to it, if you could just make clear the CapEx remaining and your share of that?

And just what's been spent to date?

And whether there's any significant scope changes?

Okay.

Just before I turn it over to Alex, the construction completion is scheduled for Q1 2021.

And I think over to you, Alex, on the percent of capital still to go.

Yes.

So we've provided some new guidance here in the release here as we work towards our definitive cost estimate.

We see cost increasing to just under $800 million.

Right now, we've spent slightly over $200 million to date incurred and have a little over $300 million committed under contract.

Okay.

And then maybe one for you, Don, just overall.

As you looked at QB3 and now that QB2 construction has actually started, perhaps can you give an update on the bridging and your latest thinking on how QB3 fits in with QB2.

Yes.

So we're working on the scoping study for QB3, looking at a number of different development models ranging from an increase in capacity of QB2 of about 50% in one version, which would be sort of a phase 2 all the way to a triple or even quadruple, because there's clearly such a vast resource there.

We will finish that scoping study this quarter.

And then take a hard look at it and probably move into pre-feasibility quite quickly.

It is very promising and has a number of advantages over QB2, just benefiting from QB2's infrastructure and so on.

And when we get to that point, we'll release more details about it at that time.

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

I really just wanted to take a step back and ask Don the high-level question about country risk, given that you've tethered your company's focus on areas with less country risk.

And then I just wanted to ask if that impression is changing at all with some of the recent uprisings in Chile and also some of the, maybe, company-specific project challenges in Peru.

Yes.

No, I think it's a fair question.

I think until a week ago, Chile was still thought of as the -- probably the leading country in South America in which to invest and has had a great track record the last 28 to 30 years and, obviously, attracted major investment from our industry, which has been by and large very successful.

So -- and we believe and have faith that Chile will remain that in the long term.

We're encouraged that, for example, our employees are back in the office yesterday, working is normal.

And we've had no effects on any of the operations in the country to speak of.

So until you see some longer-term evidence that something has significantly changed then I think that's the position that we take.

Likewise, Peru, of course, I mean geologically is a tremendously trusted country for lots of opportunity.

We have one of the best mines in the world there at Antamina and a really good development project in Zafranal.

We've had a good experience there.

And while we see a stress and strain from time to time in different communities, just as we were seeing now in Chile and, by the way, which we see in Canada, different provinces from time to time.

I think at this point, there's nothing to change our perspective that those are 2 very good countries to invest in.

If you compare the current challenges that those countries are facing to challenges that are happening elsewhere in the world, this helps bring things into perspective.

And we won't be changing our position quickly, but we will watch it closely.

And yes, the recent developments are concerning.

Okay.

Super helpful.

And I don't want to be a broken record, but I keep asking about some of these copper projects, like Project Satellite, I think.

Just wondering if you can give us any updated thoughts on the emphasis or the timing if they are getting pushed out any or backburnered or if you're continuing to go ahead with some of the pre-feasibility stages?

We're continuing to advance those projects towards different milestones such as pre-feasibility and feasibility.

And we are receiving calls of other companies that are interested in either buying or partnering or codeveloping and that's where, I think, still those conversations are ongoing.

So nothing's really changed.

We have reduced the budgets for next year consistent with our cost reduction program.

But we're still advancing it to get to those milestones.

And there are some pretty positive results in cases such as Zafranal and San Nicolás that are near term.

So steady as she goes.

The next question is from Lucas Pipes with Riley FBR.

I wanted to revisit the strip ratio comments for the coal segment.

And I believe you were referring to clean coal strip ratio.

So I was wondering to what extent the improvement in the strip ratio is driven by better yields at the Bosch plant versus geology.

I would appreciate your thoughts.

I think that's the first time we've ever (inaudible).

Very good, Lucas.

Yes.

No, it's -- the short answer is geology.

The yields at the plants are pretty much where they are.

We do expect some improvement in yields.

We've got a number of different projects with RACE21 and some of the upgrades at Elkview certainly will help improve yield.

But the bulk of that change in strip ratio is really around just less waste move per tonne of coal we produce.

Yes.

I'd encourage you to ask that question, Lucas, a year from now.

It will be interesting.

I hope I will see it in the results before then.

Just to turn it maybe to the broader met coal market, I don't think there have been many questions on that.

Maybe Réal, could you comment what you're seeing, obviously, it's been really volatile over the summer.

And I'd be curious, what do you see in the next year, what could be a catalyst?

All right.

Lucas, thanks for that.

I guess what we're seeing broadly in the market, yes, sure, the prices have corrected, but I would not say it's a weak market for coal.

The pricing is still just under $150, which is by all measures still a decent price.

And we've seen demand quite resilient and hot metal production is up just under 4% year-to-date, August.

So we're continuing to see demand from our customer base.

If we look at the various markets, that hot metal production is especially strong in India, Southeast Asia, in China, which is more than offsetting the reductions that we've seen in Europe, Japan and the Americas.

If we look into 2020 compared to 2019, so the World Steel Association is forecasting steel demand to grow 0.9% in 2019, 1.7% in 2020.

But the interesting point in the number for 2020 is that growth outside of China is expected to still be 2.5% in 2020.

And most of that is coming from India and Southeast Asia.

We've also seen reduced steel exports from China.

So that is supporting domestic production in the other countries.

So all in all, we see demand for products containing to be fairly strong, and customers are continuing to nominate vessels in line with our contractual commitments.

Our next question is from Oscar Cabrera with CIBC.

I'm wondering if you could give -- given the fact that you seem to be a lot more cautious with your cost reduction programs.

How are you thinking about your capital allocation with regards to returning cash to shareholders as we move into 2020?

So nothing has changed with regards to the capital allocation model that we laid out in detail, I guess, 4, 5 months ago.

And so you can run your models and come up with whatever available for return to shareholders based on what we disclosed previously.

In terms of cost reduction program, I mean we saw a pretty steep decline from USD 210 down to a low $128 before bouncing back to $150 or so.

So in that kind of environment and with trade wars, Brexit issues, all sorts of global stress and strain, it seem prudent that we should initiate a cost reduction program and do it quickly, get on with it and get it done.

So that's what we did.

Okay.

Maybe if I may, just a follow-up on that.

In terms of the RACE21, we're expecting almost completed the $150 million in 2019.

Is that number for 2020 an additional $250 million?

Sorry, Oscar, you're coming through a very muffled manner.

But I think I got the question on $150 million capital value that we disclosed on RACE21.

So for an investment -- one-time investment of $45 million, we will improve various aspects of the operations, such that EBITDA of $150 million or greater on an annualized basis will be in place by December 31 this year.

For next year, in February, we will disclose the target for the end of 2020, and we'll do the same for 2021.

And they -- those numbers will be substantially larger than the $150 million.

$150 million is the first goal at this.

We're right in the midst of implementing some of the things on the process side of the flow sheet.

Early results are very exciting.

So we're very pleased with the targets.

We're obviously going to try and exceed them, but we would be able to report in detail on those results at the February investor call.

Yes.

Apologies for the line, Don, but -- so is the additional RACE21 for 2020 included in the disclosed $500 million that you have in your release today?

No.

No.

I need to emphasize this once again.

And I'm pretty sure we made it very clear in the release.

CRP of $500 million is entirely separate from RACE21, will be reported on separately, completely different actions that we're taking.

RACE21 is all about innovation and doing things differently in different aspects of our operations.

We will report the results of the 2 program separately.

And there is no overlap, no double counting.

The next question is from John Tumazos with John Tumazos Very Independent Research.

Please go ahead.

I don't want to ask the same question, the same way over again but in terms of the met coal price decline.

Is there new supply or restarted mines producing in China?

Is there higher output in Australia, we know Mozambique has been poor and the US is about the same.

Or are the steel companies just asking for price relief because they don't think, they're making enough profits in China?

Yeah, good question.

The US is in decline to make that clear but over to Real for more detail.

Thanks, Don.

So yeah, John, there is a number of factors at play.

First of all, you talked about domestic production in China, domestic coal -- coke and coal production in China is down again in 2019, and that trend is continuing.

With respect to the market and steelmakers, you will have seen that the iron ore price has been quite high.

It's come down recently but it is still at a level that is putting pressure on steelmakers' margins.

And the same time, steel prices have also come down.

So steelmakers are looking for relief where they possibly can get it.

And to your point on overall supply, Australian supply is up around 6 million tonnes year-to-date.

They are still not back to pre-Debbie levels.

Forecast is for somewhere around 183 million tonnes production this year compared to 189 pre-Cyclone Debbie.

When you look at other markets, you're right, Mozambique is down.

They're down.

Vale is down somewhere around 30% year-over-year at the end of Q3.

So that's 1 million tonnes lower.

In the States, the exports have declined somewhere between 1 million and 4 million tonnes depending on which source you use.

And Wood Mac is forecasting that they could be down as much as 7 million tonnes this year.

And it is a few ones that have actually been idled so far, hard coking coal mines, total of somewhere around 1.5 million tonnes of production or so in 2018 from those mines that have been announced to be idle this year.

So it's a number of factors that have impacted the coal price.

And maybe one of the last one is, every time we see a quick correction in the coal price, there is a dramatic increase in the number of transactions that we see reported by the assessment providers.

That is probably a result of traders' offloading positions and, maybe to a lesser extent, some opportunistic purchasing from some steel mills.

So that's what we're seeing out there.

So if steel output is up 8% to 9% in China, but the coal supply is not up, is it reasonable to infer that the Chinese steel mills must have liquidated 0.5 month or more of met coal inventories?

And iron ore output looks to be down 6%.

And it appears that steel mills have liquidated about 1 month of iron ore supply inventories in process.

Yes.

So it's difficult to get precise numbers on China.

But what we know for sure is that seaborne imports year-to-date at the end of August are up over 3 million tonnes.

So they are still continuing to purchase coal from the seaborne market.

And that's also helped by the arbitrage, the domestic coal is actually around $30 or so a tonne, more expensive than the seaborne.

The next question is a follow-up question from Greg Barnes with TD Securities.

On the Active Water Treatment Facilities, you noted in the release today that you expect Fording River to be the last one you build to be replaced, I assume, by SRF or something else.

When do you think you're going to be able to be in a position to give us a clear view on what the strategy will be in terms of CapEx and OpEx profiles going forward?

Robin will fill in some details, but nothing really has changed from what we announced last quarter.

The government has endorsed Saturated Rock Fills, and we are building the Elkview facility.

It will be in place by the end of 2020, and presumably will operate very well as it has so far, to date, for some time.

And that will then give the government confidence to continue to allow us to substitute Saturated Rock Fill for water treatment plants in the overall plan that we have with the government.

So looks very good from here, and that's how we're thinking of it, which is why we have that disclosure in this quarter.

Robin, do you have anything else to add on that or is it?

Not really.

I'd maybe just add that we're already in the process of designing and initiating early works on the next Saturated Rock Fill at Fording River, which would -- which will extend the water treatment required in addition to what we're building at Fording River South as was the plan before.

So our strategy is very much linked to Saturated Rock Fill is now is the best.

In fact, we down tools on engineering for the water treatment plant at the other Fording River for quite some time ago, 3 or 4 months ago.

So yes, we're proceeding on that basis, Greg.

Okay.

There was some big CapEx numbers associated with active water treatment in the guidance you've given us before.

I'm just trying to get a sense of when we can get some update on those numbers now that SRF looks like it's the way you're going to go.

Well, I think the update is the same that we've said that the CapEx for Saturated Rock Fill is around 20%, maybe 25% of what a active water treatment plant would be, and the OpEx is about half.

That remains the same.

And we're proceeding with Saturated Rock Fills.

We can't give you like a 5-year forecast without having government approvals, of course.

They're going to do it one at a time until they've really seen it running for some time.

And we respect that.

So I think you have the information already.

It's a question whether you choose to use it.

And the next question is from Mark Levin with Seaport Global.

So going back to Neptune or just circling back to Neptune in the comments that you made in the report about the increase in CapEx.

Could you maybe provide some more color as to what's behind that increase?

Is there going to be increase in the amount of capacity available to you?

I think you had mentioned before that you would be going from your current capacity of 12.5 million up to 18.5 million.

Does that change with this increase in CapEx?

Or is there something else behind it?

We have stayed with the 18.5 million public target.

We certainly believe, as we have said before, that we will do much more, but I'll turn it over to Alex for the specifics of what's behind the pieces.

Thanks, Mark.

So Neptune right now, we're just little over 80% engineered and 30% construction.

And just in the process of completing a definitive capital cost estimate, which we expect to have finished here in the fourth quarter.

So the initial indications coming out of that cost estimate are that the costs are going to increase to just under $800 million.

And there's a number of factors really that's driven these increases.

The first and foremost is really site-specific conditions.

So as we were working on the site, there's been some challenging subsurface geotechnical conditions.

As we get out of the ground, those end up getting behind us.

We also have some productivity impacts of constructing within an operating terminal.

So really with respect to access to work fronts, ability to have lay down and then just worker productivity in a congested site.

We have some costs for additional project scope and some admissions that weren't included in the original estimate.

We sanctioned the project back in 2017 and about 5% engineered.

So we've had quite a bit of engineering design evolution and change and costs associated with those have progressed from that basic engineering level to our current 80%.

We have seen some costs related to some of the scheduled changes over the last few years as well as some of the -- so we're putting some costs into -- to continue to maintain an accelerated schedule.

That includes things like night shift and longer weeks, et cetera.

And then we have some additional costs related to escalation as you bring the dollars forward to the current year as well as some -- the actual pricing out from contracts and materials, so all those are included in this definitive estimate, which was currently underway, and we should be able to confirm these when that's complete.

And maybe just to refresh the real value of what we're doing, this will be enormously valuable to Teck for 3 main reasons.

I mean, first, the operating cost will be significantly lower and much closer to our competitors in Australia and that will be an enormous ongoing savings for the length of the mine life decades.

So net present value of that in itself is huge.

Second and just as important, maybe even more valuable is that we will then have consistency of delivery and when coal prices are high, we won't to be put at the back of the line and watch thermal coal go ahead of us.

We'll be able to deliver our product and capture the high margins when they're available.

And so that will be worth hundreds of millions of dollars to us in some years because that has cost us hundreds of millions of dollars in recent years.

And then third, we'll be able to deliver the consistent quality or high quality hard coking coal will not be contaminated and that is very important to our customers.

As you know everywhere in the world, customers are getting more demanding in terms of quality, and that's just something that we have to keep up with and it will be much easier to do at Neptune.

So we look forward to getting there.

Yes.

That makes -- all that stuff -- all that makes perfect sense, Don.

So is there any reason why you wouldn't shift the lion's share of your coal away from Westshore to Neptune given all of those factors?

Or is there a reason why you would want to keep your -- keep it diversified among different ports?

Well, you've seen the scope of the project.

We've announced 18.5 million tonnes, we think we'll do a lot more.

So you can assume we will be moving the lion's share.

I think you want to diversify your risk in some form between other ports that are available.

And so we'd probably do some, but that remains to be seen.

Those decisions will be made sometime in the future.

Got it.

Last question, too, just a clarification one on QB2.

So I think you mentioned in your remarks that you would expect to have an updated capital estimate in February.

Was that correct?

Yes.

In Q1, we've said...

Oh, in Q1.

I'm sorry.

When you report earnings next.

My apologies.

Yes.

I'm not sure exactly when in Q1, whether it's February or later.

But I will just say Q1.

The next question is a follow-up question from Orest Wowkodaw with Scotiabank.

I'm just thinking about the potential CapEx spending for next year.

It seems like there's a lot of moving parts with the deferrals on one hand saving capital but then higher capital related to Neptune coming into the budget next year.

Like outside of QB2 spending, which is obviously ramping up, should the rest of the business -- should we think about it as largely kind of flat from a CapEx perspective because there's a lot of offsetting components next year?

I just wanted to repeat again, while there are some CapEx deferrals, the bulk of things that are cuts, actual cuts in CapEx won't recur.

So Ron Millos, over to you.

Yes.

It's -- we're in the middle of the budgeting process, Orest, so it's hard to really comment on exactly what's going to come out.

But order of magnitude, the sustaining and the deferred stripping, which is the main capital buckets for some of the odd items have been historically about $1.2 billion a year.

And they go up and down in any given year, depending on the nature of the projects.

But I think it's probably best to wait until we give the guidance in Q1.

Operator, Elana, I think we're coming to the end of our time.

Maybe we'll turn this back over to Don for some closing remarks now.

Okay.

Well before we wrap it up, I would note that when we get together next in February, one of our key executives will have retired by then and that's Andrew Stonkus, our Senior Vice President of Marketing, Sales and Logistics.

I just want to publicly thank Andrew for a tremendous career with Teck over 30 years.

He's made a wonderful contribution.

And for many years, he has been the the lead guy in the world in setting the benchmark treatment charges in the zinc industry, and certainly he can retire with great pride and tremendous accomplishments and contribution to Teck.

And succeeding Andrew will be our own Réal Foley, who, of course, many of you have been asking him questions on this call.

And frankly, he's been dominating the conversation for many years on the price of coal.

He is widely respected in the market by the customers and competitors as well as was Andrew in zinc.

And so we are very fortunate to announce his promotion to Senior Vice President of Marketing, Sales and Logistics.

And so congratulations, Réal, and we're counting on you.

And with that, thank you all for joining us today.

We look forward to talking to you in February.