Teck Resources Ltd

NYSE:TECK

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Teck’s Second Quarter 2020 Earnings Release Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. This conference call is being recorded on Thursday, July 23, 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.

[Fraser Phillips, SVP, IR and Strategic Analysis]

Thanks very much, Laurie, and good morning, everyone. Thanks for joining us for Teck’s second 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.

[Don Lindsay, President & CEO]

Thank you, Fraser and, good morning, everyone. Thank you for joining us today.

I will begin on slide 3 with our second quarter highlights followed by Ron Millos, our CFO, who will provide some additional color on the financial results. We will than 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.

So these continue to be challenging times, as the world works its way through the COVID-19 pandemic. Teck will remain focused on protecting our people and communities while continuing to operate responsibly and safely, support the economic recovery in the wake of the pandemic.

We took steps during the quarter to further strengthen our financial position and reduce costs and position Teck to a significantly improved margins towards the end of 2020 and early 2021 as we complete our major capital projects.

We were also pleased to be recognized, as one of the best 50 Corporate Citizens in Canada, ranking by Corporate Knights for the 14th consecutive year.

Turning to our financial results, on slide 4. In the second quarter, revenues were CAD$1.7 billion and gross profit before depreciation amortization was CAD$453 million. Profitability was impacted by the significant negative effects that COVID-19 had on both prices and demand for our products as well as abnormal costs because of the pandemic.

Bottom line adjusted profit attributable to shareholders, was CAD$89 million or CAD$0.17 per share on both the basic and a fully diluted basis. Details of the second quarter's earnings adjustments on slide 5. The most significant adjustments was CAD$147 million of COVID-19 expenses in the quarter on an after-tax basis, which is primarily related to the suspension of our QB2 project.

We also had a CAD$69 million adjustment for environmental costs, which relates to the impact of re-measuring or decommissioning and restoration provisions for our closed operations using a current credit adjusted risk-free discount rate.

In addition we had adjustments of CAD$38 million for inventory writedowns and CAD$17 million for share based compensation. This was partially offset by commodity derivatives and taxes and other items, which were CAD$20 million and CAD$21 million respectively.

With these and other minor adjustments, bottom line adjusted profit attributable shareholders was CAD$89 million or CAD$0.17 per share on both the basic and fully diluted basis.

I'll now run through key updates for the quarter starting on slide 6. The COVID-19 pandemic obviously had a significant negative impact on our business in the quarter. While all of our operations are currently producing with comprehensive virus prevention measures in place, the economic impacts of the pandemic have reduced demand and prices for our products.

We expensed to CAD$260# million in costs associated with COVID-19 in the second quarter on a pre-tax basis, and this includes CAD$151 million of QB2 demobilization, remobilization and care and maintenance costs and CAD$75 million of borrowing costs that would otherwise have been capitalized at QB2 construction not been suspended. Ron will speak to these items in a few minutes.

Looking at our key updates in our steelmaking coal business on slide 7. We continue to focus on increasing margins not volumes. Our second quarter sales were 5 million tonnes, as the pandemic continued to negatively impact supply and demand, particularly outside China.

Now just asked if everyone could please go on mute, so we can eliminate the paper shuffling. Thanks very much.

Chinese steel production returned to pre-pandemic levels during the quarter and established new average daily record highs in both May and June. We are shifting to a lower cost base due to a declining strip ratio. Also due to the Elkview plant expansion which was completed due to the Cardinal River closure and as well as our cost reduction and RACE21 programs.

Our adjusted site cost of sales are expected to decrease over the remainder of 2020 and to the end of the year, we expect to be below CAD$60 per tonne. Our strip ratio was 11.4 to 1 in 2019 and we now expect it to decline to below 10 to 1 by 2021 as planned.

We completed the major expansion of our Elkview operations plant in Q2 despite the pandemic. The plant now has the capacity to produce 9 million tonnes annually, which will enable us to replace that higher cost production from Cardinal River with higher quality coal products at lower cost from our Elkview operations.

As planned Cardinal River completed its final production in June, after 51 years of mining and the operation is now transitioning to closure. I'll come back to our steelmaking coal business in just a few minutes.

Turning to QB2 on slide 8. QB2 is the key component of text future growth as we rebalance our portfolio. Construction activities are ramping back up with over 3000 people currently on site and robust COVID-19 prevention protocols in place.

We are planning to continue a gradual ramp up of the construction workforce over the next three months towards the pre-suspension workforce level as conditions allow. We expect to have approximately 4000 people on site by the end of July, and approximately 8000 people on site by the end of October.

We're also aiming to achieve overall project progress close to 40% by year-end. The impact of the suspension on cost and schedule will depend on the length of the suspension the ramp up period that I just described. And I’ll provide more detail on QB2 in a few minutes.

Looking at progress on our Neptune facility on slide 9. We continue to advance the project, which will secure a long-term, very low cost and reliable supply chain solution for our steelmaking coal business unit. Major equipment deliveries remain on track.

COVID-19 related issues have not substantially impacted works on the critical path. The project remains in line with the previously announced capital estimate and the schedule. Terminal operations were suspended for five months as we previously announced starting in May, in order to improve productivity and safety at the terminal as we advance construction. And completion construction is still expected in Q1 in 2021, just about eight months away.

Turning to key updates on our financial position on slide 10. We have a strong financial position to weather the effects of the pandemic. And we took steps to enhance it even further during the second quarter.

This includes adding a US$1 billion, two years unsecured revolving credit facility bringing the total committed credit facilities down to US$5 billion. We also issued US$550 million of 10-year notes through July 2030, bearing interest of 3.9% per annum.

We used the net proceeds to purchase near-term notes and to repay amounts gone on our $4 billion revolving credit facility. This is a conservative that we think is prudent during these COVID-19 times and reinforces our commitment to maintain a very strong liquidity and our investment grade credit profile.

We also continue to focus on our cost reduction program. We have achieved significant reductions as of June 30th, including approximately $250 million in operating cost reductions and $430 million of capital cost reductions. And Ron will provide further details later in the presentation.

Looking at our guidance on slide 11. We have issued updated guidance for the second half of 2020, with revisits to reflect the continued uncertainty around the extension in duration of the impact of the pandemic on both demand and prices for our commodities.

We've also changed the categories under which we present our capital expenditures guidance. So going forward, we will present capital expenditures in three buckets. First, sustaining capital, then growth capital and finally capitalized stripping, which you've all been getting used to for the last five years.

We will continue to report QB2 capital expenditures and external funding separately. Spending, previously categorize as major enhancement capital is now primarily considered sustaining capital. And new mine development is now included in growth capital.

The Neptune upgrade project and RACE21 are considered both growth capital. You'll find all the details with are updated guidance in the guidance tables in our press release.

I will now run through highlights of our second quarter by business unit starting with steelmaking coal on slide 12. As I mentioned earlier, Q2 steelmaking coal sales were 5 million tons. And this is higher than originally expected, despite steelmaking cutting production faster than during the global financial crisis in 2008 and 2009.

Our adjusted site cost of sales increased to $68 per ton, reflecting the COVID-19 impacts to our production cost. Production averaged around 80% of plan in the quarter, due to the pandemic. We reduced our workforce by up to 50% per physical distancing requirements, starting on March 25th. And then we ramped back up to 75% on April 10th. And on May 12th, we returned our workforce levels to 100%.

Looking forward, we expect 5 million to 5.4 million tons of sales in Q3 given the impact of the pandemic on supply and demand, particularly ex-China. Adjusted site costs of sales are expected to decrease over the remainder of 2020, as I mentioned, and we expect to end the year below $60 per ton of site costs. Our production guidance for the second half of the year reflects the estimated impacts of the pandemic and the suspension of terminal operations of Neptune.

Turning to our copper business unit. Our Q2 results are summarized on slide 13. Copper production at 59,000 tons in the quarter reflects the 43-day temporary suspension of operations at Antamina to support Peruvian COVID-19 response efforts and to facilitate a change in workforce.

Antamina has since then ramped up to full production, which is ahead of our original expectations. And we now expect to achieve full production in the completed quarters. At Highland Valley after initiative reducing on site workforce by 50% and scaling back operations, we have now gradually ramped back up to full production rates.

In Chile at our Carmen de Andacollo and Quebrada Blanca operations, we have generally maintained production levels, while reducing the onsite workforce where possible. Significantly lower total cash unit costs before by-product credits in the same period last year to reflect our Cost Reduction Program or CRP and also favorable exchange rates. Lower by-product credits was also a bit slightly lower net cash unit costs after by-product credits in the same period.

Turning to QB2 on slide 14. As I said earlier, we are planning to continue a gradual ramp up of the construction workforce over the next three months towards the pre-suspension workforce level, as conditions allow. The impact of the suspension on cost and schedule will of course depend on the length of the suspension and on that ramp up period.

In the second quarter, we expensed $133 million of costs associated with the QB2 project suspension and also $75 million of interest for the project that would have otherwise been capitalized, if construction had not been suspended. As of June 30th, we have expensed a total of $165 million due to the suspension, excluding interest.

Looking forward in the third quarter, we expect to continue to expense some costs associated with the projects expansion, as well as some interest that would have otherwise been capitalized. Assuming the ramp up proceeds through the third quarter as currently planned, the aggregate estimated impact from the suspension is expected to be approximately US$260 million to US$290 million excluding interest, with a scheduled delay of approximately five to six months.

In addition, we expect to construct more camp space at an incremental cost of US$25 million to US$30 million to ensure that we can maintain necessary physical distancing protocols to protect the health and safety of our construction workforce.

If we are not able to ramp up through the third quarter according to the current plan, each additional month of partial suspension impact is expected to have an additional cost impact of approximately $25 million to $35 million in one month of additional scheduled delay.

Our zinc business unit results for the second quarter are summarized on slide 15 and as a reminder Antamina’s zinc related financial results are reported in our copper business unit. Red Dog zinc and concentrate sales were 93,800 tons, reflecting the normal season pattern of Red Dog sales.

Our net cash unit costs after by-product credits were US$0.06 per pound lower than the same period last year, despite US$0.03 per in unexpected costs associated with COVID-19. Travel restrictions and modified schedule for maintenance [indiscernible] at Red Dog due to the fly in, fly out nature of the operation.

The maintenance schedule and our ability to respond to maintenance challenges were impacted as a result of that in Q2. Red Dog zinc production was lower than the same period one year ago primarily due to those maintenance challenges and also to lower grades resulted from mine’s sequencing changes to manage site water level which restricted some access to higher grade ore.

We continue implementing an increased number of challenged water related projects in 2020 to manage increase precipitation in water levels at Red Dog that seems the frequency of extreme weather event has been increasing and these projects are designed to ensure that it will continue to optimize the mine operations.

At Trail operations, production of refined zinc in the quarter was impacted by annual zinc roaster maintenance. Looking forward, the Red Dog concentrate shipping season commenced on July 13 following the delays due to the failure of the world environment on one of our two shipping markets.

Shipping will be completed with one barge operational now and we currently expected repairs to another barge will be completed by the end of July. This will affect the timing of custom deliveries, but for an unforeseen severe weather conditions we do expect to ship all Red Dog production during the shipping season.

We expect Red Dog sales of 160,000 to 180,000 tons of contained zinc in Q3 which reflects normal seasonality. Red Dog production is expected to return to full production rates in the third quarter as throughput and grades improvement. However, water level of the site may continue to restrict access of high-grade ore in the second half of 2020.

Our energy business unit results for the second quarter are summarized on slide 16. As previously announced the Fort Hills Partners safely and efficiently reduced operations to a single train facility in the quarter, which helped reduce the negative cash flows in light of COVID-19 and the unprecedented low Western Canadian select prices.

Production was also negatively impacted by extreme wet weather, resulting in flooding in the mining area in June and early July. However, we expect to remain within the full year production guidance that we provided in Q1 of 2020. As a result of lower realized prices, we recorded inventory write down to $23 million in the second quarter.

Please note that adjusted operating costs are low in the quarter because of inventory write downs which are adjusted out. For the first half of the year and including $46 million inventory write downs, our site production costs are within our previously issued guidance of CAD$37 to CAD$40 per barrel bitumen for the period.

Looking forward our guidance for production, operating costs and capital spending is unchanged from the disclosure provided last quarter. Fort Hills Partners continue to monitor market conditions, and may adjust the operating plan to report those accordingly.

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

[Ron Millos, CFO]

Great. Excuse me. Thanks, Don. And I'll start by addressing the changes in our cash position during the second quarter, which was shown on slide 17. So, we've generated $300 million in cash flow from operations in the quarter. We issued US$550 million of the 10-year notes and used the net proceeds to repurchase that US$268 million of the notes, maturing in 2021 '22 and '23.

And used the balance to reduce draws on our $4 billion net revolving credit facility resulting in the transactions being leveraged neutral. In the second quarter, we had a net reduction of US$32 million on the draws against our revolver and we didn't draw US$388 million on the QB2 project financing.

And that accounts for most of the increase in our total debt, which totaled $6.2 billion at the end of June versus $5.5 billion at the end of March. Our capital spending was $889 million in the quarter, of that $97 million was stripping activities and the largest single piece was $446 million on QB2.

We paid $78 million in interest and finance charges and $52 million on expenditures on investments and other assets. We repaid $40 million of lease liabilities and paid $26 million for our regular $0.05 quarterly base dividend. So, after these and other minor items, we ended the quarter with cash and short-term investments of $336 million.

Turning on to the COVID expenditures on slide 18. In terms of the accounting what we're doing is costs related to capital projects that do not qualify for capitalization are expensed as incurred in our other operating income expense line item. And these are primarily the demobilization and remobilization care and maintenance costs.

Cost not directly related to the production of our products are expense that incurred and cost of sales. But they're not included in our costing of inventory so they're not flow through our future earnings when the products are ultimately sold. So that basically expensed in the quarter incurred.

And again, borrowing costs on capital projects that are temporarily suspended are charged against finance expense, as they're no longer allowed to be capitalized while the project is down. And that's primarily QB2.

And we've deducted all of our COVID-19 related costs or expense from a profit attributable to shareholders in our adjusted earnings table to assist readers and analyzing understanding our operating results absent the effects of the pandemic.

In the second quarter, we expensed $260 million related to COVID on a pretax basis. $133 million of that related to the temporary suspension of construction at our QB2 project. And $18 million was related to the temporary closure of Antamina and COVID-19 fund donations.

$75 million in additional finance expense was expensed rather than capitalized against QB2 during the construction period. And then we had $34 million related to other incremental costs at our various operations. So on a year-to-date basis, we've expensed $304 million related to COVID19. And that includes $80 million of interest that would otherwise had been capitalized.

Slide 19 summarizes our cost reduction program. So to the end of June, we have achieved approximately $250 million of operating costs reductions, and $430 million of capital cost reductions. And of that total, $305 million was achieved in the second quarter.

And just as a reminder these reductions are against what we were expecting to spend back at the end of June 2019, when we started looking at cost reduction opportunities. The reductions are spread throughout the company with the majority of the operating business units. They include the satellite projects, the exploration projects, our IT systems and our admin and operating costs throughout the company.

And the savings from our cost reduction program have been included in our guidance since we've announced the program back in Q3 with our Q3 2019 results. And they are included in our current updated guidance as well.

Turning to slide 20. We have a strong financial position to weather the effects of the pandemic. And as Don mentioned earlier, we took steps to enhance it further during the second quarter by adding a new two-year unsecured revolving credit facility.

So together with the US$4 billion revolving credit facility which matures in 2024 and a US$2.5 billion project financing facility for QB2. This new $1 billion facility and the extension of debt maturities gives tax significant liquidity as we complete QB2 and the Neptune Terminal facility upgrade, while we go through the COVID situation.

We've currently drawn $195 million on our US$4 billion revolver and our current cash balance is $430 million and a balance available on our lines of credit, we currently have CAD$6.9 billion of liquidity. Importantly, our facilities do not have any earnings or cash flow based financial covenants.

We do not include a credit rating trigger and there's no general material adverse effect borrowing condition. So the only financial covenant that we have is a net debt to capitalization ratio that cannot exceed 60% and at June 30th that ratio was 22%.

And for our QB2 project. We have currently drawn $563 million on the $2.5 billion limited recourse facility. Going forward, project funding will be from that project financing till the project reaches a specific ratio of project financing to total shareholders’ funding.

Teck’s next contributions are not expected until the first half of 2021. And of course, that is subject to the impact of the pandemic on the project schedule and timing of the capital spending. We do not expect COVID-19 impacts to prevent us from drawing on the project financing facility.

And as previously mentioned, we issued the $550 million of notes that are due in July 2030. They bear interest of 3.9%. And we used the net proceeds to purchase $268 million of the 21s, 22s and 23s. And the balance of those proceeds we’re used to reduce the draws on the $4 billion credit facility.

We've also given notice of our intention to redeem the remaining US$13 million balance on the 2021 notes that were not tendered to our recent offer. And that's expected to happen by the end of this month. And after that will leave us with only US$258 million of notes maturing until February 2023. And after that, there are no notes due until the new 10-year notes maturing in July 2030.

The combination of these various transactions is obviously leverage neutral. We also have investment grade credit ratings from the four credit rating agencies. So overall, our financial position is in good shape to allow us to weather the challenges around COVID-19.

And with that, I will turn the call back over to Don for his closing comments.

[Don Lindsay, President & CEO]

Thanks, Ron. To wrap up on slide 21. Teck has quality operating assets and stable jurisdictions. We're advancing a proper growth strategy, it is funded and is being implemented. We continue to progress our four key priorities, which are the QB2 project, RACE21, the Neptune Upgrade Project and our company wide cost reduction program do reduce spending.

We are executing on these priorities to create value and position Teck for decades to come. And we are confident that our strategy will drive significant value over the long-term as the world recovers from COVID-19.

And with that, we would be happy to answer your questions. I should say that like many of you, most of us are on phone lines from home. So please bear with us if there is a play while we sort out who will answer your questions. Operator over to you for questions.

[Operator]

Certainly. Thank you. [Operator Instructions] The first question is from Orest Wowkodaw from Scotia Bank, please go ahead.

[Orest Wowkodaw, Scotiabank]

Hi, good morning. Last quarter, you warned that you were seeing customers defer contracted coal volume. I'm just curious if you're still seeing that. Whether customers, I guess, outside of China are still deferring? And whether the guidance for Q3 assumes a higher proportion of spot sales in that number?

[Don Lindsay, President & CEO]

Okay, thanks, Orest. Good question. I'll turn that over to Real. Real Foley?

[Real Foley, SVP, Marketing and Logistics]

Yes. Can you hear me, Don?

[Don Lindsay, President & CEO]

Go ahead. I hear you.

[Real Foley, SVP, Marketing and Logistics]

Can you hear me?

[Don Lindsay, President & CEO]

Yes, we can.

[Real Foley, SVP, Marketing and Logistics]

Okay. Thank you. Thanks for the question, Orest. So actually, we're seeing quite the opposite right now. You're right, in Q2, we had deferred sales. But now some of the customers that had deferred sales are actually bringing some back into Q3.

And there's a couple reasons for this, actually. First, if you look at the steel price, it is back to nearly what it was at the beginning of 2020 through COVID-19. And steel production is coming back, of course, the demand for our customers’ products is increasing. And we are seeing some increased production in some areas.

But as steel mills reduced production during Q2, they were also a lot quicker to reduce their inventory as well than they did during the global financial crisis in ‘08, ‘09. That basically leveraged the learnings, the technical learnings from that period.

So, of course, as production is starting to ramp up for steel products, they need to import steelmaking coal from the market. And this is what we are seeing from our customers. And your last question on the ratio of spot to contracted sales, our ratio remains very similar, around 40% of contracted sales and the balance in spot sales.

[Orest Wowkodaw, Scotiabank]

Well, that's great. Thank you. That's great to hear. And then just finally, on the costs for coal, you have talked about an exit rate this year of onsite costs it looks less than $60 a ton by year end. That's certainly a big improvement from what we've seen in the first half the year. Should we take that to mean that for costs for 2001, at least onsite costs, are going to average below that $60 a ton?

[Don Lindsay, President & CEO]

I think you mean 2021. I’ll turn that over to Ron.

[Ron Millos, CFO]

Appreciate the question, Orest. There's a number of things that have happened in the coal over the last few years. And I've kind of walked a group through that a few times. I'm going to take the opportunity to take a shot out.

Again just because it sets up for the structural change that's occurred. So the first thing that I've spoken to a number of times is the strip ratio. And, that's a key cost driver for us. And for the last three years, we've been transitioning from coal mining closure and setting up to the expansion of Elkview where we need to go -- where we want to go from 7 million to 9 million ton. To do that, we had to run a higher strip ratio through 2019. So that was around 11.4 to 1.

And we're going to come in around 10.7 to 1 in 2020. But in the second half, we're actually going to be mining at less than 10 to 1. And that'll continue that through the 2021 and forward. So that key structural change of getting the strip ratio established at a 10 to 1 average or below was the biggest part of getting our cost structure adjusted.

The second key piece of that was bringing Cardinal River closure. So that's been done as mentioned. So just to put that in perspective that operation ran at almost double the cost of sales at the BU average. So bringing that to closure actually reduces our cost per ton by about 3 bucks a ton, that's for cost of sales, sorry. So that's been established.

And then the third piece of the puzzle was getting Elkview expanded. And we've successfully done that. Elkview now is capable of 9 million tons per year. So when the market comes around, we're well positioned now with that operation, which is low cost and produces a higher quality product.

So I know this has been talked about a few times again. But that will generate about $160 million of EBITDA annually if the price of coal is that 150 [ph] and exchange around 1.35 or 1.38 [ph]. So that structural shift from shutting down high cost tonnage and replacing it and more with low cost tonnage has had a significant structural change.

And then the fourth component that we're executing through 2020 is RACE21. And we know and have spoken to a number of times that kind of value that that can create across the company, and certainly within the coal BU.

So when you combine all those things together, when I say we will exit 2020 at $60 a ton or lower, we will be less than $60 a ton going into 2021 and be able to sustain that. And we've got significant opportunity to build on that performance, just with the work being done at RACE21. So pretty excited about both the second half of this year and 2021.

If you look at cost of sales below $60 a ton, that's roughly US$44 ton. So on an operating basis we're going to be operating at a good cost.

[Orest Wowkodaw, Scotiabank]

That's excellent. Thank you very much for the color.

[Operator]

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

[Greg Barnes, TD Securities]

Yes. I just want to continue on the coal side. On Neptune, Don, it sounds like it is on track for completion in Q1. I just want to understand more about the rail capacity through Vancouver to get the volume of coal to Neptune that you want. Has the work been done to open that up? Is that being done as we speak? Or is it completed? And will it be ready by the time that the Neptune's ready?

[Don Lindsay, President & CEO]

Yes, it is. And I should say just before I turn over to Ian Anderson, that we had a terrific visit to site at Neptune just last week. And it is impressive what they've been able to accomplish so far. And it gave us a lot of confidence. So, Ian, are you there, if not Real?

[Ian Anderson, VP, Logistics]

Yeah, I'll take that, Don. So Greg, I guess one thing to say is we've also had visits with CM as to some infrastructure upgrades that they are doing to address the increased tonnage. This is on schedule and progressing very well. Maybe at this point, we have no concern with capacity being sufficient to maximize the volume throughput through Neptune, which is our overall goal to ensure that we have long-term competitive supply chain.

[Greg Barnes, TD Securities]

Thanks Real. Don, secondarily, the guidance on QB2 construction now. Just to be clear by October, or assuming everything goes according to plan you will be back at full construction on the project.

[Don Lindsay, President & CEO]

That is the plan. Obviously, everything’s subject to the ramp up from here. We're actually about 3400 people on site today. And we think we'll be at 4000 by the end of the month, which is not that far off, of course. And between now and then one of the key criteria is to get to the room.

And we've developed protocols just as has been done with the health authorities elsewhere in the country to do that. So if all goes according to plan, yes, we'd be at full strength by October and starting to get that 3% to 4% completion per month thereafter.

So, it isn't done yet. Obviously, there's still way to go, but we were encouraged we come from the demobilization level was at about 400 people on site. So we come from 400 to 3400, headed the right direction, but still story to tell.

[Greg Barnes, TD Securities]

Okay. And again, according to plan, a five to six-month delay in the construction schedule will mean that you get first ore in the mill hopefully by the end of 2022, or is it slipping into '23 now?

[Don Lindsay, President & CEO]

Yeah, it's in 2022. We've spent the last five to six months. We'd initially said Q2, 2022. So we should think in terms of a couple of quarters. That's right.

[Greg Barnes, TD Securities]

Okay, great. Thank you.

[Operator]

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

[Curt Woodworth, Credit Suisse]

Hey, good morning, Don.

[Don Lindsay, President & CEO]

Good morning.

[Curt Woodworth, Credit Suisse]

First question is just on portfolio construction. So when you evaluate the copper supply landscape today, you look at Codelco and others in terms of challenges to meet mine production. I wonder if you could give us an update on projects Satellite. And any monetization efforts there, I would think was the recovery we've seen in the markets that would maybe be some more momentum on that front?

[Don Lindsay, President & CEO]

Yeah, I'll turn it over to Andrew Golding in just a minute. But, yeah, we remain constructive on the copper market for the long term, which is why we have a portfolio rich and opportunities to develop. But we don't need to do them all ourselves. So as we've said in the past, if market conditions are appropriate and interest is there, we could have sold out right or contributed to another company take back shares, that sort of thing.

There are two projects of the five that are advanced enough that we think it's appropriate to look at potential transactions when the mark is right. But we're not quite sure that mark is all the way there yet. So copper, of course, has had quite a run.

Why don't I stop there and turn it over to Andrew with any other thoughts that he may want to share?

[Andrew Golding, SVP, Corporate Development]

Can you hear me, Don?

[Don Lindsay, President & CEO]

Yes.

[Andrew Golding, SVP, Corporate Development]

Okay, good. I don't really have a great deal to add to what you said there. Clearly, there are some significant logistical constraints as a result of COVID-19 in advancing field work. And for that matter, if we want to conduct any form of sales process that would be logistically extremely challenging right now.

But we are in very good shape for when it becomes logistically more practical to take potential buyers and interested parties to sites. So we continue to get a lot of interest. These are very good projects by world standards and obviously backdrop over positive copper market. These are the things we'd hope to advance COVID notwithstanding in 2021.

[Curt Woodworth, Credit Suisse]

Okay, that make sense. And then just a follow up, maybe for Real, on the coking coal market. It seems like there's been some increased activity out of India, but then there's been some reports around quota restrictions being kind of exhausted in China.

I was wondering if you could just provide a little bit more granular outlook in terms of what you're seeing, perhaps regionally in terms of the demand trends you're seeing in coking coal. Thank you.

[Real Foley, SVP, Marketing and Logistics]

Yeah. So thanks, Curt. So let's look at maybe China first to address one part of your question on the import restrictions. So the China economy is really continuing to recover and showing well. And the steel industry is producing very strong right now with achieving record production in both May and June.

So year-to-date, they're running at a high level. And as a result, the seaborne coking coal imports into China have also been very strong with May year-to-date up 11 million tons year-over-year.

And there's a couple of reasons for that. Reduced Mongolian coking coal imports are one thing. They're down 9 million tons year-over-year and lower domestic coking coal production. They're actually down 3 million tons year-over-year.

And the seaborne price is still lower than the domestic coking coal price today, it's around $60 and it's been above 50 for a while now. And then we're seeing sustained demand, increasing demand from the coastal steel mills. So that is all helping with the seaborne market.

Now, when we look at outside of China, depending on the market areas, there is definitely still risk with the pandemic. But we are seeing some economies reopen. And as I answered the one question earlier, we are seeing some customers bring back the original deferred tons into Q3.

And that's a result of the opening economies, but it is also a result of expected supply disruptions, ongoing supply disruptions this year, but also expected further production cuts as we're going through, whether it's related to COVID-19 or overall mind disruptions.

So when you look at the [indiscernible] figured for instance, they're forecasting that seaborne exports this year will be down 30 million tons that includes somewhere around 10 million tons from the U.S. a little bit less from Australia, Russia, Canada and Mozambique, somewhere in the 2 million to 3 million ton range.

And for those other markets outside of China. The China's steel exports are also a lot lower this year, which is continuing to support production as the economy recovers in those other parts of the world.

In India, monsoon season will be over during the quarter. So we are expecting to see some demand come back as a result of that as well.

[Curt Woodworth, Credit Suisse]

Great, I really appreciate it. Thank you.

[Operator]

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

[Jackie Przybylowski, BMO Capital Markets]

Thanks very much. I just wanted to get some more color from you guys on what's happening at Red Dog, if you don't mind. I know in the MD&A it says that there's a risk to grade, I guess specifically for the second half of the year if the water conditions continue to restrict access. Can you tell me a little bit about what is the risk to the guidance that you've given and how much additional work might need to be done or CapEx might need to be spent to mitigate those risks? Thanks.

[Don Lindsay, President & CEO]

Okay. Thanks, Jackie. We'll turn that over to Dale or Shehzad.

[Dale Andres, SVP, Base Metals]

Yeah, it's Dale. Thanks, Don and thanks Jackie. Just to give you a bit more color on the issue. Due to changing climate conditions we have experienced higher precipitation levels at Red Dog in recent years and our discharge capacity for water that we do collect on site is restricted. And it’s also dependent on background levels in our discharge water as well.

So we’re seeing naturally higher levels that we’re discharging into which restrict us. So in order to manage those water balances, we’re actually storing water in various areas at the site and that includes in our pits.

And so when we’ve to store water in our pit, it does restrict us accessing higher grade at the bottom of the pit and we’re having to mine lower grades towards the top of the pit. So what we’re doing about it is we’re raising the tailings dam to store more water in that facility and that will be complete in the next two to three months for the next lift of the tailings dam.

And we’re also building, and that’s normal course, but we’re staging that in a bit of a different way to get capacity earlier. And we’re also increasing our water treatment capacity and putting in [multiple speakers] that is probably costing in the range of $25 million U.S. that wasn't originally budgeted.

[Jackie Przybylowski, BMO Capital Markets]

Alright, thanks. So that's sort of a one time -- I guess both of those things are one-time cost and then after that you should have sufficient water capacity to manage going forward?

[Dale Andres, SVP, Base Metals]

Yeah, through future tailings dam lists and other water management efforts. Exactly.

[Jackie Przybylowski, BMO Capital Markets]

Great. And if I could just ask one follow-up question on Red Dog. I noticed that the back of the MD&A where you talk about the costs, the royalties for Red Dog seem to be a credit to tax this quarter? And can you just help me maybe interpret or explain what happened with the royalties in the zinc division this quarter? Thanks.

[Dale Andres, SVP, Base Metals]

Ron, I'm not sure, if you want to take that one.

[Don Lindsay, President & CEO]

Ron Millos, are you there?

[Ron Millos, CFO]

It's a cash flow royalty-based calculation. So it might have to dig into the numbers there on that one. And it ties in with when we receive the receipts from the sales and when we pay our bills and stuff. And in the first half of the year, we're generally buying a lot of supplies and paying for those supplies getting ready for the shipping season.

And of course, we have no lower sales volumes. So the revenue coming in is a lesser numbers, so there's a good chance that it generally catches up in the latter half of the year, where you see the largest royalty payments would normally be in Q1 based on the Q4 results.

[Jackie Przybylowski, BMO Capital Markets]

Okay. Got it. Thanks a lot, Ron. That's it for me.

[Operator]

Thank you. The next question is from Oscar Cabrera from CIBC. Please go ahead.

[Oscar Cabrera, CIBC]

Thank you, very much and good morning, everyone. So I'm just wondering, in QB2, there's been reports coming out of different companies in Chile, where there has been workforce, two-thirds reported by [indiscernible]. So wondering in the ramp up assumptions that you're making for your labor force in the QB2 construction.

What are your assumptions in terms of allowance by the government to do everything safely? And then secondly, there's also been reports of labor just being reluctant to go back to site without any strict policies on COVID-19? I just wonder if you can comment on that as well.

[Don Lindsay, President & CEO]

Okay, thank you, Oscar. Good question. And I'll turn that over to either Alex or Dale. Alex, are you there?

[Alex Christopher, SVP, Exploration, Projects & Technical Services]

Yes, Alex here. So maybe I'll answer to Oscar here. And then Dale can chime in if he has any additional comments. But Oscar our priorities here continue to be the safety of our workforce, and supporting the Chilean efforts to limit the transmission of COVID-19.

So the project team, Bechtel, we've been working very closely with the government, with our subcontractors and with our unions. And they've done a really good job of developing and putting protocols in place to manage the workforce, the camp environment, the transportation of workers to and from the site.

So over the last couple months, we've spent a fair bit of time ensuring that essentially the protocols that we put in place are working well. The government has been up and inspected and are quite complimentary in terms of what we're doing.

So we have a trigger action response plan in place to manage the situation, should we see an outbreak. And then the protocols that we have in place there to manage, so to ensure that we have timely identification as symptoms. And particularly, as we see some cases of workers that are arriving at site, who may bring the disease with them.

So we're looking at testing. Basically, quarantine and medical treatment and working with the government on that. And we have a COVID committee that meets regularly to review the status of what we're doing and approve all of the additional ramp up changes that we're having.

So a lot of protocols in place and working very closely with both the government and our subcontractors in union. So we haven't seen any substantive challenges to date. But should we see challenges, we do have a response plan prepared to manage those.

So with that, maybe I'll pass it over to Dale, if he has any additional comments on that?

[Dale Andres, SVP, Base Metals]

No, I think you've covered it off well, Alex.

[Don Lindsay, President & CEO]

For those who have followed us closely through the beginning of construction of this project. You may recall that during the first year, we had several delays related to permitting and we’re still in our permitting process.

But one of the silver linings to the COVID delay is that the federal government and local governments and the independent regulators and so on, have been working very hard in getting through that. So yesterday, we actually got the final group of permits that had been outstanding. So we're very, very pleased about that to be able to go forward with construction.

[Oscar Cabrera, CIBC]

That’s helpful. Thank you, Don, Alex and Dale. Now just if I may moving back to the coal market. It sounds like you're more optimistic on the fundamentals of metallurgical coal. However, we haven't seen prices move above $110 a tonne based on [flat], and this is for the last month or so.

I was just wondering if you can comment on this notion of Chinese restocking in the first half of the year to make sure that they have enough materials to process in the second half should we have more disruptions. I mean, that is the bearish argument.

The bullish argument is that there is enough demand in the second half, and hence that's why all of the things that you have pointed to would suggest to a higher coking coal price in the second half of the year. Can you just add more color on that please?

[Don Lindsay, President & CEO]

Those are interesting concepts for us and that’s just things about the commodities markets, you can always create a scenario both bullish or bearish based on a number of factors like you've listed. But Ron I'm going to turn it over to you if you want to take a shot at answering that.

[Ron Millos, CFO]

Yes, sure. Thanks Oscar. So yes, the prices is holding around CAD$110 right now. So we are seeing positive signs out there in terms of demand, whether it's out of China or markets outside of China. But of course there is still uncertainty with the pandemic.

And we've seen reductions on both the demand and the supply side. So, the market is still trying to find the balance for sure. But we are cautiously more optimistic about Q3 than we were at the beginning of Q2. So, we are seeing changes.

With respect to restocking, we have not really seen restocking in China right now, because China steel industry is running at record high levels. And when you look at what is happening in terms of supply, the increase in seaborne supply is just about balancing the reductions from Mongolian imports, but also domestic coking coal production.

I don't know if that answers your question.

[Oscar Cabrera, CIBC]

Yes, that does. Thanks very much. And congratulations for strong performance under challenging situations.

[Ron Millos, CFO]

Thank you.

[Don Lindsay, President & CEO]

Thank you. Well, operator. I think we've got time for maybe one more question here, before we hit the top of the hour.

[Operator]

Certainly. The next question and last question is from Alex Hacking from Citi. Please go ahead.

[Alex Hacking, Citi]

I just wanted to clarify something on the QB2 CapEx. I think when you put out the update a few months ago, you said that the sensitivity to the peso, I think you would republish that 775 as the underlying assumption, and said if the peso went to 850 there would be about a CAD$240 million benefit on the CapEx.

Should we assume that that relationship is linear? Obviously, copper has strengthened, the peso strengthens. So, if the peso were to go back to 700 would it be fair to assume kind of a CAD$240 million headwind there? I'm just trying to understand how that relationship works. Thanks.

[Don Lindsay, President & CEO]

Okay. That would be for Alex please. And at the time that we published in peso it was 850, actually, which is why we did that sensitivity. It's right close to the 775 or 770 or so right now. Alex, over to you.

[Alex Christopher, SVP, Exploration, Projects & Technical Services]

Thanks, Alex. As the exchange rate changes, the exposure to the exchange rate is somewhat different, but in general, the relationship is close to linear. Obviously, the lower the peso becomes against the U.S. dollar, the less exposure you have to the Chilean peso, but inside of a couple hundred pesos to the U.S. dollar exchange rate that relationship you can assume that it’s close to linear with just around 70% or 69% of our to-go capital exposed to the Chilean peso.

[Alex Hacking, Citi]

Thank you.

[Operator]

Thank you.

[Don Lindsay, President & CEO]

So, I think that was the last question. So, I just want to say thank you to everybody for joining us for the call today. We're very pleased to get Q2 behind us. Q2 2020 was a tough one for sure.

Things have improved significantly. We're delighted to have the Elkview plant expansion complete and got that done despite COVID. We're delighted to be ramping up slowly but surely at QB2. And look forward to getting back to full strength there in October.

And we're looking forward to continued global recovery from the pandemic throughout Q3 and Q4. And we'll speak to you again in October. Thanks very much all. Meeting adjourned.

[Operator]

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