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Teck Resources Ltd
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Ladies and gentlemen, thank you for standing by. Welcome to Teck Resources Q3 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. This conference call is being recorded on Thursday, October 25, 2018.
I would now like to turn the conference call over to Mr. Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead, sir.
Thanks very much, Leta. Good morning, everyone. Sorry, for that brief delay, we had a little technical difficulty with some of our folks dialing in from a remote location. We think we got that sorted out. Thanks for joining us for our third quarter 2018 results conference call.
Before we begin, I'd like to draw your attention to the precaution regarding forward-looking statements on Slide 2. This presentation contains forward-looking statements regarding our business. The 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'd also like to point out that we use various non-GAAP measures in this presentation. You can find explanations and reconciliations regarding these measures in the appendix.
With that, I'll 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 some highlights from the third quarter followed by Ron Millos, our CFO who will provide additional color on our financial results. We'll conclude with a Q&A session as usual, where Ron and I and additional members of our senior management team would be happy to answer any questions.
Turning now to Q3, we continue to advance our key growth initiatives Quebrada Blanca Phase 2 and we continued to strengthen our financial position. But we received regulatory approval for QB 2, which is a major step forward in advancing the project. And importantly, it was a unanimous vote from Chilean authorities which is a testament for the level of support for the project locally.
We also closed the sale of our two thirds interest in the Waneta Dam in July, resulting in receiving $1.2 billion in cash. And then we reduced our outstanding notes by $1 billion US, which further strengthens our balance sheet. And all of this puts us in very good position ahead of our potential sanctioning decision on our QB 2 project later this year.
In addition, we received regulatory approval to renew our normal course issuer bid or NCIB in early October and this allows us to purchase up to 40 million Class B shares over the next one year period. Our operations continued to perform well, although commodity prices for our key products declined during the third quarter which impacted our profitability compared with the last quarter.
Fort Hills continues to ramp up towards exceeding name plate capacity of 194,000 barrels a day and we expect full production in Q4. And as a result of our solid operating performance year-to-date, we have improved our production guidance in each of Copper and Zinc for 2018. And finally, we were very pleased to be named Dow Jones Sustainability World Index for the ninth consecutive year.
Turning to our financial results for the third quarter on Slide 4, revenues were 3.2 billion, gross profit before depreciation and amortization was 1.4 billion and after adjusting for unusual items adjusted EBITDA was 1.2 billion. Bottom line adjusted profit attributable to shareholders was 466 million or $0.81 per share or $0.80 per share on a diluted basis.
I'll run through some highlights by business units starting steelmaking coal on Slide 6. Global steel production and demand for seaborne steelmaking coal remains strong. And as a result, steelmaking coal prices are continuing to outperform market expectations. With the spot price at $217 per ton currently and now as of yesterday, in fact this morning that spot price is $225 a ton.
In the third quarter we generated significant cash flow based on continuing solid operating performance. Customer sales were strong. We had sales orders in hand to significantly exceed our guidance of 6.8 million ton. However, once again logistical issues at Westshore Terminals negatively affected our ability to deliver coal to customers and as a result delivery of some 250,000 tons was delayed into Q4, negatively impacting revenues by about $55 million.
Fourth quarter sales are expected to be around 6.7 million tons subject to the performance of our logistics chain. Production was lower in Q3 2018 than it was in Q3 2017, largely as a result of the end of mining activity at Coal Mountain. However, we are well positioned to meet our full year production guidance. Equipment utilization and productivities are continuing to achieve historical highs and the majority of our planned plant shutdowns are now behind us.
Operating costs increased in third quarter relative to both Q3 2017 and relative to Q2 2018 and this to due to increased use of contractors to capture additional margin in the current strong steelmaking coal price environment and inflationary pressures on consumables particularly diesel. On top of this in Q3 2018 cost increased due to maintenance shutdowns of two of our larger plants and also mining in higher cost areas of our pits something that varies from quarter to quarter.
I would note that these costs are not permanent. They're not a permanent part of our cost structure. In the current strong coal market where we'll now be receiving almost $300 Canadian per ton, we are using contractors to capture incremental production that is helping to generate very strong profitability and strong cash flow. If coal prices were to decline, we would reduce the use of contractors. The majority of our planned plant shutdowns are now behind us and we expect to move to lower cost areas of our pits in due course.
That being said, we have increased your site cost guidance for the full year to $60 to $63 per ton from $56 to $60 per ton due to higher use of contractors and higher diesel costs than previously anticipated. Perhaps most importantly this quarter, we are very excited to report that we have had promising initial results for our Saturated Rock Fill project Elkview Operations.
Saturated Rock Fill is a new form of water treatment resulting from our ongoing investment in water quality research and development. Our Elkview facility is achieving near complete removal of selenium and nitrate in 10 million liters of mine affected water per day and that number 10 million liters exceeds the 7.5 million liters per day design capacity of our West Line Creek active water treatment facility and it does so at a fraction of the cost.
Saturated Rock Fill has the potential to augment or in fact even replace traditional water treatment technology for treating large volumes of mine waters at significantly reduced capital costs and significantly reduced operating costs. We are continuing to prove out the results of the Elkview facility and to work towards broader implementation of that technology. This is a very exciting and long-term development.
Turning to our copper business unit and our Q 3 results is summarized on Slide 7. On QB 2, as I mentioned earlier, we received regulatory approval for the project during the quarter which was based on a unanimous vote from Chilean authorities and this is a major milestone for the project. The partnering process for QB 2 is progressing very well. We are encouraged by what we have seen so far and we continue to believe a transaction could be announced in the fourth quarter that is in this quarter, sanctioning of the project could also occur at that time.
At the same time work is underway to further optimize the initial mine life of QB 2 as well as the production rates in the early years of the operation. And in addition engineering studies are underway to assess the expansion potential beyond QB 2 including a potential doubling of throughput capacity in the future which we now refer to as QB 3. And this will position Teck to have growth in our copper division for a long, long time to come.
Overall in the third quarter gross profit before depreciation and amortization was up modestly from the same quarter last year. Sales were up 1,000 tons and strong cash credits for byproducts helped to offset a small increase in unit offering costs. Highland Valley had lower copper grades and mill throughput as anticipated in the mine plan. Also, Carmen de Andacollo set a new monthly record for mill throughput in September.
And for the full year we now expect copper production to be in the range of 285,000 to 295,000 tons compared with 270,000 to 285,000 tons at the start of the year. We have also lowered our copper unit cost range to $1.25 to $1.30 US per pound after byproducts compared with $1.35 to $1.45 US at the start of the year. Finally, on the technology front our autonomous haulage pilot at Highland Valley now has two trucks fully operational in the Lornex pit and it is on track to have six trucks operational by year end.
Our zinc business units are summarized on Slide 8 and as a reminder and to mean as zinc related financial results are reported in our copper business unit. I zinc market remains tight. Reported exchange zinc inventories are at their lowest levels since 2008 and reported zinc stocks held on the LME and the Shanghai Exchange fell close to 100,000 tons combined during the third quarter. In Q3 contained zinc sales for Red Dog were 9,500 tons lower than our guidance due to timing of sales and shipments.
We expect Q4 sales for Red Dog to be 180,000 tons which reflects our normal seasonal pattern. Mined zinc cash unit cost after byproducts were up $0.09 US per pound compared with the same period last year. The operating costs increased primarily due to high diesel costs at Red Dog. Red Dog's concentrate shipping season is expected to be complete in late October. We expect to ship approximately a million tons of zinc concentrate and 175,000 tons of lead concentrate representing all of the concentrate available to be shipped.
At Trail refined lead production was impacted by temporary shut down due to smoke from forest fires. On top of this the planned major maintenance shutdown started in mid-September and is expected to continue to mid November. These factors had a negative impact on Trail's operating cost during the quarter and Trail's operating costs were also reflecting higher electricity costs related to the sale of the Waneta Dam.
Looking forward, based on our strong performance at Red Dog, we have increased our overall zinc and concentrate production to the range of 660,000 to 675,000 tons compared with 645,000 to 675,00 tons that the start of the year.
Our energy business unit results are summarized on Slide 9 and as a reminder commercial production was achieved at Fort Hills on June 1. The plant startup has continued to exceed expectations with respect to both production volumes and production quality and as I mentioned earlier, Fort Hills is continuing to ramp up towards nameplate capacity. In Q3 our share of Fort Hills bitumen production was around 2.5 million barrels or around 27,400 barrels per day and this reflects some unusually wet weather that impacted mine production in July and planned maintenance that restricted plant to 50% capacity in the last two weeks of September.
During the maintenance period the mine operations focused on overburdened stripping and exposing more ore to support full production in the fourth quarter. Our sales of blended bitumen were 3.1 million barrels in Q3. Looking forward, we now expect to be at the high end of our full year production guidance range of 8.5 million to 10 million barrels of bitumen for the full year compared with the range of 7.5 million to 9 million barrels at the start of the year.
We're also expecting to be at the high end of our operating cost guidance of $2,850 to $3,250 Canadian per barrel for the year this year. One final note the Frontier year project public hearing before a federal and provincial panel which commenced on September 25 is essentially complete before closing arguments to come in December. The earliest that we would see a federal decision statement is probably mid 2019.
And with that I will pass over to Ron for some comments on the financial side.
Thanks Don. I'm on a slide 10 and I'll start with a summary of changes in our cash during the third quarter. So we generated 882 million in cash flow from operations and of course we received roughly 1.2 billion in proceeds from the sale of investments, almost all of that was from our two thirds interest in the Waneta Dam. We spent 1.3 billion Canadian buying back some of our notes with near term maturities, spent three 397 million on capital projects and our capitalized stripping costs were $162 million.
We paid $140 million in expenditures for investments in other assets of which 60 million are Canadian; 78 million was for the second payment of the acquisition of IMSA that was required upon receipt of the regulatory approvals for QB 2 that Don mentioned earlier. We also paid 133 million in interest and finance charges, $29 million for our regular quarterly based dividend of $0.05 per share. After these and other minor items, we ended the quarter with cash and short-term investments of 1.5 billion and our current cash balance is now approximately $1.8 billion.
Turning to liquidity on Slide 11, our liquidity is currently 5.7 billion and that includes the 1.8 billion of cash and to US 3 billion of our undrawn committed credit facility. We now have no significant debt maturities prior to 2024 and our strong credit metrics which are shown on the bottom right compare favorably to our diversified and our North American peers. And as Don mentioned earlier, we also received regulatory approval to renew our normal course issuer bid in early October and that allows us to purchase up to 40 million Class B shares prior to October 9 of next year. And overall we're not very good position ahead of a potential sanctioning decision on our QB 2 project.
So with that I'll now turn it back to Don for his closing comments.
Thank you, Ron. I like to wrap up by looking forward to the next key catalysts or evaluation milestones if you like. For the remainder of 2018, first, we expect full production at Fort Hills in the fourth quarter. We may complete the partnering process for QB 2 and be in a position to announce the transaction towards the end of the quarter and then sanctioning of the project could also occur at that time. In addition we aim to complete the Highland Valley 20/40 pre-feasibility study in Q4. And in early 2019 we aim to complete the feasibility study at Zafranal. We also aim to complete the feasibility study on NU by Q3. And in addition we expect to complete the prefeasibility study and submit the SEIA for San Nicolas in the second half of 2019.
So a lot to look forward to over the next year and with that we would be happy to answer your questions and I should say that some of our management team members are calling in from a number of different locations, so there may be a brief pause after you ask your question while we sort out who is going to be answering it. And with that I'll turn it over to you operator.
Thank you. [Operator Instructions] The first question is from Chris Terry with Deutsche Bank. Please go ahead.
Hi, Don and team. Thanks for taking my questions. The first one is just around QB 2, you gave some color there and you still expected to be in the fourth quarter. I just wondered whether you talk a little bit about the competitive tension, the different parties, I think previously you mentioned that there's three main groups, trading groups, potential operating partner et cetera. I was just wondering whether you can talk through how that process is evolving in the wake of current price environment. That's my first question. Thanks.
Okay, well, I appreciate the question and that would be a lot of curiosity on the issue, but I need to say that we really aren't in a position to disclose much about that other than what we've said already that the process is going very well, we're moving along. At this stage we are on track for announcing a transaction this quarter. At the end of the day, of course that depends on who we select as the partner and different aspects of their own schedule and their own board meetings, so we'll see how that works out, but we are very pleased with things looking forward. This could make a big difference to us in terms of reducing any financial obligations we have going forward but a very significant amount a couple of billion dollars US that order of magnitude and really leave us with a lot of financial flexibility and cash coming in. So and we're getting really good validation of both the quality of the project. People are now starting to see the data on QB 3, which is very exciting and the perception of the project is changing quite dramatically into a project that is likely to be in the top five copper producers in the world when we move on to QB 3 and what we think will be a doubling or a twining of the concentrator there. So we're in the midst of it, we can't see much more than that other than we're very pleased.
Okay, thanks. Thanks, Don. And then just on the coal division you mentioned the higher cost more the one off nature. I just wondered if you can give a little bit more color on that or I guess heading into the budgeting process for 2018 and setting the garden for coal division over that period. I'm just a little bit confused on the use of the contractors and planning versus what actually happened in that quarter, so just looking for a little bit more color on how to think about the next few quarters and into 2019 on the cost side. Thanks.
Yeah, no, important question and I'm going to turn it over to Robin Sheremeta, to go through some of the details on that, but an overview comment I would say is that we're very pleased with how the coal business is running and shaping up for next year and thereafter and I'm quite excited exactly about what we are able to deliver to our customers in the context where my coal guy this morning really said, you know what, there's no coal up there, that's why we're seeing 225 US or close to $300 Canadian. The operations are performing well on that context, so Robin over to you.
Yeah, thanks for the question Chris. So I'm going to walk you through a number of the different components because I expected - want to understand this in a bit more detail. So if you look at the difference in cost to sales from Q2 to Q3 and there was quite a jump of about eight bucks. The first one is really associated with our schedule plant maintenance shut downs and now that our two largest operations Fording River and Elkview, this impacted our cost by about $2 a ton. We've got no further major shutdown scheduled through the end of the year, so these costs are pretty much behind us now. The second is associated with their use of contractors and the best example of this and I think I've spoken to this in the past is with Coal Mountain shutting down we've got latent capacity at that operation in the plant, they don't have - the mining portion is shut down, but the plant is still fully operational and it's close enough to Elkview, it's about 30 kilometers south, so we can deliver the additional raw coal we have available at Elkview because of the strong mining performance there and process it through Coal Mountain, but that does cost more money to ship it that distance by highway. And so if you take that and a number of other uses of contractors we've had to maintain equipment availability at a high level and things like that that's impacted our cost by about $2 a ton. And then in the quarter - somewhat unique to the quarter we were generally mining in higher cost areas and that's just an artifact of the mine plan, it's simply a timing issue with good development, so we expect it to balance out through the year and that for the quarter was actually around $3 a ton - between $3 and $4 a ton. So those are the three main components to it and then as far as - and maybe I'll just speak to the guidance change.
There are - again the two main areas that have affected are year cost is different and I guess we've got it too earlier in the year, first being diesel. Diesel alone consumption pricing has added about $2 a ton for the year over what we had originally guided to and diesel is what it's going to be and then certainly the other area has been the use of contractors. So as Don mentioned with the strong margins we're seeing, we're chasing those last few tons of coal that deliver exceptionally good value in this kind of a market not - the LP example is probably the best one for that so. Then I think that's pretty much the big buckets.
Okay, appreciate the detail there. Thanks, that's all for me.
Thank you. The next question is from Orest Wowkodaw with Scotiabank. Please go ahead.
Hi, good morning. I'll ask some questions really about the coal. The first one just on the cost side, so if I heard what you just said I think, it sounds like we should think about higher costs moving forward for at least these long contractors of call in the range of four to five a ton higher than maybe we're thinking about before is that then just kind of fair to say if we kind of eliminate the following distance issue and maintenance in the quarter?
I think on the diesel it is what it is. On contractors, I guess one key piece of the contractors I should mention is, we've been wrapping up our internal capacity around traits, but that takes time. So that means developing apprenticeships, it means recruiting and in the time it takes to do that we've supplemented a lot of our onsite labor around maintenance with contractor use, so you're going to expect that to reduce over time as we get additional trades on track, so that - again that's a cost we incurred today because we're not going to put production at risk in this kind of market environment, so we expect that kind of cost to come back down. Our cost like oil and coal from Elkview to Coal Mountain, again that will change in time as we build up the capacity of the Elkview plant, so that operation will move from 7 million to 9 million as we look ahead to the plan to replace [indiscernible] and Elkview capacity increases will likely reduce the amount of coal we have to come up because there will be a lower cost. So those are a couple of the key things that will change in time.
Okay. And then -
And just to put in perspective, the swing factors in where we are in the mine plant or the coal prices itself was up more in a single day today than the total of the cost increases that we're talking about and looking through quarter-to-quarter you could have significant major changes just by where you are. Strip ratio is coming down from 10.7 to 10 over the next year so and that will overwhelm these kinds of cost numbers that everyone's focused on. And we do have the flexibility to stock easing contractors if there was a very significant downturn, so it's not a permanent part of the cost structure that can't be addressed or something.
Okay. I appreciate the color there. And just sticking with the call, I mean, this is I think the recurring theme of volumes being constrained by logistical issues. Should we start to worry that this is going to impact 2019 and 2020 volumes, given that you're still beholden to assure. And is there anything that can be done in the interim to, I guess, ease some of those constraints? Or is there being anything done?
Yeah, we'll just turn it over to Andrew Stonkus in a moment, but we are in a constant dialogue with the management of Westshore, they have taken some steps to improve, we've actually seen better performance over the last quarter or so. So - but Andrew, I want you to put a color on that.
Yeah. Thanks. The question, as you know, where we have multiple terminals that we need to move our coal, so we have Neptune facility of Italy, and we also go to the East bound shipments as well. So we have some flexibility to move our coal to the markets using other service providers. So, Westshore has - had the unplanned maintenance downtime in Q3, which impacted our shipments. But we're in dialogue, as Don says, to wish Westshore to make sure that your performance meets our expectations. So we have flexibility and we utilize our flexibility when required.
Okay. Thank you.
Thank you. The next question is from Lucas Pipes with B. Riley FBR. Please go ahead.
Hey, good morning, everyone, and thank you for taking my question. I'm still a little hesitant to ask about - to ask a question about capital returns but, Don, you received a regulatory approval for 40 million of Class A repurchases and obviously this is a Board decision, but could you please put this figure in context and how you think about capital returns at this time? Thank you.
Okay. Thanks, Lucas, and we continue to appreciate all the good work that you've been doing.
You know, where - we changed our policy a year ago last September to a more flexible driven dividend and buyback or capital returns policy is more like the companies that we compete with particularly the London listed ones. We have a base dividend of $0.20 per share, which is sacrosanct. And then each year as we get to November board meeting, we look at how the year was and what the capital needs are going forward and determined the quantum of capital that we would return to shareholders and then how we would split that between a cash dividend and buybacks. And also as part of our policy, we canvas the shareholders during that September, October period, which we have been actively doing and we've received a lot of feedback. While I can't - I speak with the Board is very clearly a Board decision, but I can't say is that in the feedback from shareholders as most of you will know already, there is a heavy, heavy bias towards buybacks and so we renewed our normal course issuer bid and we doubled the size of it in terms from our regulatory point of view, and that is a strong signal that what we intend to do and we intend to do shortly. So I think that's something that we would want to have in place all year long and we think at this stage that it's a very attractive allocation of capital to do larger buybacks in last year. Order of magnitude, it's hard to say it's a Board decision, but clearly this year is a good year with a record first half we did see significant declines in copper and zinc, so it may not be a record year, but it could be our second or third best year so that that suggests a pretty healthy capital return. But the final amount won't be decided until the November Board meeting. And you know, we won't quite have the partnership deal on QB 2 decided by them, but we anticipate a reasonable amount of cash coming in the door in that sense, so you could see the decision adjusted related to that as well depending what the Board's thoughts are on future allocation of capital. But certainly these share price levels, we were sitting here thinking about the company's operations are doing quite well, customer demand is very strong, my coal guy says there's no coal guy out there, my zinc guy says there's no zinc guy out there, my copper guy says soon there is going to be no copper out there. So we think it's a pretty interesting opportunity right now.
That's very helpful. Thank you. To turn it may be back to coal, I noticed in the release there was a mentioning of a notice from the Canadian federal side in regards to the Fisheries Act. Any color as to potential financial impact from that notice? And then to put that in context with your announcement regarding the saturated rock fill development, does that speed up the process or deployment of that technology and if you could maybe remind us on the financial impact of the saturated rock fill versus your previously disclosed initiatives? And that would be very helpful. Thank you.
Okay, another good question. I'll turn that over to Peter Rozee.
So I'll start with the Fisheries Act charges, we are in discussions with federal regulators and prosecutors and importunately is really nothing more we can say in terms of providing color on that issue. At the moment I would say we expect that it will take a number of months to play out. And in terms of the saturated rock fills, that issue I think is quite unrelated to progress on saturated rock fills. And I turn it over to Rob to talk about the financial impacts of the saturated rock fills.
Yeah. I guess, I'll try and put it in context of a saturated rock fill cost compared to the active water treatment facilities that - and the best example of that is no more building at Fording River right down. So Fording River north - sorry, south facility is designed for 20,000 cubic meters of water a day, so 20 million liters a day and it will cost just over $300 million dollars to construct. The Elkview saturated fill right now in a pilot stage is running at 10 million liters of water a day throughput. It cost $40 million to put in place and it has a capacity we think easily around 60 million liters of water a day, so six times what the pilot is right now. So the next active water treatment facility that we were - which is a part of our outside water quality plant to construct would be the Elkview plant. So that saturated fill that Elkview has a potential to replace the Elkview plants that we had planned to build, which would be roughly $300 million. It will cost a bit more to bringing water from the same location that we would feed the Elkview plant from, so there's some capital associated with that. But again it's - it will be a fraction of the cost of what it would take to treat or storage to construct an active water treatment facility and it's treating significantly more water than we anticipated. And as Don mentioned, to-date and we've been running for nine months, we're getting 100% - virtually 100% removal of selenium, nitrate from that project. So it's extraordinarily exciting in terms of the potential that this has. It's still working its way through the proving stage, so we still have to work through that. But at this stage we're very confident; this has a lot of potential for us.
That's fantastic. Great job on that and continued best of luck. Thank you.
Thank you. The next question is from Greg Barnes with TD Securities. Please go ahead.
Yes, thank you. Robin, just want to understand the 2019, can you support the 27 million tons to 26 million tons of coal production without the high use of contractors that you have to use this year?
I'm thinking through that. You went the other way, I mean, on the tonnage 26 to 27, we can look forward [ph] first about that for a second. I mean, we're still working through our budget plan. I think certainly the initial plans I've seen, we're trying to reduce contractors on maintenance that is - that's just a matter of hiring and we're in that process we've - hiring trades. We are building apprenticeship. So I would expect there to be less contractors associated with maintenance labor. As for things like hauling coal from Elkview to Coal Mountain, I think that would be discretionary additional tonnage and we could support a tonnage profile 26 to 27 without doing that. We would do that because it would return exceptionally good value if there as a continued strong market. The market pullback, we wouldn't spend that kind of money to do that additional tonnage. But the mine plan between 26 and 27 is achievable without the level of contractors that we're currently using.
Is it supportable without trucking the coal to Coal Mountain or not? Do you have to ship to Coal Mountain to get to the 27 million ton?
We don't.
Okay.
We don't have to ship to Coal Mountain to achieve that - that range of tonnage for next year.
Okay. I just want to follow up on the coal market, Don or Real, obviously, the coal price looks very good today, is that just the fact that [indiscernible] fire there has stripped out potentially 3 million tons of coal or is it higher demand out of India? And how is Indian demand tracking this year relative to what you expected?
Okay. I'll turn it over to Real.
All right, Greg. So I guess the main reason why coal prices are where they are and demand continues to be really strong. If you look at crude steel production around the world, September year-to-date, it's up nearly 5% compared to last year and out of that India is up over 6% very similar to China actually. And the rest of the world is running at plus 3%. So we continue to see very strong demand fundamentals on steel - per steel pricing is also very high not only in China but everywhere in the world. And that is continuing to support the steel making coal market. On the supply side, supply is actually very tight and as soon as there is a little disruption, we see that reflected in price. We know our logistics limitations and also our production challenges. On logistics side, we've talked about Westshore earlier. But in Australia, there is also limitations with Horizon and CT. On the production side, there has been the fire at the northern [indiscernible] and that mine produced 2.8 million tons in 2017. And then in The States, Mission filed for Chapter 11. And they shut down their Pinnacle Mine, which produced nearly 1.2 million tons in 2017. So steelmaking coal supply continues to be impacted. And as a result, pricing for coal is still somewhere around $220.
Okay, great. Thanks, Real.
Thank you. And the next question is from Oscar Cabrera with CIBC. Please go ahead.
Thank you, operator, and good morning, everyone. If I may just go back to - I was really surprised to see this move by the Canadian federal prosecutors, I mean, if memory serves you have been super proactive and spending a lot of money with this water treatment. I don't understand that is difficult to provide guidance on the financial impact, but would it be possible just to Fisheries Act or the things that they're looking at on selenium versus what you have been working on?
Thanks, Oscar. I would like to reinforce that we certainly believe we have been super proactive too and I think the evidence of that is just what Robin Sheremeta has been talking about. And a lot of dollars spent on R&D that looks like it's going to be very successful and that's in addition to the large capital spending on plant construction already. But in terms of the more specifics of your question, I'll turn it back to Peter Rozee to answer that one.
Yeah, Oscar, unfortunately, we just can't give you any further color on the issue given the status of our discussions with regulators.
Okay. Fair enough. And then if I may just continue on the coal side, you talked about your valuing the McKenzie Redcap, the sign, which may give you about 1.8 million tons of additional production from by 2020. Could you talk about the scope of the project in terms of capital, I know that the other project that you were working on, I think the intensity of capital was about $250 a ton, any color you can provide on this one?
Sure. So that project up until I guess last year we were anticipating closure at Cardinal river and that would have occurred around 2020. So the plan that we were working on is to advance or not like a pitch that's a little farther out and I would support that 1.8 million tons a year. Through to about 2027 I think is the year, so eight or nine additional years. And as far as the order of magnitude on capital costs it would be less couple intensity than Quintette. So it's actually a pretty strong project and I don't want to speak too much about the state we're going through an approval process and the final economics on it, but it would fall in that way. It should be better project than Quintette would be.
And in terms of level of magnitude with better project 20% lower capital or we have this - there was actually some - we have some numbers for Quintette?
Yeah, it's going to roughly fall in a range of a between $100 million to $150 million.
Okay. Perfect. And last but not least, now like you, we've been surprised by what appears to be still a strong physical market and I was wondering if you guys could comment on what you're seeing for both zinc and copper in terms of refining premiums and spot thesis?
Okay, over to Andrew Stonkus.
Yeah, thanks, Oscar. Let me start off with zinc. Zinc continues to be drawn down the aluminum inventories as we're watching it's of significant drawdowns in the aluminum inventories and then set the inventories. From the back of Chinese smelting underutilization rates of smelters in China with the environmental regulations in place and being enforced. So Chinese metal production is down about 5% year-to-date based on the last statistics and the domestic Chinese mine production is down roughly around 10%. So in China both metal and concentrates are dropping drawn down or not being produced and we are going into the winter season in China, so that Northern Chinese mines will tend to reduce their production, so they'll be now going drawn down of inventories in China we suspect, so no inventories being drawn down. The arbitrage is attracting metal from aluminum inventories do anything specifically to China and strong pricing in the Asian marketplace. In North America demand is very strong. As Real pointed out, there is two mills are running at strong utilization rates and that includes galvanized production, so galvanized global production is up about 3%. So demand globally for galvanized steel was strong. On the copper side, as well the inventories as well know, are really at extremely low levels. Metal premiums have been going up there, approximately $100 on the spot market and annual capital premiums have already been established $10 higher than last year. So the metal inventories are tight, so we still have smelters down - some smelters down in India specifically, and some other smelters are struggling with their production. So supply is being constrained on the metal side and demand remains to be strong. So it's all shaping up to be fundamentally very strong markets for both metals and concentrates. On the zinc concentrates, TC start going up Oscar reflecting some of the additional new mine production coming onstream. But so they're still very low TCs relative to historical levels.
Thank you, everyone.
Thank you. The next question is from Mark Levin with Seaport Global. Please go ahead.
Thanks. My questions have been asked and answered. I appreciate.
Thank you. The next question is from Matthew Fields with Bank of America. Please go ahead.
Hi, everyone. You obviously made - on the balance sheet you made it a lot of progress with $1 billion tender in the quarter. Is the last - sort of agencies have talked about clarity on QB 2 from a partner and a funding perspective as kind of the last hurdle towards upgrading you back to IG. Is that your understanding as well and do you think that kind of if you sort of resolve everything in the fourth quarter, we could see the agencies move by maybe one 1Q '19?
I'll turn that over to Scott Wilson.
Thanks for the question, Matthew. The credit rating agencies don't tell us anything differently than what they've published in their reports and indeed you've captured our understanding of what the agencies are looking for before potentially moving on their positive outlooks on our rating that being the QB 2 partnering, the timing of sanctioning and the financing. And so we do anticipate, as Don said, being able to provide clarity on most things potentially as early as later this quarter or early in Q1 and we would hope that the agencies would then act on the positive outlook.
And then your sort of, intent to, sort of, pursue that upgrade, given that it frees up tremendous amount of LC capacity for you?
You're correct, it would lower our costs. Our requirements for letters of credit for certain contractual arrangements would fall away. So we are very interested in having our investment grade rating being stated.
All right. Thanks. That's it from me. Thanks very much.
Thank you. The next question is from Brian MacArthur with Raymond James. Please go ahead.
A couple of questions. Good morning. Just - first of all, there's a comment made on Trail that costs were up partly because of higher electricity costs. Can you just remind me where we stand now post the sale of dam? Are you net short power for trail and that's why the cost was up? Was it just you don't have the third party power sales now? Or is it, like, there's just plain higher costs in BC? Or what combination of where we stand on this going forward?
No. We're not short powered at all. It's just simply a reflection of deal that we did and when he did on Waneta. Maybe I'll turn that over to Dale on the phone.
Yeah. Sure, thanks. Thanks Brian. As part of our negotiated PPA as part of the sale agreement, our power costs at Trail will increase around $70 million to $75 million, so it reflects that starting in Q3.
But that's just a BC power right? So we have a situation that goes way back like we had 15 years ago when rates get out of whack. Are you protected, or is that -
Yeah, it's a long-term negotiated rate under our PPA with the sale agreement to BC Hydro. So it's a fixed rate that escalates over time with inflation, but that's it.
Great. Thanks. But second question goes back to the coal story, just how many tons are actually have been moved from Elkview to Coal Mountain? I'm trying to determine, obviously, overall business is up two bucks a ton, but obviously those tons cost more and there must be decision made on A) I guess whether the volume tips the whole market over or B) just a pure economic change because I would think that $180 coking coal, you would always continue to do that. I'm just trying to figure out how many tons you're actually moving at those much higher cost?
Robin?
Yeah. We're sort of at the front end, and - but we've been doing it for a few months now. We could - I think through the year we could move as much as 400,000 tons from Elkview to Coal Mountain, so that's roughly the tonnage we're looking at this year. But again, I mean, that's not an ideal situation in the sense that we would prefer to process it closest to the mine and that's why we're advancing the expansion of the Elkview plant. So, ultimately we try from a cost basis certainly to keep the processing as tight to the mines we can.
Great. Thanks. Maybe one final comment and I don't know - I appreciate and I think Oscar's asked as well and it's been asked before. You really can't comment on this Elk Valley situation, but can you even say what the feds are after here, I mean, there's a comment made in here that says, I'm talking about since 2014 and I assume that was written carefully. Are they actually disputing what you've done since you put in the new stuff? Or does this go back to historical, because I would think there are slightly different issues, if they're complaining about what you're doing going forward, all the money and all the newest good stuff you're doing is going to be less valuable? Or can you comment at all on that?
No, I'm sorry, we just can't comment that all.
Sorry about that. Thanks.
And Brian, just on Waneta, just to be clear, we have like a long term 15 years stable agreement, so totally insulated from volatility and cost cards and option to renew after that. And the valuation of Waneta reflected about 16 times EBITDA or a bit more and that's more than quadruple what that stream would have been worth within Teck Resources today. So there was a very strong logic to doing that transaction.
No, I totally agree with that. I was just curious when you made the comment the costs went up and I'm just trying to figure and make sure there was nothing else in there, but that's very helpful. Thanks, Don.
Thank you. The next question is from Greg Barnes with TD Securities. Please go ahead.
Thanks. I just want to follow up on QB 3. Maybe jumping the gun of that that - would that require to go through that whole permitting process again in Chile? And are we talking this is a 2030 type of initiative or is it 2027, 2035, what are you thinking?
No. Short answer to the first part is yes, but the advantage of course is we've got all the people in place both on our side and the government side that are very experienced in this, very good high quality dialogue, so we anticipate that being easier. And remember we're just talking about twinning what's there and there would be an awful lot less to do on the tailings management facility, because it's already done. So QB 3 will have significantly less capital required and QB 2 so it goes to become very capital efficient in terms of CapEx put on a capacity and much IRR [ph] and become the best project in our portfolio, in terms of timing because of what we see and certainly from the feedback from potential partners we have who are very excited about it. We would be filing the SEIA, while we're under construction, so that we could start that process as soon as we can and our target would be to be in production by 2026. So all of this is just at the scoping or conceptual/scoping stage but we're clearly going to move as long as fast as we can, because basically, we're coming to realization that the 4.8 billion tons resource that we've published isn't anywhere near with the end resources going to be and given the scope of that that we should be thinking bigger on what this is in a great geo political jurisdiction it's got the complete community support with 100% of the business community signed now. This is unique. We had unanimous support and the vote for the permits. So we should be thinking much bigger on what QB 2/QB 3 and beyond could look like.
And, Don, given great profile with this the doubling of capacity, would just mean it's a 500,000, 600,000 ton a year copper mine or is it somewhat lower than that then the profile comes down?
Certainly we've been targeting over 500,000 plus more on top of that. So it's in that range.
Okay. Thank you.
And that would be for a QB 3, who knows where they will end up with QB 4 way down the road.
Right.
The next question is from Carl Blendon with Goldman Sachs. Please go ahead.
Hi, guys, thanks a lot for taking the time. A question if you just on the capital allocation decisions you can make and I know we touched on a little bit earlier if you get clarity on QB 2 and the partnership funding there that might be enough for the rating agency to move in and give you more freedom. Could you comment a little bit on whether if you think there are any tradeoffs there when you think about the equity return that you've discussed has that been a hold of or clarity is on QB 2 really the only thing you really need now.
I'm not sure if I fully understood the question, the first part is that we have said that the [indiscernible] what the rating agencies have told us they're looking for - I do want to remind people that in terms of our ratios right now and everything that we have done working towards getting that investment grade reinstated who are already there and all that. They're just wanting to lock down what their assumptions going forward are on the QB 2 side of it which is fair. I'm not sure what equity component of your question might mean.
Yeah, the question there was that as you increase your equity returns too, which is fair given the cash flow that you generated, whether that was something that they viewed negatively and a contributing factor to the time they're taking to recognize the improved metrics.
But does your phrase equity returns refer to returning capital to shareholders?
That's right, yeah.
Okay, well I think the [indiscernible] we look at that. We've announced our policy and we'll be striking through a policy. Again, we don't know what the quantum is, but it will be consistent and reflective of the very good year we're having and the fact that we will have reduced capital on these going forward, so I think we'll be aligning with for a policy as they're already aware of our policy.
Okay, that's helpful. I think the last piece there is great. Thanks.
Operator, I think we're going to have to close there unfortunately with the end of our time and let's turn it back to Don for any closing remarks.
Okay, well, thank you very much for joining us today and thank you for questions. I thought they were a very good list of questions today. We're feeling pretty good about the status of the company and a lot of things happening that are very, very positive for the future. We're seeing strong operating results while the market will always be volatile. The actual customer demand, the fundamentals of supply and demand that we're seeing are not reflective of the tone of concern that we see in the equity markets. Who knows which way the world will actually go, but for now these are very strong markets for us and the cash is flowing in. We have tremendous growth opportunities in copper and bill our praise from the long known industry associate. At Teck we now have copper growth, but as far as I can see, say that with a smile. But again thank you very and we look forward to speaking to you next quarter.
Thank you. The conference has now ended. Please disconnect your line at this time. And we thank you for your participation.