Earnings Call Transcript - TECK Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teck's Third 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 Tuesday, October 27, 2020. I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead.

Fraser Phillips, Senior Vice President, Investor Relations

Thanks very much, Melanie. Good morning everyone and thanks for joining us for Teck's third quarter 2020 results conference call. Before we begin, I would like to draw your attention to the caution regarding forward-looking statements on Slide 2. This presentation contains forward-looking statements regarding our business. This slide describes the assumptions underlying those statements. Various risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward-looking statement. 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 and CEO

Well, thanks very much, Fraser, and good morning, everyone. Thank you for joining us this morning. I will begin on Slide 3 with our third quarter highlights and will be followed by Ron Millos, our retiring CFO, who will provide additional color on the financial results. We will then conclude with a Q&A session where Ron and I, along with several members of our senior management team, would be happy to answer any questions. Before I start, I do want to say that after 25 years with Teck, this is expected to be Ron's last quarterly conference call, and I just want to personally, and on behalf of our whole team, thank Ron for his many outstanding contributions to Teck over 25 years with the company and we wish him the very best in his retirement. Thank you, Ron. Jonathan Price, Teck's new Senior Vice President and Chief Financial Officer, will join me in presenting our fourth quarter 2020 results in February. These continue to be what many call unprecedented times as the world adapts to a new normal with COVID-19. Despite the ongoing challenges, our financial performance recovered strongly from the second quarter, which was clearly very significantly negatively impacted by COVID-19. Despite the decline in realized steelmaking coal prices that you will have seen, we did post gains in profitability and operating cash flows. We made significant progress during the quarter on the execution of our major projects, including advancing the Neptune terminals upgrade in line with the schedule and the budget and also safely ramping back up construction on our QB2 project. We've also made progress in reducing costs throughout supply chain improvements and our cost reduction program as a result of RACE21. Our adjusted site cost of sales in steelmaking coal is expected to be below CAD60 per ton in December, around CAD45 per tonne at the mine site. Across our business, our people have adapted to the new normal of operating through the pandemic, staying focused on health and safety while continuing to responsibly produce materials that are essential to the global economic recovery. Turning to our financial results on Slide 4. In the third quarter, revenues were CAD2.3 billion, and gross profit before depreciation and amortization was CAD703 million. Bottom line adjusted profit attributable to shareholders was CAD130 million or CAD0.24 per share on both a basic and a fully diluted basis. While these results reflect the negative effect of COVID-19 on the prices and sales of our products compared with a good quarter last year, they also represent a strong recovery from Q2 2020, which was significantly negatively impacted by the pandemic. I'll now run through some key updates for the quarter, starting with our steelmaking coal business on Slide 5. We are continuing to successfully restructure our cost base due to our planned decline in strip ratio, due to the Elkview plant expansion, the closure of our Cardinal River operations, as well as our cost reduction program and our RACE21 programs. Our adjusted site cost of sales are expected to decrease over the remainder of 2020 and to be below CAD60 per ton in December. Our strip ratio was 11.4 to 1 in 2019, last year, and we expect it to decline to around 10 to 1 throughout the fourth quarter and into 2021. We completed the major expansion of our Elkview operations planning in Q2 despite the challenges of a pandemic, and that plant now has the capacity to produce 9 million tons annually, enabling us to replace higher-cost production from our Cardinal River operations with higher quality coal produced at a lower cost from our Elkview. At the same time, we're nearing the end of the major capital deployment phase for Neptune for the next quarter and the water treatment facilities at both Elkview and Fording River, so three capital projects will be coming to an end by the end of next quarter. Turning to our Neptune upgrade project on Slide 6. We continue to advance the project in line with the previously announced capital estimate and schedule. The planned five-month shutdown of the terminal operations was successfully completed in September, and all the different things that we wanted to achieve and accomplish during the five months were achieved. Major equipment deliveries are now complete, with all equipment currently on site. I was thrilled to see it arriving on the special shiploader called Jumbo on October 8th as it sailed into Vancouver's Lion's Gate Bridge; it was a beautiful sight. The Neptune upgrade will secure for us a long-term, low-cost, and reliable supply chain solution for our steelmaking coal business soon. We expect construction to be completed next quarter, in Q1 of 2021, and the terminal capacity is expected to increase as the new equipment comes online, starting to increase before the quarter is over. We made solid progress during the quarter on the QB2 project on Slide 7. QB2 is a key component of our copper growth strategy. It is a big part of rebalancing our portfolio, as copper will ultimately be our largest business. We currently have over 7,000 people on site and are targeting over 9,000 people on site by the end of the year. All major contractors have remobilized, and work is progressing well across the project, in line with our ramp-up plan. Construction of additional camp space has been built to manage the COVID-19 impact, providing additional capacity as it begins to come online in Q4 2020. We aim to achieve overall project progress of approximately 40% by year-end. Due to COVID-19, we expensed $107 million of costs related to the project extension of construction and $23 million of interest that would have otherwise been capitalized for the project in the third quarter. To the end of September, we've expensed total costs of $272 million and $102 million of interest that would have been capitalized for the project. We recommenced capitalization of borrowing costs on the QB2 project in the third quarter, consistent with the return to active construction on the project, and assuming the ramp-up proceeds in the fourth quarter as currently planned. The aggregate estimated impact from the suspension is expected to be approximately $350 million to $400 million, excluding interest, with a scheduled delay of approximately five to six months. The additional camp space has an incremental cost of $45 million above that. First production at QB2 is expected in the second half of 2022. Turning to Slide 8. At Teck, our approach to safety and sustainability is core to the success of our business. Robust COVID-19 protocols remain in place at all of our operations. We continue to focus on preventative measures, controls, and compliance integration into our new normal. Year-to-date, our high potential incident frequency was 31% lower in the same period of 2019 at 1.1 per million hours worked. In September, together with AES Corporation, we entered into a long-term power purchase agreement to provide 100% renewable power for our Camdenton operation in Chile. This agreement is expected to eliminate approximately 200,000 tons of greenhouse gas emissions each year, and it is our goal to be the leading diversified mining company when it comes to sustainability and ESG rankings and performance. I'm proud to say our efforts on sustainability have been recognized by a number of organizations. In 2019, Teck was named to the Dow Jones Sustainability World Index for the tenth consecutive year, and we were the top-ranked mining company in the index. We are also the top-ranked diversified metals and mining company on Sustainalytics and are highly ranked on MSCI in comparison to our peers. We are an ICMM member company. I just finished three years as Chair and have been recognized as a strong performer by ISS, FTSE4Good, and others. We were proud to announce yesterday that Teck has been named to the Forbes World's Best Employers 2020 list, which is an employee-driven ranking of multinational and large companies from 45 different countries. They look at topics including COVID-19 response and the willingness to recommend an employer to friends or family. We are proud of our performance, but there is more work to be done as these issues become more uncertain for many stakeholders. I'll now run through highlights of our third quarter by business unit, starting with steelmaking coal on Slide 9. Third quarter steelmaking coal sales were 5.1 million tons, which was within our guidance range. We had planned mining and production outages at our operations in the third quarter to correspond with anticipated reduced demand related to COVID-19. We reduced logistics capacity in accordance with that by using the planned five-month shutdown at the Neptune terminal, which was completed in September. As a result, our Q3 production of 5.1 million tons was 22% lower than the same period last year. The net effect costs, as you would expect, our adjusted site cost of sales of $67 per ton reflected that lower production and lower sales volume. Transport costs were higher than the same period a year ago, primarily due to the lower volumes through Neptune during the planned five-month shutdown of terminal operations. On August 25th, we announced that we signed an agreement in principle with Westshore terminals for the shipment of 32.25 million tons starting on April 1, 2021. Together with the Neptune upgrade and our contract with Ridley terminal, this will provide greater flexibility and optionality to protect shipments and contribute to reduced costs and improve performance and reliability throughout our steelmaking coal supply chain. Looking forward, we expect strong sales of 5.8 million tons to 6.2 million tons in Q4 of 2020, up from the 5.1 million tons in Q3. We expect our adjusted site cash cost of sales to decrease over the remainder of the year and to be below $60 per ton in December, supported by restructuring the cost base in our steelmaking coal business unit. Turning to our copper business unit, our third quarter results are summarized on Slide 10. Antamina performed well at full production rates in the quarter, following a temporary suspension of operations due to COVID-19 that happened in Q2 of 2020. Production was lower than the same period last year in both Highland and Carmen de Andacollo. At Highland Valley, production was impacted by harder-than-expected ore due to the change in mine sequencing earlier in the year in support of reduced waste movement, as well as maintenance challenges. Production is expected to be higher in Q4 due to increased mill throughput and higher ore grades. The decrease in Andacollo was primarily the result of lower ore grades, which were expected in the mine plan, and reduced mill throughput due to longer-than-anticipated labor shutdown. Notwithstanding the reduced production, you would expect costs to go higher; we actually had significantly lower total and net cash unit costs in the same period of last year, supported by a cost reduction program and the contribution from the late 21. Looking forward, we've lowered our copper production guidance range for the second half of 2020 to 140,000 to 155,000 tons, which is 5,000 tons lower than before, due to the lower production in Highland Valley. Our zinc business unit results for the third quarter are summarized on Slide 11. As a reminder, Antamina's zinc-related financial results are reported in our copper business unit. Red Dog sales of zinc and concentrate were 175,300 tons, which was in line with our guidance range. Red Dog zinc production was significantly improved from Q2 2020. Climate change impacted site conditions, limiting our ability to discharge due to excess water. However, operating restrictions were resolved in the third quarter, and we completed a raise at the Trail facility earlier than originally planned, which provided us with additional flexibility for longer storage. We also installed a new water treatment plant to increase discharge capacity when permit limitations arise. At Trail, refined zinc and lead production was higher than in Q3 of 2019. Looking forward, we continue to expect to ship all concentrates during the Red Dog shipping season, which will complete in just a matter of days. Repairs to the loading arm on one of the two shipping barges were completed by the end of July. We expect sales of Red Dog zinc and concentrate of 145,000 to 155,000 tons in the fourth quarter, reflecting our normal seasonality. We have lowered our guidance for our net cash unit costs in the second half of 2020 to $0.30 to $0.40 per pound from a previous range of $0.40 to $0.50 per pound. This is definitely the right direction. Our energy business unit results for the third quarter are summarized on Slide 12. Our realized prices and operating results were significantly impacted by both lower production and a material decline in benchmark oil prices compared with Q3 of 2019. As previously announced, the Fort Hills Partners safely and efficiently reduced operations to a single train facility in the second quarter, which helped reduce negative cash flows in the third quarter in light of COVID-19 and the very low Western Canadian oil prices. Production was also negatively impacted by extreme wet weather, which resulted in soft pit conditions starting in June and continuing into July. Looking forward, the Fort Hills Partner decided to restart the second train and ramp up production to around 120,000 barrels per day by the end of the year, earlier than had previously been anticipated. On October 23rd, just five days ago, the Government of Alberta announced that it will not issue monthly production limits for the December 2020 production month. This means operators will be able to produce above their previously issued production limits without having to purchase curtailment credits or acquire special production allowances. The curtailment rules have been extended to December 31, 2021. However, the Government of Alberta will only issue ministerial orders to limit production when it is deemed necessary. If required, no stakeholders will be issued with 30 to 60 days' notice to allow time for producers to respond and plan accordingly. The Fort Hills Partners continue to monitor the business environment and assess plans to maximize cash flow, including the potential to increase production and lower costs. We've lowered our guidance for adjusted operating costs in the second half of the year to CAD35 to CAD38 per barrel of bitumen, down from the previous range of CAD37 to CAD40 per barrel. We are all looking forward to getting back to the level we were at in December of 2018, when Fort Hills was allowed to run at full capacity, and in that month averaged 201,000 barrels per day at cash costs of CAD23 per barrel. We are looking forward to getting back there sometime in the future. Now, with that, I'll pass it over to Ron Millos for some comments on our financial results. Ron, over to you.

Ron Millos, CFO

Great. Thanks, Don. I'll speak to the changes in our cash position during the third quarter, as shown on Slide 13. We received net proceeds of $540 million from debt in the quarter, made up of net draws of $49 million on our revolver and $341 million on the QB2 project financing facility. We generated $390 million in cash flow from operations. We spent $589 million on capital projects, including $246 million on QB2 and $89 million on the Neptune facility upgrade. Our stripping activities used $110 million and that was lower than our Q3 2019 due primarily to the planned mining and production reductions in our steel coal operations. We paid $104 million in interest and financing charges and $54 million on expenditures on investments and other assets. Lease payments totaled $41 million, and we paid $27 million in our regular $0.05 quarterly base dividend. After these and other minor items, we ended the quarter with cash and short-term investments of $403 million. Turning to the impact of COVID-19 on our business on Slide 14. As Don mentioned earlier, while our third quarter financial results reflect the negative effect of COVID-19 on the prices and sales of our products compared with the same period last year, we saw a strong recovery compared with Q2 of this year, which was significantly negatively impacted by the pandemic. In the second quarter, all of our mines recovered from COVID-19 production disruptions. In the third quarter, we expensed $130 million related to COVID-19 on a pretax basis, which is half of the amount expensed in Q2. We also expensed $107 million in other operating income expenses related to the temporary suspension of construction and remobilization at the QB2 project, and $23 million in additional finance expense representing interest that would have otherwise been capitalized if construction on QB2 had not been suspended. While we have certain increased costs associated with operating our mines at full production in the new normal environment of COVID-19, such as medical testing, safety equipment, supplies, and additional transportation and accommodation costs for social distancing, they are cost of operating in this environment and are not adjusted for an adjusted earnings calculation. On a year-to-date basis, we've expensed a total of $434 million related to COVID-19, which included $103 million of interest that would otherwise have been capitalized. We recommenced capitalization of borrowing costs on the QB2 project in the third quarter, consistent with our return to active construction on the project. Barring any further negative developments around COVID-19, we do not expect significant COVID-19-specific costs going forward. Slide 15 summarizes the latest results of our cost reduction program. To the end of September, we've achieved approximately $270 million of operating cost reductions and $500 million of capital cost reductions. These reductions are against what we were expecting to spend back at the end of June 2019 when we started looking for cost reduction opportunities. We've made pretty good progress against our targeted reductions of $1 billion. The reductions are spread throughout the Company with the majority occurring in our operating business units, and it also includes satellite projects, exploration projects, our IT systems, and our administrative and marketing costs throughout the Company. The realized and remaining targeted cost reductions from our cost reduction program have been included in our guidance since we announced the program in October of last year and are reflected in our current guidance as well. Turning to our financial position on Slide 16. We have a strong financial position with current liquidity of CAD6.8 billion, including cash balance and amounts available under our $5 billion committed revolving credit facilities. CAD3.8 billion is available on our $4 billion facility that matures in the fourth quarter of 2024, and our $1 billion sidecar that matures in the second quarter of 2022 is undrawn. Importantly, both of these facilities do not have any earnings or cash flow-based financial covenants, do not include a credit rating trigger, and do not include a general material adverse effect borrowing condition. The only financial covenant is a net debt to capitalization ratio that cannot exceed 60%, and at September 30, that ratio was 23%. For our $2.5 billion limited recourse project financing facility for QB2, we've currently drawn about $860 million, of which $341 million was drawn in the third quarter. Going forward, project funding will be from the project financing until the project reaches a specific ratio of project financing to total shareholders' funding, and cash contributions to project capital for QB2 are not expected until the first half of 2021, and we have no significant debt maturities prior to 2030, with investment-grade ratings from all four credit rating agencies. Overall, our financial position is in good shape to allow us to continue to weather the challenges around COVID-19 and to complete the Neptune facility upgrade and the QB2 project. With that, I will turn it back over to Don for his closing comments.

Don Lindsay, President and CEO

Thank you, Ron. To wrap up on Slide 17. Despite the ongoing challenges, our financial performance recovered strongly in Q3, following the second quarter that was obviously negatively impacted by COVID-19. We believe that Teck has quality operating assets in stable jurisdictions, and we are advancing our copper growth strategy that is funded and being implemented. We continue to progress our four key priorities to create shareholder value and position Teck for the future. Those are the QB2 project, RACE21, Neptune, and our company-wide CRP cost reduction program. We believe Teck is well-positioned to generate shareholder value as the world adapts to the new normal with COVID-19. 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 delay while we sort out who will answer each question. So now, operator, over to you for questions.

Operator, Operator

Thank you. The first question is from Orest Wowkodaw of Scotiabank. Please go ahead. Your line is now open.

Orest Wowkodaw, Analyst

Don, I was hoping we could get a bit more color on the cost guidance in coal. I find the language in the MD&A fairly confusing because on one hand, you say that you expect on-site cost in coal to exit this year sub $60 a ton. But then in the disclosure, it also talks about kind of preliminary 2021 site cash guidance to be in line with H2 levels, which are 60 to 64. Can you help explain how we should interpret that?

Don Lindsay, President and CEO

Yes, I'll turn it over to Robin in just a minute, but you should have the context that we haven't finished our budgeting for 2021 yet. So we didn't want to put out formal numbers very specifically until we've done that. That process is ongoing. There are a number of different factors within the operation that come at you throughout the course of the year. We want to ensure that we've examined all those things before we provide specific guidance. But for sure, the cost structure of the business has been materially reduced, and while it would be plus or minus a couple of bucks going forward, we are at a level substantially lower than it was before, and the starting point going into 2021 is pretty good. With that, Ron, over to you.

Robin Sheremeta, Senior Vice President

You bet. Thanks. Thanks, Orest. As Don said, we're going through a budget process right now, so there are many factors like haul distance and the plant maintenance outages that normally occur in Q2 and Q3 that we must take into account. We've also got two new water treatment facilities coming online this year with Fording River, expected to be completed at the end of Q1, as well as the Elkview saturated rock fill, which just came online now. Those things all have to be accounted for in our budget, but I'll give you some important data points that will help frame our view around this. Our strip ratio, which is a key cost driver, is going to be around 10:1 through this last quarter. We will go through 2021 at that 10:1, and we see ourselves staying at 10:1 over the next few years. Remember, our strip ratio through 2019 was 11.4:1. It's going to be around 11.1:1 through 2020. So now that we've completed the Elkview expansion, we see that strip ratio stabilizing. That's one really important data point. Don also mentioned the closure of Cardinal River, which was our highest cost operation, with lower quality coal. That's been created through the Elkview expansion, which is now successfully executed and running at a pace of 9 million per year at that operation, which is one of our lowest cost and higher quality operations. So that's another factor you have to consider because it's both cost-effective and provides greater value on the product side. The other thing we probably haven't talked much about is that through this time, we have maintained our mine plans and key assets, so we have healthy rock coal inventories now going into 2021. If you remember, that was one of the constraints we faced over the last couple of years when we were driving to produce in the high price market. So that's behind us now. We now have healthy rock coal inventories with stable mine plans, which allows us to maintain that 10:1 ratio. After recent production challenges, three of our four operations are now pretty much down to stable levels, meaning this is no longer a constraint for us, which is another reason we have a strong base going into 2021. And finally, we are driving our RACE21 strategy through coal, and we see significant value right now, evidenced by record high mine productivities in Q3, above anything we've seen previously. This structural change supports a very strong cost base going into 2021. I don't want to provide specific numbers right now as we finalize the budget, but suffice it to say that we're operating from a much better cost base than we have over this two-year transition period.

Orest Wowkodaw, Analyst

But Robin, just on that, I mean, for all the reasons you cite here, I guess I'm not understanding why costs are not going to remain below $60 a ton in 2021.

Robin Sheremeta, Senior Vice President

Well, Q4, I mean, one aspect of Q4 is that we don't have plant shutdowns in that quarter. It's typically a quarter where that's all behind us. On average, we'll operate at a lower cost normally in Q4 than we do over a full year. So quarter-to-quarter, you're going to have different impacts on your cost base. That's why we're confident we'll end the year below $60. But that does not mean that every quarter forward in '21 will be at that same level.

Orest Wowkodaw, Analyst

Thank you very much.

Don Lindsay, President and CEO

Orest, you can assume it is certainly our objective to keep costs stable at $60 if possible. However, we don't want to over represent that until we finish the budgeting process.

Orest Wowkodaw, Analyst

Yes, thanks, Don.

Don Lindsay, President and CEO

I might add that regarding the off-truck productivity's comment Robin made, we actually had a really high record off-truck productivity during spring runoff. For those of you who have been in format the pit and seen the road conditions at that time of the year, that speaks volumes. So RACE21 is definitely helping us a lot.

Operator, Operator

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

Carlos De Alba, Analyst

My question maybe, Don, is on Highland Valley copper. Just two points there. First, given the guidance for the fourth quarter, is it expected then that the hardness of the ore resulted in lower output if I think of the past and moving forward, that is normalized, and production should stabilize beyond the fourth quarter guidance that was provided? And also on that operation, the molybdenum production in the third quarter declined significantly year-on-year due to particularly lower grades. What can you comment in terms of the moly grade going forward at Highland Valley?

Don Lindsay, President and CEO

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

Dale Andres, Senior Vice President

Yes. Thanks, Carlos. Just to start on the first question regarding hardness. Basically, there are two factors that led us to change the mine plan and the sequence for the year: one due to reduced stripping around COVID in the second quarter, where we focused more on the valley pit, as well as some geotechnical constraints that limited our flexibility for the various ore sources we feed to the mill. We found ourselves in a particular area in the pit that was harder than expected, an area from which we didn’t have as much hardness data. That's the reason for the lower guidance for the quarter. We do expect higher production and throughput going into the fourth quarter and into 2021 as well. While we won't completely be out of that area in 2021, we do have other areas that will blend with the softer ores, so we don't anticipate facing the same issues as Q3 going forward. As for molybdenum, again, the change in mine sequence originally stemmed from other areas in the mine, and when we altered play, that directly affected the reduction in grades. We don't anticipate the low grades we've experienced for moly to continue, and we expect that production to strengthen going forward. We'll issue updated guidance for 2021 on Q4 as we complete the budgeting process.

Operator, Operator

Next question is from Curt Woodworth of Crédit Suisse. Please go ahead.

Curt Woodworth, Analyst

A question on coking coal. I'm curious what you're seeing on the demand side, given some of the port restrictions now in China? It seems like if you look at the domestic price in China, it's up about $15 a ton to $200. I guess your Australian price has done a quick U-turn now that they are out of the market. So it seems like the ARB is extremely wide. And potentially, India is coming back to the market. So I'm just curious your take on that. And do you have any sense at the consumer level how you're viewing coking coal inventories, given that there's limited data for us to look at?

Don Lindsay, President and CEO

Thank you for your question, Curt. I thought this would actually be the first question of the day. There are some exciting developments there, but I'll turn it over to Réal Foley.

Réal Foley, Senior Vice President

All right. Thanks, Curt. So maybe I'll start with your second question regarding inventories. You'll recall that steel production turned down as blast furnaces were shut down quickly during the pandemic. As a result, inventories of steelmaking coal were also drawn down very quickly. Going into this quarter from the second half of Q2 and into Q3, we've seen blast furnaces restart again. As those furnaces restart, steelmakers are trying to replenish inventories, which is reflected in our Q4 sales guidance. However, a note of caution: Demand is not yet back to pre-COVID levels, so I want to clarify that. Now regarding what is happening in the coal market overall and the impact of the heightened seaborne import restrictions. The first thing to note is that there has been no official announcement on those restrictions; rather, they appear to be impacting mainly industrial and coal. We're continuing to see China steel production run at record-high levels. You're correct that we are starting to see a few sales to China above expectations, which is coinciding with our operations ramping up through the quarter, as Robin explained. When we look at China specifically, there are three sources of steelmaking coal: the seaborne market, which includes Australia, Mongolia is another, and of course, domestic coal, which is where the majority comes from. On the seaborne side, the pandemic has reduced supply from the main supply areas—Australia, U.S., Canada, and Mozambique are all down about 20 million tons year-to-date. Australia alone is down about 10 million tons over the same period. When we look at IHS market data for October, steelmaking coal vessel loadings are trending down to about 4.5 million tons month-over-month. There is a likely impact from that reported ban. Also noteworthy is that there are vessel queues at the Chinese ports, with approximately 6 million tons of coal sitting in queues, but we have not seen any Australian cargoes waiting at the Chinese ports being diverted elsewhere. The coal prices have dropped significantly—nearly $30 since the beginning of October, making it rather difficult to resell some of those cargoes as the losses would be substantial. Another consideration is, according to December 2019 stats, only around 120,000 tons were imported into China from the seaborne market, but around 4.8 million tons were offloaded but didn't make stats until early 2020. That could happen again, and we are hearing about at least one Australian coking coal vessel that was discharged after the reported ban. As for how long these restrictions may last, we don't know. However, when Mongolia imports were banned in 2016 and '17, they lasted less than one month. An estimation suggests there is about 45 million to 50 million tons of coking coal inventory currently in China's supply chain, which is about four weeks at the current consumption rate. We're expecting improved sentiment and the potential disruptions related to weather in Australia in the fourth quarter and in early 2021, which should support increased activity in the steelmaking coal market, as reflected in our guidance for Q4. It's a long answer, but there are many moving parts, and as I mentioned, there have been no official announcements regarding restrictions.

Curt Woodworth, Analyst

Réal, any further color on the Chinese domestic price and the spread between that and the seaborne price, and whether any of that will find its way to a non-Australian seaborne supplier?

Réal Foley, Senior Vice President

Yes, good question. The current arbitrage is somewhere around $70 or just under that, actually. We're starting to see a few sales to China above original expectations. If Chinese steelmakers become pinched for steelmaking coal, they may well continue looking for more supply from regions other than Australia, which could drive prices up.

Don Lindsay, President and CEO

I appreciate all the granular data. That's fascinating. A quick follow-up for you, Don, as we come out of COVID: the base metal performance has indeed been commendable, particularly in both copper and zinc. Regarding portfolio construction—any updates on project satellite? Has there been any traction with regards to divestiture potential? Also, regarding Fort Hills, as additional capacity is anticipated, is there potential for monetizing that asset ahead of when it reaches baseline levels? Yes. On project satellite, we continue to add value where we can on the five different assets. However, with travel restrictions, any sales process would be difficult. We do like the direction the market is taking. Zinc has performed well, which should benefit the assets' value. We're not in a rush, but we can't do everything we want until travel restrictions ease. In terms of Fort Hills, the partners will need to create a plan for how to ramp up Fort Hills effectively. As I mentioned earlier, we'll look at differing market conditions and operational parameters, aiming to get back to full production to lower per-barrel costs. You'll see some future version of that, but Suncor is the managing partner, and we will await announcements from them in due course. Regarding the asset's position within Teck's portfolio for construction, we have established that we won't be paid what we're worth at Teck Resources. We are engaged in transactions that range from cash sales to potentially taking back shares in consolidation plays, which is some consolidation. You can safely assume conversations are taking place, but I wouldn't anticipate anything in the near term until we've ramped up to demonstrate the asset's value. Notably, Fort Hills had an outstanding operating performance right out of the gate. When it first started, we got it to a point where it was operationally above capacity and remain positive about it.

Operator, Operator

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

Greg Barnes, Analyst

Just a question for Don or Réal. Do you have the ability to meet additional demand from China for Canadian coal? You said they're coming to you. Does the guidance imply that you are leading some of that demand? Or is there upside to that guidance number?

Don Lindsay, President and CEO

Réal, I'll turn it over to you, but Greg, you can expect I'm putting pressure on Réal.

Réal Foley, Senior Vice President

Yes, we are seeing some demand. We are making a few sales to meet that demand. However, the guidance that we provided is based on the fact that overall demand for steelmaking coal globally is not yet back to pre-COVID levels. So we feel our guidance is appropriate at this time.

Greg Barnes, Analyst

Sure. So I just want to go back to Orest's question regarding costs for 2021. Does that also reflect some caution on volumes next year? Clearly, it looks challenging in 2021, and this would impact unit costs if volumes return to the 26 million ton, 27 million ton level.

Don Lindsay, President and CEO

I'll let Robin discuss initial production plans. However, directionally, Greg, we want to be entering 2021 at full production or at least very close to it. Go ahead, Robin.

Robin Sheremeta, Senior Vice President

There's not much to add; indeed, that is the plan. We go into '21 quite strong with healthy rock coal inventories, stable mine plan, and record productivities. All those factors set us up well, so if the market supports full production, the plan is to indeed meet that demand.

Operator, Operator

Okay. Just a follow-up question finally for you, Robin. In the MD&A, it mentions regulatory changes coming shortly that would increase water management costs over and above the CAD350 million to CAD400 million as planned for 2021 through 2024. What does that whole amount entail?

Robin Sheremeta, Senior Vice President

I would defer to Peter for that one.

Peter Rozee, Senior Environmental Manager

Unfortunately, Greg, there's not much more we can say on that in light of the ongoing process. We expect some additional regulatory requirements in the near future that will complement our existing measures under the Elk Valley water quality plan. To the extent that those represent a significant change in our spending plans, we will make an announcement when those are finalized.

Operator, Operator

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

Jackie Przybylowski, Analyst

I have a couple of questions. First, regarding your dividend policy. I know that when you initiated the formula last summer, you indicated you would provide an update on the dividend either in November or February. I believe it was in February last year. Do you have a sense of the policy going forward? Can we expect a dividend announcement next month, or is it more likely to be an update in February?

Don Lindsay, President and CEO

No, it would be February. The decision was made to wait until the year is complete before determining any supplementary capital returns. We have a capital allocation model that's published, and I believe we keep it in the IR appendix of every presentation so you can see how the decision-making flows on that. If capital is available for further returns above the base dividend, we survey shareholders to determine preferences for buybacks or cash dividends, and then the Board makes a decision at that stage. Essentially, nothing has changed from what was established.

Jackie Przybylowski, Analyst

Okay. And to follow up on Greg's question about coal: If you do see— and I know you mentioned risks to volumes and outlook— however, if you see higher demand for coal, say, from China through Q4 and into 2021, are there mechanisms like you've had in the past to push the mines to raise volumes? Could you bring in contract labor or something like that to produce more than usual for a short period to take advantage of that high demand? Is that still possible?

Don Lindsay, President and CEO

Robin?

Robin Sheremeta, Senior Vice President

It's less possible now than it was when we had six operating mines. We are down to four now, so flexibility around that option is incrementally less than before. There are still opportunities, but they're pretty marginal.

Jackie Przybylowski, Analyst

That makes sense. And maybe just one final question. We've seen reports recently about more stringent water treatment protocols, whether through Canada or in some U.S. states like Montana. Is it possible that Teck would need to do more to keep selenium levels under control beyond what you envision in the water treatment plan? Can you elaborate on that?

Don Lindsay, President and CEO

Yes. I think we should start with Peter for that question and then maybe Jon.

Peter Rozee, Senior Environmental Manager

What we have to do in the long-term will depend very much on results from our current program and ongoing environmental monitoring. We are committed to protecting water quality as far down as the transboundary impacts of our operations, including Lake Koocanusa. There is Montana rulemaking still ongoing. We're primarily regulated in BC, and the BC government hasn't yet announced a recommended water quality objective for Lake Koocanusa. They recently affirmed their commitment to a science-based process. BC will only commit to a standard once the science-based process is complete. There's also ongoing consultation with the Ktunaxa Nation Council. From a good news perspective, annual average selenium levels in Lake Koocanusa have been stable since 2014, and we expect to see reductions as treatment capacity comes online. As Robin mentioned, the Elkview saturated rock fill is being commissioned, and the Fording active water treatment facility will ramp up soon. It's difficult to predict what the future holds, but we believe our current spending estimates are reasonable, subject to any additional regulatory actions that Greg mentioned, which may require further spending.

Jackie Przybylowski, Analyst

Okay, so that's helpful.

Don Lindsay, President and CEO

In the next three to four months, our capacity to treat water will significantly increase from 7.5 million liters a day currently to 47.5 million liters. The Elkview SRF will be complete shortly, and the Fording River Active Water Treatment plant will be operational next quarter. This will enhance our ability to treat water and demonstrate how the other SRFs will continue to help that. We're eager to finish this capital deployment, which will strengthen the company. It's significant to note, also, that exciting events on October 8 took place. In the morning, we received pictures from Chile of Ball Mill #1 being almost rolled into place. It symbolizes a substantial construction milestone. That afternoon, we observed the ship order arriving from Vietnam, passing under the Lion's Gate Bridge— both being significant pieces of equipment for us. These projects will significantly strengthen Teck, with critical projects like Neptune lowering costs for decades and QB2 doubling consolidated copper production. These initiatives will enhance our overall portfolio. Commodity prices may fluctuate, but the value of our underlying assets will be strongly heightened. I want to express gratitude to all for contributing to the company's evolution. Thank you for your commitment, and with that, operator, we will close.

Operator, Operator

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