Earnings Call Transcript - TECK Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teck's First Quarter 2021 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 Wednesday, April 28, 2021. I would now like to turn the meeting over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead.

Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis

Thanks very much, Kaye, and good morning everyone. Thank you for joining us for Teck's first quarter 2021 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 statements. I would also like to point out that we use various non-GAAP measures in the presentation. You can find explanations and reconciliations regarding these measures in the Appendix. And with that, I'll turn the call over to Don Lindsay, our President and CEO.

Don Lindsay, President and CEO

Thanks very much, Fraser, and good morning, everyone. I'll begin on Slide 3 with first quarter highlights; I will be followed by Jonathan Price, our CFO who will provide additional color on our financial results. And then we'll conclude with a Q&A session where Jonathan and I and several additional members of our senior management team would be happy to answer any questions. So strong operational performance and higher commodity prices contributed to a very solid start to 2021 and the first quarter. Our operations continue to be resilient despite ongoing challenges associated with COVID-19. The Teck team continues to rise to meet those challenges, putting in place comprehensive measures to protect the health and safety of our people and our communities to ensure that we can continue to operate responsibly and progress our strategy to grow copper production. Across our businesses, production was in line with plan. We met our quarterly sales guidance in both steelmaking coal and zinc, and there are no changes to our annual guidance. At the same time, we achieved major milestones for priority projects. We're now past the halfway point of construction at our QB2 project, which is a long right low cost operation with major expansion potential. QB2 is expected to double our consolidated copper production by 2023 and we continue to expect first production in the second half of 2022, which is next year. Our Neptune port upgrade project has moved into the commissioning phase. We've now loaded 18 ships. We successfully commissioned the Elkview saturated rock fill expansion in the first quarter on schedule and below budget. The Elkview SRF has been achieving near complete removal for Selenium and nitrates from up to 10 million liters of water per day since 2018. It is part of our ongoing work to affect the value water quality plan to maintain the health of the watershed around our students and cooperations. The Elkview SRF expansion doubles the water treatment facilities capacity to 20 million liters of water per day. Turning to Slide 4, revenues were up 7% from a year-ago to $2.5 billion. The profitability improved even more, with adjusted EBITDA increasing almost 60% to $967 million and bottom line adjusted profit attributable to shareholders increasing almost 250% to $326 million which is $0.61 per share on a daily basis. This reflects higher prices for our principal products most significantly copper, zinc, and Western Canadian select. Jonathan will review our financial results in more detail in just a few minutes. I'll now run through highlights of our first quarter by business units starting with copper on Slide 5. Our copper business unit had a strong Q1 with a 205% increase in EBITDA compared to the same period last year, reflecting a substantially higher copper prices. Production was similar to a year-ago, with higher production at Highland Valley Copper and Antamina offset by lower production at Carmen de Andacollo and QB as expected in our mining plan through 2021. Net cash unit costs were US$1.38 per pound in the quarter up from US$1.28 per pound a year ago, but in line with guidance. The increase in costs is primarily due to higher workers participation in royalty expense, resulting from higher profitability at Antamina as well as lower production volumes at Carmen de Andacollo. Turning to an update on our QB2 projects on Slide 6. Overall project progress surpassed the halfway point in April. We have been seeing the pace of construction trending upwards through the first quarter. In fact, we have been hitting new weekly record over the last month. These successes are a reflection of the project team's efforts in effectively managing through the current wave of COVID-19 in Chile. We continue to enhance our extensive COVID protocol in order to protect the health and safety of our workers and the communities in which we operate, including prescreening of the entire workforce with PCR testing. The situation is being actively managed to maintain the current workforce level and to allow for further ramp-up as soon as possible. As I mentioned earlier, we're still on track for first production in the second half of next year. Our capital cost estimate remains at US$5.2 billion that's absent the COVID-19 related capital expenses, which are being tracked separately. We have previously disclosed US$450 million to US$500 million of COVID-19 related costs of which US$197 million have been expensed. COVID-19 does continue to affect project progress. That said, we're pleased with the progress we're making in light of the current COVID-19 restrictions but the final extent of COVID-19 related costs will depend on the progress of the pandemic in Chile and the extent of further impacts on staffing levels. Slide 7 provides an aerial view of the concentrator area. The grinding line shown in the middle remains the critical or longest path for the project. We have made significant progress on the grinding lines in five of the six mills that are now in place. Since the start of the year, we have advanced the placement of third and fourth ball mills. And here you can see the last shell segment being lowered in place for the fourth ball mill. We've also significantly advanced the structural steel of the grinding building and have installed the stage filtration reactor or SFR installed in the flotation area, which you can see just here in green on the far right of the photo. These are just adjacent to the large blue flotation tanks which are well advanced in terms of mechanical installation. Slide 8 shows our marine works. We're piling for the jetty is advancing from shore, if you got in the foreground, as well as from a temporary Highland in the background as supporting two additional work fronts offshore. Slide 9 shows the Starter dam of the Tailings Management Facility. We have significantly advanced construction in this area, completing the abutment seen in the background and continuing to raise the elevation of the dam in the foreground. And for these words, we have been using Teck's current mining fleet, which includes several new Teck 794 haul trucks that were recently commissioned. Teck mining fleet is performing very well and has provided significant benefit to the project. Slide 10, the pipeline right away and platform development is now essentially complete and we continue with trenching, pipe stream, welding, and placement of the pipelines. Slide 10 shows a section of the water pipeline being lowered in place. This is the pipeline that will bring desalinated water from the port to the site. To see more of the latest progress at QB2, I'll encourage you to take a look at a video of the project in our quarterly photo gallery. We've posted these with our quarterly conference call materials at teck.com. And there are links to them also in our Q1 2021 press release. Next our zinc business unit results for the first quarter are summarized on Slide 11. As a reminder, Antamina's zinc related financial results are reported in our corporate business units. Substantially higher zinc prices were more than offset by a stronger Canadian dollar, lower sales volumes and higher unit operating costs and royalty expense. As we said last quarter, lower 2020 production volumes at Red Dog have resulted in lower material available for sale and higher unit cash cost of sales in the first half of this year. Red Dog's sales in concentrate were 104,000 tonnes which was above our guidance range of 90,000 to 100,000 tonnes. Looking forward to Q2, we expect Red Dog's sales to be 35,000 to 45,000 tonnes which again lower than normal as a result of the reduced production in 2020. And at Trail, while we continue to expect to produce between 300,000 to 310,000 tonnes of refined zinc this year, Q2 production will be impacted by planned annual zinc roaster maintenance. Turning to our steelmaking coal business on Slide 12. Sales were 6.2 million tonnes in line with our quarterly guidance. The second quarter average realized price reflects around 2 million tonnes of sales to Chinese customers at high CFR China prices. Our adjusted site cash cost of sales were $63 per tonne in the quarter. This was higher than anticipated due to internet and processing challenges which are largely behind us and mining sequence adjustments which advanced higher costs, steelmaking coal production from later in the year into Q1. Despite these challenges, unit costs were within our annual guidance range and all operations currently have healthy steelmaking coal and returns. We're now well positioned to maximize production out of the operations and deliver strong cash flows going forward. Also in Q1, we resolved the charges under the Fisheries Act in connection with discharges of selenium and calcite in 2012; for the Fording River and Greenhills operations. As I mentioned earlier, we have successfully commissioned the Elkview SRF on schedule and below budget. Looking forward to Q2, we expect sales of 6 million to 6.4 million tonnes. And we will continue to prioritize available spot sales volumes to China, which is expected to continue to result in favorable price realizations. We expect our realized price in Q2 to be materially higher than the 10-year average of 92% at the benchmark, which is coming from the average of the three assessments lagged by one month. And as I indicated earlier, our Neptune Port Upgrade project has now moved into the commissioning phase. The first steelmaking coal was unloaded using the double railcar dumper pictured on Slide 13 on April 19, I visited the site the day before yesterday saw it all in action, it looks terrific. The ramp-up is proceeding as planned and all major equipment is performing according to or better than planned. Today 18 vessels have already been loaded using the new outbound system. And at the same time, the upstream rail infrastructure improvements by both CP Rail and CN Rail to support our increased volume through Neptune, they are all largely complete. So we're very, very pleased with the status of Neptune. As I said the first steelmaking coal went through the new double rail dumper on April 19. And you can see a photo on Slide 14 shows it being placed on our stockpile by the new stacker reclaimer. If you'd like to see the new double dumper in action, we have posted a short video with our quarterly conference call materials at teck.com and there's a link to it in our quarterly press release. Slide 15 shows our new shiploader loading steelmaking coal into the vessel. We're really pleased to see the project moving to the commission phase and achieve first steelmaking coal as Neptune is a key component of our long-term, low cost and reliable supply chain for steelmaking coal business. Turning to our energy business unit results for the first quarter, which are summarized on Slide 16. Our realized price and results reflect a material improvement in benchmark rail prices in Western Canadian Select compared with Q1 2020. However, this was partially offset by higher unit operating costs due to lower production. Estimated production in the first quarter was impacted by little available mine inventory levels at the end of 2020. So looking forward though, Suncor expects to ramp-up to two train production by mid-year and to same production of 175,000 to 185,000 barrels per day by the fourth quarter. The focus is on overburden stripping and building mine inventory level to allow ramp-up to achieve train production. And with that, I'll pass it over to Jonathan for some comments in our financial results. And I could please ask everyone to keep their phone on mute while the presentation is ongoing. Thank you.

Jonathan Price, CFO

Thanks, Don. I'll begin by discussing the first quarter earnings adjustments. Environmental costs amounted to $33 million after-tax, mainly due to an increase in the rates used for discounting decommissioning and restoration provisions and higher expected remediation costs. We reversed $6 million in inventory write-downs, recorded share-based compensation expenses of $10 million, and incurred $15 million in commodity derivatives on an after-tax basis. After these and other minor adjustments, the adjusted profit attributable to shareholders was $326 million for the quarter, equating to $0.61 per share on both a basic and diluted basis. The changes in our cash position during the first quarter are detailed in our presentation. We generated $585 million in cash flow from operations and spent $869 million on sustaining and growth capital, which included $523 million for QB2, $157 million for upgrades at the Neptune port, and $153 million in sustaining capital. Stripping costs were $134 million, primarily driven by advancing pits for future production in our steelmaking coal operation, which was lower than last year due to decreased strip ratios in that business. For investments and other assets, we spent $44 million, receiving $11 million in proceeds. Net proceeds in the first quarter included a $577 million drawdown from our $2.5 billion limited recourse project financing facility to support the QB2 development. We repaid $44 million net on our $4 billion revolving credit facility. Lease payments were $33 million, and we paid $113 million in interest and finance charges. We issued $6 million in Class B subordinate voting shares and paid $27 million in regular quarterly dividends of $0.05 per share. After these and minor items, we closed the quarter with cash and short-term investments of $369 million. Now, regarding our financial position, we have maintained a robust financial standing with current liquidity of CAD$6.3 billion. This total includes our current cash and the amounts available from our $5 billion committed revolving credit facilities. $3.8 billion is accessible from our $4 billion facility maturing in Q4 2024, and our $1 billion sidecar maturing in Q2 2022 has yet to be drawn. Neither facility has earnings or cash flow-based covenants, credit ratings, or material adverse effect borrowing conditions. The only financial covenant is a net debt to capitalization ratio capped at 60%, which was 26% as of March 31. For the QB2 project, $1.6 billion was drawn in the first quarter, and the project has surpassed its financing targets, which will result in shareholder contributions starting in the second quarter. We have no significant note maturities until 2030 and hold investment grade credit ratings from all four agencies. Overall, we are well-positioned financially to navigate the impacts of COVID-19 while continuing the QB2 project. Now, I'll turn it back to Don for his closing comments.

Don Lindsay, President and CEO

Okay, thanks, Jonathan. In closing, I want to say we remain focused on Teck's prudent copper growth strategy going into green metals as they're now called. And we made solid progress on our key initiatives in the first quarter, we surpassed the halfway point of construction at QB2, we've moved into the commission phase at Neptune and we successfully commissioned the Elkview SRF on schedule and below budget. We believe Teck is one of the best positioned companies globally to capitalize on the strong demand growth that we see for green metals and in particular, for copper. We have one of the very best copper production growth profiles in the industry, and located in attractive jurisdictions. Accelerating copper growth is the cornerstone of our strategy and by growing our copper production; we rebalance our portfolio towards what's now called green metals. And in the process, we expect to continue to reduce carbon as a proportion of our total business while continuing to produce the high quality steelmaking coal that the world absolutely needs for a low-carbon future. We're also continuing to strengthen our high quality or existing high quality low-carbon assets to RACE21 technology, which is harnessing cutting-edge technologies, including artificial intelligence and automation to drive step change improvements in productivity, efficiency, safety, and sustainability. We strive to maintain the highest standards of sustainability and offer operational excellence in everything we do. And we have a leadership team with the right mix of skills and experience to deliver on our strategy. So with that, we will be happy to answer your questions. And like many of you, most of us are on phone lines from home, although I'm in the office personally today. Please bear with us if there is a delay while we sort out who will answer your question and with that operator, over to you?

Operator, Operator

Thank you. We will now take questions from the telephone lines. Our first question is from Orest Wowkodaw from Scotiabank. Your line is open. Please go ahead.

Orest Wowkodaw, Analyst

Hi, good morning, and thanks for taking the question. So I was wondering if I could get some more color on the QB2 development here, just in the context of what's happening with the COVID outbreak in Chile. You did say that COVID is having an impact on the pace of development. Just wondering where you are with respect to headcount, have you been able to get to the full rate? And also where is the project with respect to consuming the contingency that was embedded in the original $5.2 billion CapEx number?

Don Lindsay, President and CEO

Okay, I'll make an opening comment. And then I'm going to turn it over to Red Conger and Alex Christopher whichever one wants to follow me. So we have been affected by COVID. No question about that. And so that has slowed us down relative to the ramp-up schedule that we had. But having said that, we just had our best four weeks. In fact, we just had our best two weeks. So it continues to improve. And we're quite encouraged by the progress the last month; there's no doubt that February, March were very tough. But things are coming along well. But COVID is still with us, it is still an ongoing challenge. In terms of the contingency, we still have most of the contingency that we published, available going forward. So with that, I'll turn it over to Red or Alex whichever one wants to go.

Red Conger, Executive Vice President

Yes, Don, Red here. Orest, thanks for the question. Again, we're really proud as a team and all the accomplishments that they continue to make there in place to be circumstances; headcount right now is about 9,400. We've been able to hold that level here the last couple of months and continue to make the progress that we would expect just that level of effort on the site. And the beauty of how the team is managing that numbers but we faced with COVID continue to get better, we were in a great position to springboard off of that and increase additional personnel on the site. All in all, very, very proud of where we're at.

Orest Wowkodaw, Analyst

Thanks, Red. I didn't quite catch the number you gave us. Sorry, the headcount can give you the headcount one more time, and what percent is that where you're supposed to be in terms of maximum?

Red Conger, Executive Vice President

Yes, it's 9,400. And I don't have the percentage of total, but it's I'm guessing 10% less Alex, if you want to add more precision to that.

Alex Christopher, Senior Vice President

Yes, I think Orest, our peak numbers here has been at around, I plan coming over definitive estimate that we were going to hit just shy of I think 12,000 workers on site. So it's sort of 9,400 well, sort of 20% there or so below that in that order. And this is really moved from I would say two people for instance, two people were actually come through with some current wave of COVID things. And I think there's lots of positives here with respect to Chile on that some of the levels now, given I think vaccine 42% of their total population and nearly 32% of the population or 7 million people actually have two vaccines doses. So this is really positive there, I think one of the leading countries in the world in terms of vaccination. So this gives us lots of a view towards what's going to happen over the next few months and our ability to start to ramp back up to that.

Don Lindsay, President and CEO

No, the peak workforce wasn't intended to be there today, that was the target for mid-year.

Operator, Operator

Thank you. Our next question is from Greg Barnes. Your line is open. Please go ahead.

Greg Barnes, Analyst

Yes, thank you. Lot of delay with this point, but what completion rate per month are you achieving. Thank you.

Jonathan Price, CFO

April will be our best month and I don't have that number yet. It was not quite finished. I think we're going to have to leave that Greg because it varies quite a bit week-to-week, but we're very pleased with April hasn't had a tough February month.

Greg Barnes, Analyst

Okay. So just a question for you, Don, given you have QB2 in slide, you've got a couple of projects in the pipeline potential if you want to build in, there's a lot of talk about what the long-term incentive copper price is. Do you have a view on that? And could you give us your ideas on that?

Don Lindsay, President and CEO

In our planning, we typically use a copper price of $3, occasionally $3.10 or $3.15, as it has remained in those ranges. I've noticed several research reports suggesting that the price needs to be at least $3.50. It's essential to consider whether these figures are adjusted for inflation and compare them to real prices. Personally, I believe that COVID has shifted copper demand, increasing it from a long-term growth rate of about 2% to possibly between 3% and 3.5%. This is evident in recent global activities, such as President Biden's Climate Summit, President Xi's announcements, and Mark Carney's efforts to mobilize substantial funds towards net-zero goals. These developments will likely fuel decarbonization and increase copper demand. Therefore, I anticipate prices will reach that level. However, I don't believe the required resources are readily available for development. We're fortunate to have a variety of projects at different stages; some could be constructed soon, potentially with partners. The QB project itself is substantial, currently over 8 billion tonnes, with a trajectory to reach 10 billion tonnes. We could focus on this for the next decade, which would significantly benefit the company. Given the circumstances, I think achieving a copper price of $3.50 is necessary for companies to take the initiative to develop projects, as there must be significant incentives for the 10 to 15 years of challenges involved in building these operations.

Greg Barnes, Analyst

Thanks Don, that's really helpful. And if I can, one final question maybe to Jonathan, the 42% tax rate in the quarter. What drove that, significantly above what the normalized rate would be?

Jonathan Price, CFO

Yes, Greg, there were a couple of items, which were unique to the quarter that were essentially non-deductible for tax purposes. In the absence of that it will probably have been at 37% so consistent with our usual range. But nothing significant and nothing that's structural.

Operator, Operator

Thank you. Our next question is from Jackie Przybylowski from BMO Capital Markets. Your line is open. Please go ahead.

Jackie Przybylowski, Analyst

Hi, thanks very much. I want to just ask you a question on the coal the coal division first, your performance for Q1, are they seem quite strong 2 million tonnes and the guidance you have given previously was for the year 2021 at 7.5 million tonnes. I thought Q1 was supposed to be sort of lower run rate versus the rest of the year. So are you thinking that there's any way that the coal sales in China could go above that 7.5 million tonne number that you've previously guided?

Don Lindsay, President and CEO

I'll turn it over to Réal. But I'll just say that we thought the same as you because normally with Chinese New Year in the first quarter, you'd have a little lower number. But the answer to the big picture question is no, 7.5 million is our target. So Réal, more detail on that.

Réal Foley, Vice President

Yes, not much more to add, Jackie. I guess in reality, we're continuing to try to maximize sales to China. But as Don is saying, we have contractual commitments with long-term customers in other markets. So we're still looking very similar target 2.5 million tonnes throughout 2021.

Jackie Przybylowski, Analyst

Thank you. Can you share your observations on the current market situation? I understand that conditions can change rapidly. The Chinese coal market appears to be quite robust at the moment, but that might differ in other regions like India. Could you provide some insights on the CFR premium compared to the FOB benchmarks today?

Réal Foley, Vice President

Yes, sure Jackie. So the current premium is getting very close to US$100, FOB price this morning is down to around 109, and CFR, China is at 227. So if we develop ocean freight, which currently for us is in the low 20s, you end up with very close to US$100 tonne crew.

Jackie Przybylowski, Analyst

Thank you very much. That's amazing. Maybe just shifting gears, I just have been reminiscing on some old places as, we haven't left the house in a while. And thinking back to the site visit we did to Highland Valley, I think it was around September 2019. And we saw the technology working there or sorting the autonomous haulage; would you give us, would you mind giving me an update maybe on how those trials are going? I think it's been a while since you've been doing those trials? Are you seeing success there? And is there regroup for how that might be kind of rolled through other mines or other areas of your business?

Don Lindsay, President and CEO

Yes, it's pretty good. Shehzad, why don't you start?

Shehzad Bharmal, Vice President

Sure, thanks Don. Jackie at Highland Valley, we have converted 21 trucks, and while not all are currently in autonomous service, they will be as 2021 progresses. Our goal is to have 35 fully autonomous trucks operating in both pits by the first quarter of 2022. That's our plan. Regarding Highland Valley's performance, it is meeting our expectations. We're generating cash flow that will provide long-term benefits through improved maintenance and fuel savings, in addition to the anticipated advantages of utilization and addressing labor issues. Importantly, safety has been excellent, with no significant issues reported. On your other question regarding shovels, we have three in operation, typically using two at a time. While utilization has been slightly below our expectations, we are addressing technological challenges to enhance their robustness. Furthermore, in terms of RACE21 at Highland Valley, it has been beneficial. The location and combination models we have created for grinding circuits are flexible and performing effectively. Highland Valley has made considerable progress in throughput compared to our geological models, along with improved recovery rates, which makes us very pleased.

Jackie Przybylowski, Analyst

Is there any plan to expand these trials to other operations?

Shehzad Bharmal, Vice President

I can, perhaps Andrew or Robin can talk. We do have AHS at LQ as well right now. Andrew or Robin if you want to add to that?

Robin Sheremeta, Vice President

That you got it. Pretty much a repeat. We're pursuing the same technology as the LQ mine, we've got about half the truck fleet converted there now, so about the same 21 trucks. And we'll have that fully converted by the end of the year. And we're seeing very similar safety improvements, maintenance type improvement, shale life, that kind of thing. So very, very strong technology and it's still quite successful in coal as well.

Operator, Operator

Thank you. Our next question is from Emily Chieng, Goldman Sachs. Your line is open. Please go ahead.

Emily Chieng, Analyst

Good morning, everyone. I wanted to pivot back to met coal and just maybe your return views on the commodity there, certainly doesn't seem to be a lot of new Greenfield groups for met coal certainly supportive on the supply side. But how do you square that off against what's happening in global steel markets longer-term where different regions of the world, China in particular perhaps looking at curtailing production or more globally, you're seeing a transition to more AS capacity?

Don Lindsay, President and CEO

Okay. Réal Foley why don't you turn that.

Réal Foley, Vice President

Yes, I can do that. Thanks for the question, Emily. And so what we're seeing actually in the short-term is record high steel prices and that in large part due to recovering demand in all parts of the world, including China, India, and also outside of those regions. And there was an announcement this morning actually that China is removing the tax rebate on the majority of its steel product exports that will also support steel production in other countries, and will help China to reduce their exports. But the exports from China just put this in perspective, there are 54 million tonnes last week, estimates of that announcement again, it's just as of this morning, so it's pretty early, but it looks like it could reduce those export by 70% to 75%. So that's 40 million tonnes or so. And that compares to record high exports from China that were around 115 million tonnes a few years ago. So there is a shift in terms of scrap utilization that we're starting to see in China. China's currently using around this is a low 20% range in terms of scrap utilization. But overall, production in China is still very low. And given the stage that China is at in terms of scrap generation, a lot of this in China is going into construction and infrastructure, which is a longer cycle to January, submit a significant scrap to support faster increase of VAS. In other countries like India, where the majority of the growth is going forward, the story is quite similar scrap availability is lower. And when we look at more developed markets, scrap utilization is probably somewhere around low-30s to mid-30% utilization. So we could see eventually shifting to that kind of level. But that will probably take some time to get there just in terms of scrap availability.

Emily Chieng, Analyst

That's really helpful color. And then maybe just one follow-up if I may, on the copper price environment and positive demand trends that you're seeing for the green metal and definitely your QB2 delivering into that should be a very exciting time. But as you think about your longer-term organic portfolio, is there a need to accelerate any of the other growth projects that you have, or from a tech perspective, would you rather see how the copper price environment plays out for a little while longer enjoy the free cash flow harvest, and then make those decisions?

Don Lindsay, President and CEO

Let me speak to that, Emily. We don't need to see the copper price play out any longer, we have confidence in the long-term copper price that the market is going to need those projects. So that wouldn't be the limiting factor. The limiting factor is the stage at which each of the projects are at. So for example, QB2 is obviously going to be finished next year even if we wanted to go ahead with QB3, the earliest we could sanction that is probably beginning of 2026, because we have to finish the pre-feasibility study in now and feasibilities and file for the FCRA and so on. If everything went perfectly, you might be able to do in three to six months faster, but nothing if it does go perfectly. So there's going to be a gap between when QB2 starts up next year, probably three, four years of very, very strong free cash flows. And even when QB3 is sanctioned the first equity capital comes from our partners and in project finance so Teck wouldn't have to come up with any funding till 2027 to 2028. So there's a long stretch there where there should be very, very strong cash flows available to return to shareholders. The other project Zafranal the feasibility is finished but there's a lot of optimization going on. Peru is still locked down, and I saw earlier that that's likely to stay until September. So the earliest anybody who wanted to partner with us there could go visit it. It's not for several months, yet. San Nicolas, we've just finished the pre-feasibility study, which we'll be publishing in due course. We're just working on some final questions. And, that's one that maybe could be built during the period between QB2 and QB3. We probably have a partner build that for us. So again, we wouldn't have to come up with any capital. The market will need the projects. But the projects themselves have to go through the stage gate process, until they're ready to built. So, that's really the state of affairs. And that's the same worldwide, by the way, you look at all the list of projects, there's about four or five that are already under construction coming on in the next two years. And after that, there's a long period when there's quite a gap to still open up.

Emily Chieng, Analyst

Great. That's perfect. Thank you.

Don Lindsay, President and CEO

A consultant recently released a research report predicting a 4.5 million tonnes gap between supply and demand by 2030. That translates to 15 QB, which just aren't available.

Operator, Operator

Thank you. Our next question, Adam Bryce, CIBC Capital Markets. Your line is open. Please go ahead.

Adam Bryce, Analyst

Good morning. Thanks for the update and taking my questions. Actually, I just have one. It's a follow-up to Orest and related to QB2, with today's update the project past 50% completion. And going back to 2020 update, I recall you were targeting 40% completion by year-end, which ultimately you achieved. So my question is, and I know that COVID is a variable, but on your updated project schedule, what percentage of completion are you targeting by 2021 year-end?

Don Lindsay, President and CEO

I don't think we're going to give you a number on that because it's so dependent on COVID and we're not through that situation yet. Well, once we are through it and we can finish the ramp-up to peak workforce, then the predictability and the percent per week to go back to Greg’s question, all that becomes much clearer and we can give you a better number. What we can say is that we just had our four best weeks in April. So it's going in the right direction. We expect, the percent completion per week to continue to increase week-by-week, going forward, as long as COVID doesn't get in the way. But until, we have COVID well and truly behind us, it wouldn't be right for us to be too definitive on those things. But we do have a lot of confidence, a very high-level of confidence that this is going to be finished, as we've always said in the second half of 2020s.

Adam Bryce, Analyst

Okay. Excluding COVID, if we assess it at a high level, first production is anticipated for the second half of next year. We're currently at or above 50% completion. Would it be reasonable to suggest that in order to stay on track for first production, the project needs to reach about 75% by the end of the year? Is that a fair assessment?

Don Lindsay, President and CEO

I think you're trying to get too specific and we're going to leave the disclosure as it is. Thanks.

Operator, Operator

Thank you. Next question from Timna Tanners, Bank of America. Your line is open. Please go ahead.

Timna Tanners, Analyst

Hey, good morning guys. I have two follow-up, to the topics we had earlier on met coal and on the satellite projects. So, net coal, it's really missing the party in terms of global prices and the gap you pointed out. It is really wide. And I know you said you have long-term contracts, but are there any potential for revisiting these contracts that they can do at any point, if this is a long-term situation, is there anything that can happen down the road? And then I'll ask a follow-up on the copper projects. Thanks.

Don Lindsay, President and CEO

We understand your question and it’s certainly something we are considering. However, it's too early to determine if the situation between China and Australia is long-term. Even if it turns out to be, we need to focus on the global market and not rely solely on one country. We have strong relationships with important customers we've worked with for a long time. What we are likely to see is an evolution in the current pricing mechanism over time. Presently, we have a divided market with two distinct prices; one is risky but favorable for us. While we wish we could sell more at a higher price, if the market sees the geopolitical situation as long-term, we expect that the pricing mechanism will change in a way that benefits us, though it may not be as beneficial for some of our competitors.

Timna Tanners, Analyst

Thank you for the information. Regarding the satellite project, you mentioned that the earliest approval for QB2 would be in 2026, and that Zafranal has completed its feasibility study with San Nicolas potentially following. Could you clarify the earliest production timelines for these projects and identify any gaps? You've noted that Teck is well-positioned to start earlier than other companies, so I would like to understand the timing more clearly. Thank you.

Don Lindsay, President and CEO

That's a fairly detailed question. What I'm going to suggest is that, what's the best way. I know, because there's eight projects really and all different timetables because they are at different levels of development, from pre-feasibility, feasibility, it's on the permitting in different countries takes that different length of time. I think, what we'll probably do is put a packaged answer to that and get it out to the market generally in some form between now and the next quarterly, and certainly at Investor Day, we'll be going through that, those plans in details, but it would be a very long answer. And it would only generate a whole bunch of more questions if we tried to go through the whole list today. So, certainly appreciate the question and, we in due course, will get to you a more reasonable answer.

Operator, Operator

Thank you. Our next question from Lucas Pipes, B. Riley Securities. Your line is open. Please go ahead.

Lucas Pipes, Analyst

Good morning, everyone. I have similar questions. First, regarding China and the met coal market, you mentioned an 80% decline in imports. The global steel market is very strong, so I'm curious how China is currently meeting its demand without seaborne imports and how sustainable you think this situation is in the long term. Thank you.

Don Lindsay, President and CEO

Réal, over to you?

Réal Foley, Vice President

Thank you, Lucas. In the short-term, China is increasing its domestic coal production, which went up by 15 million tonnes year-over-year in the first quarter of 2021. This increase comes amidst challenges faced by the domestic industry, including coal mine accidents and heightened safety and environmental inspections. It remains to be seen how much production can rise, but consultants expect domestic coal production to reach slightly more than 500 million tonnes in 2021, an increase of about 15 million tonnes compared to 2020. Due to this limited availability, domestic prices in China have increased, currently around 231 CFR equivalent. Additionally, China is sourcing more coking coal from Mongolia, with imports rising in the first quarter, though they are still below the record high of 34 million tonnes in 2019. For Q1, this figure annualized is about 24 million tonnes, impacted by rising COVID cases in Mongolia, which have affected exports since mid-March and continue to do so. Imports from the seaborne market are also lower, especially since there have been no shipments from Australia since December 2020. However, overall seaborne imports for the first quarter are projected to exceed 21 million tonnes annually, compared to about 13 million tonnes in 2020, excluding Australia. This illustrates the current sources of coal during this period.

Lucas Pipes, Analyst

Réal, I appreciate all the detail you provided. My second question relates to the copper project satellite and similar topics. Reflecting on a few years ago, some of those projects appeared to be potential monetization targets, but things seem quite different now. In terms of strategy moving forward, are you considering pursuing M&A opportunities specifically for copper projects? If so, what areas would you focus on? Additionally, considering the outlook for copper that you mentioned earlier, what impact might that have on exploration spending? I would really appreciate your insights on this. Thank you.

Don Lindsay, President and CEO

There were several questions in that. I'll start with a few. Firstly, regarding inquiries about potential acquisitions, we aren't looking to buy anything since we have plenty of resources and eight projects to focus on. However, we remain open to opportunities if something significantly better comes along. Currently, we don't anticipate that happening. Regarding our exploration budget, as we progress with initiatives like Neptune and Elkview water treatment, and considering current copper and zinc prices, I believe more capital will become available. I expect exploration will benefit from that. Our exploration team has performed excellently over the years, so yes, we are optimistic about that. On the topic of asset monetization, I have two points to make. First, assets are valued more today than they were a year ago, pre-COVID. This change results from a shift in the long-term outlook for copper demand, which has moved from about 2% growth to 3% to 3.5%, greatly increasing project value based on the long-term pricing that investors are using. Additionally, mid-cap companies in need of new projects have much better access to capital markets, making it easier for them to finance new ventures. This has increased both the number of buyers and their purchasing power significantly over the past year. In this context, we have to consider our market options. As one of our board members pointed out, given the future outlook for copper over the next decade, selling a copper project may seem unwise. However, we are evaluating a balanced approach, taking into account various situations and the inbound inquiries we’ve received. There are intriguing opportunities where we could partner with another party, allowing them to invest their capital and expertise to build a project while we retain a significant stake for minimal cost. If this aligns with our timing between QB2 and QB3, it would be advantageous. We will compile comprehensive information about our portfolio. To address Timna's earlier question, one of the reasons we can't provide definitive answers is uncertainty regarding when COVID will conclude. COVID remains a critical factor influencing whether people can visit sites to evaluate partnership or acquisition opportunities, and that situation is still uncertain. That's why it's challenging to provide firm timelines.

Lucas Pipes, Analyst

Don, I really appreciate this perspective. Thank you very much and best of luck.

Operator, Operator

Thank you. Our next question from Matthew Murphy, Barclays. Your line is open. Please go ahead.

Matthew Murphy, Analyst

Hello. I was wondering if you could share any thoughts you might have on Peru. We've got the leading presidential candidate positioned fairly aggressively against foreign miners. I'm just wondering if, you or Anthony in the management or the Chamber of Mines have had any briefing insights into his administration and just anything you can suggest we should think about as this election plays out.

Don Lindsay, President and CEO

Yes. Clearly we're all watching it, and there's different professional geopolitical commentators that publish reports every day. I read some of them and I'm sure most of the team does. But I don't think that there's much, additional insight that we can add to that to help you with your question. No one knows the answer and the results. I see that it shows the modifying his position somewhat in the end he comes from a advantage point. That's fairly far left and it looks like in the polls, he has as a lead. In our case for our company, it's an important thing to watch. We have two key assets, Antamina of course a very, very important asset; Zafranal a development asset. It's not that material to our company as it would be to some other companies, but, in the end I’m sure, we're all just going to have to watch and see what happens.

Matthew Murphy, Analyst

Sure. And maybe just as a follow-on, on that, it's my understanding that we want to have a tax stabilization agreement in place right now. And can you just remind if we look just for Antamina, how much CapEx you'd be paying or putting into the asset over the next few years.

Don Lindsay, President and CEO

I'll turn that to Jonathan, but just saying, because you prompted the issue. We do have one at QB2, which is very important. So Jonathan, over to you.

Jonathan Price, CFO

I was just getting off mute there. I don’t have the outlook for Antamina CapEx available right now, but if you reach out to Fraser after this call, we can provide you with any relevant information on that topic.

Operator, Operator

Thank you. Our next question, Brian MacArthur from Raymond James. Your line is open. Please go ahead.

Brian MacArthur, Analyst

Hi, good morning Don. Yes, mine had to do with project satellite, and I know you've given lots of answers, but just so I, and obviously you've got lots of strategic options. Are we now seeking a originally project satellite with all monetization, you've talked about a partner building one of your projects. Can I assume that you don't really want to build any of these eight projects and I could argue maybe you should have another production center or what's your philosophical thinking on that? Given originally, you thought you could monetize probably big satellite for $3 billion or at least that number was originally put out. I don't know if you'd be willing to put out a new potential number, you might be able to get out of this.

Don Lindsay, President and CEO

We have taken several early-stage projects and progressed them through various stages including scoping, resource assessment, reserve determination, scoping studies, pre-feasibility, and feasibility. We then decide the best direction for each project, whether that involves building them as part of Teck's portfolio, partnering with another company, taking shares back, running the project cycle, or selling outright for cash. Our plan never included the expectation to monetize all the projects, but we acknowledged that some would likely not be added to Teck's future portfolio. We set a value target of $3 billion in terms of Net Asset Value (NAV), which we have significantly exceeded for five projects, although we haven't converted that into cash yet. We are aware of unsolicited offers suggesting we could clear over a billion for a couple of these projects if we chose to proceed. While we have received proposals indicating those values, we recognize that moving from receiving letters to finalizing deals is a lengthy process. The satellite team has created substantial value. The market dynamics have shifted structurally, influenced greatly by COVID-19, and the long-term demand for copper appears very robust, prompting us to reassess our strategy to ensure we do not miss out on value. Our analysis of competitors shows that many lack adequate copper resources to develop. The copper industry's exploration track record has been underwhelming overall, with limited successes. We are proceeding with caution and plan to provide a comprehensive update on our copper production division soon to show the exciting pipeline and the wealth of resources we possess.

Brian MacArthur, Analyst

Great, thanks. That's very helpful. Just a second question, just for a detailed question, for the settlement with the Fisheries I think there were two $30 million payments, have they been made yet or they out of cash flow yet?

Don Lindsay, President and CEO

Just a final thought on your last question. We almost know for sure we will be building QB3, right. We don't know, whether it's a direct 50% quick expansion of doubling or tripling, right, consider the resources are there to sustain. So you can assume that Teck and our partners in the mining we've got will be building and expanding QB overtime. On the Fisheries, I’ll turn that to Peter Rozee. I don't hear Peter. So I'll just say that the two 30s have not been paid yet. I think we have a year to do.

Peter Rozee, Vice President

I’m sorry; I’m getting myself off mute. The answer is we have not paid the Fisheries at times yet, they're recorded as a short-term liability at quarter-end.

Operator, Operator

Thank you. There are no further questions registered. At this time, I'd like to turn the meeting back over to Don Lindsay.

Don Lindsay, President and CEO

Thank you very much for joining us today. We look forward to our next quarterly call in July, where we will provide another update on QB2. We are very excited to have passed the halfway point and are pleased with our progress. In the last four weeks, we have noticed some improvements in the COVID situation in Chile, and we hope this trend continues. This would enable us to ramp back up to peak production by the middle of the year. We are thrilled to share that Neptune is in the full commissioning stage, with 18 ships already loaded. I visited on Monday, and everything looks excellent. This will be a significant long-term asset for our coal business, helping to structurally lower costs for decades and allowing us to deliver high-quality metallurgical coal to our customers when needed and at high prices. Once again, thank you all and have a good day.