Earnings Call Transcript - TECK Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teck's Second 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 Tuesday, July 27, 2021. I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please, go ahead.

Fraser Phillips, SVP, Investor Relations and Strategic Analysis

Thanks very much, Laurie. Good morning, everyone, and thanks for joining us for Teck's second quarter 2021 call. Before we begin, I would like to draw your attention to the caution regarding forward-looking statements that's on slide two. 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. But I'd also like to point out that we use various non-GAAP measures in this presentation. You can find explanations and reconciliations regarding these measures in the appendix. With that, I will turn the call over to Don Lindsay, our President and CEO.

Don Lindsay, President and CEO

Well, thank you, Fraser, and good morning, everyone. I will begin on slide three, with our second quarter highlights, followed by Jonathan Price, our CFO, who will provide additional color on our financial results and we'll then conclude with a Q&A session, where Jonathan and I, along with several additional members of our senior team, will be happy to answer any questions. So, solid performance at our operations and our priority projects against the backdrop of improving market conditions made for a very positive second quarter of 2021. At our QB2 project, we had our best quarterly progress to date and this is despite the largest COVID-19 case surge so far in Chile. Let me review a few numbers just to describe how it was. During the second quarter, the number of COVID-19 cases skyrocketed to a high of around 8,900 per day in Chile. Thankfully, recently the number of cases has declined, is now averaging about 1,500 per day. Critical care bed occupancy is still high though at 88%, but down from the peak of 99%. And in the Tarapaca region where QB2 is located, that number is 49%. And there is currently a daily average of 30 cases compared with a high of 251. Chile has done a commendable job with their vaccination program. Of its total population of 19 million people, around 85% have had their first dose and 74% have had their second dose. And at QB2 itself, more than 60% of the project workforce is fully vaccinated, with over 80% of the workers having received at least one dose. The most recent wave of the pandemic has had a much larger impact on QB2 than the first wave. When construction restarted last year following the temporary suspension, we had nowhere near the challenges that we have had in these past three months. All of the restrictions, protocols and testing that have been so important in the prevention of the spread of COVID-19 are also a large burden that has put the QB2 team to the test, but our team has risen to that challenge. The substantial progress in the second quarter has been hard-won and is remarkable under these challenging conditions. Just a bit more color on what it's like for those of you who may be sitting in an investment center, perhaps in New York, where it's wide open. What we're dealing with now is when an individual has symptoms they're taken off their project and housed in hotels on the coast where we've secured them permanently for quarantine purposes. They are PCR tested. The results are returned in about four days. They are then contact traced and the individuals who were in contact with them are also taken off the project and placed in quarantine hotels. If they test negative, they return to work; if they test positive, they quarantine for 14 days. At the peak, in Q2, we had 350 individuals in quarantine. The monthly averages were very high. So you can imagine what that does to your crew consistency, productivity, and construction weekly plans, especially when the affected individuals are critical personnel like supervisors, crane operators, or welders. Additionally, absenteeism ran at 12% during the quarter. This has posed a huge challenge. And so that is why we are immensely proud of the progress that we made during that quarter. We are very excited because just in the last couple of weeks, we've managed to reduce the number of active cases down to just about three. We're able to put three people in a room, and we're increasing resources in sight, finally getting a chance to go to full strength. This will be a tale of two projects. The project is currently heavily influenced by COVID and we hope for the next 12 months it will be an entirely different project, where we can make full progress. We continue to expect first production at QB2 in the second half of 2022, which is next year, and QB2 is expected to double our consolidated copper production by 2023. At the same time, our Neptune facility upgrade is ramping up to full capacity across the site. The equipment there is performing according to or better than planned. I was there week before last; it was exciting to see. This upgrade is a key component of securing a long-term, low-cost, much more reliable supply chain for our steelmaking coal business. We saw a significant improvement in our financial results in the second quarter, reflecting spot price increases in all of our key commodities. Adjusted EBITDA was up 104% compared with Q2 last year. Our operations performed well during the second quarter. Production was in line with plan across our business units. We met our quarterly sales guidance in steelmaking coal and in zinc. At the very end of the quarter, though, our rail logistics were impacted by the wildfires in British Columbia. The situation remains very difficult, and the provincial government declared a state of emergency last week. We extend our deepest condolences to all those who have been directly affected. While the wildfires did not impact our second quarter results, they are currently impacting transportation at our operations in B.C. Rail services have been disrupted, which is expected to negatively impact our steelmaking coal business. Our third quarter steelmaking coal sales are now expected to be reduced by 500,000 to 800,000 tonnes, with guidance revised to 5.7 million to 6.1 million tonnes for the quarter. Our annual production guidance range has been lowered by 500,000 tonnes to between 25 million and 26 million tonnes. We have increased our annual transportation cost guidance range by CAD3 per tonne to CAD39 to CAD42 per tonne. It is important to view that increase in the context of current steelmaking coal prices. While we're raising our cost guidance range by CAD3, the Australian FOB price during the quarter rose by US$100. This context is important for you. We have contracts in place to ship through all three West Coast ports, which gives us the flexibility to divert some trains and vessels to Ridley Terminals, which is clearly very economic for us. Like others in the industry, we are seeing signs of cost inflation across the business more generally. We have noted increases in the cost of certain key supplies, including mining equipment, fuel, tires, and explosives, driven largely by price increases for underlying commodities such as steel, crude oil, and natural gas. For our operations, the largest impact is on our fuel costs. While the impact on our second quarter results was slight as we delivered an adjusted EBITDA margin of 39%, we expect these price increases to put modest upward pressure on our cash unit costs in the second half of the year. Despite this, we have not changed our guidance for full-year total cash unit costs in copper and zinc, and adjusted site cash costs of sales in steelmaking coal. We have lowered our guidance for full-year net cash unit costs in zinc. Finally, we were very proud to be named to the Best 50 Corporate Citizens in Canada, which is the 15th consecutive year that we have been ranked as one of the top 50 companies in Canada for corporate citizenship. Now, turning to an overview of our second quarter 2021 financial results on slide 4. Our financial results are significantly improved compared to Q2 last year, supported by improved commodity prices. Copper prices reached all-time record highs in the quarter, with average prices 81% higher than in Q2 last year. Our realized steelmaking coal prices benefited from around two million tonnes of sales to customers in China that were priced at premium CFR China prices. Revenues were up by almost 50% from a year ago to $2.6 billion. Profitability improved even more with adjusted EBITDA increasing 104% to $989 million, and bottom-line adjusted profit attributable to shareholders increased 281% to $339 million, which is $0.63 per share on a diluted basis. Jonathan will review our financial results in more detail in a few minutes. I'll now run through some second quarter highlights by business unit starting with copper on slide 5. Our copper business unit had a strong Q2 with a 385% increase in EBITDA compared to the same period last year, driven by substantially higher copper prices. Production was higher than in the same period last year when Antamina had temporarily suspended operations due to COVID-19. Total cash unit costs were US$1.80 per pound, which was $0.23 per pound higher than a year ago. However, the increase in cost is primarily due to higher workers' participation and royalty expense resulting from increased profitability at Antamina, which had a US$0.20 per pound impact compared to a year ago, as well as higher consumables costs and the strengthening of the Canadian dollar. Despite those cost pressures, we delivered an adjusted EBITDA margin for the copper business unit of 67%. We've maintained our annual production and operating cost guidance in copper. Turning to an update on our QB2 project on slide 6. As I mentioned earlier, the project has continued to effectively advance construction with the best quarter of progress to date, despite the significant ongoing wave of COVID-19 in Chile. We continue to maintain and enhance our extensive COVID-19 protocols to protect the health and safety of our workers and the communities in which we operate. Pre-screening and on-site testing have been key to our success in managing COVID. In fact, we have screened out over 1,300 positive cases that otherwise would have gone to the site. Additionally, in coordination with the government, we've successfully rolled out a vaccination campaign for our workers right on site. With COVID-19 cases in Chile declining, coupled with the country's and the project workforce's high rates of vaccination, we are aggressively ramping up towards peak workforce levels. The critical path, which is the grinding circuit, remains on plan and we are still on track for first production in the second half of next year. Based on the solid pace of construction over the last quarter, we expect to achieve 60% overall completion in early August, so next week or very late part of the week after. Our capital cost estimate remains at US$5.26 billion including contingency and escalation. Our estimate for COVID-19 capital impacts, which are being tracked separately, has been updated to US$600 million as a result of the forecasted impact of the second wave of COVID-19. Slide 7 provides an aerial view of the concentrator area, where we are making strong weekly progress. The grinding lines shown in the background currently remain the critical or the longest path for the project, and we have made significant progress here with all six mills now in place. Behind that, you can see the tower for the core stacker that has been erected, where the stockpile dome will go up. We continue to advance the structural steel of the grinding building and the mechanical installation of the stage flotation reactor cells, which you see in the middle left of the photo in green, just after the 14 large, 650 cubic meter flotation cells in blue. In the foreground, you can see where we've advanced construction and mechanical installation of the copper and bulk concentrator thickeners and the regrinding facilities. Lastly, in the middle right, you can see the advanced stage of the on-site power substitution. Slide 8 shows the starter dam of the tailings management facility, where we have raised the dam elevation significantly in the quarter. We are continuing to utilize the tech mine fleet and some of our new fleet of CAT 794s, which are performing well. Slide 9 shows our progress in advancing the jetty from the onshore work front, and we have two additional offshore work fronts now to advance the jetty from a jack-up barge and temporary island, where we've commenced pile driving. As the pipeline right of way and platform development is now effectively complete, we are focused on advancing the pipe stringing, welding placement, and backfill. Slide 9 also shows the pipeline trench with the welded water pipe on the right and the string concentrate pipeline on the left, ready for welding in the back right. Now you’ll see our port workings. To see more of the latest progress on QB2, I encourage you to watch a video of the project and view our latest quarterly photo gallery, which we have posted with our quarterly conference call materials in the Investors section of teck.com, and you will find links to them in our Q2 press release. Next, our zinc business unit results for the second quarter are summarized on Slide 11. As a reminder, Antamina zinc-related financial results are reported in our copper business unit. Red Dog had a strong performance in the quarter with production increasing by 67% compared with the same period last year, as we had previously flagged that lower 2020 production volumes at Red Dog resulted in lower material available for sale. Additionally, Trail was impacted longer than planned annual zinc roaster maintenance, which is now behind us. Looking forward, Red Dog's shipping season commenced on July 19 and our Q3 sales guidance for Red Dog zinc and concentrate is 180,000 to 200,000 tonnes. For 2021, we expect higher production at Red Dog. We've increased our full year zinc and concentrate production guidance range by 20,000 tonnes to 605,000 to 630,000 tonnes. We've also lowered our full year net cash unit cost guidance range by $0.05 per pound to $0.35 to $0.40 per pound. We've also lowered our full year refined zinc production guidance range for Trail by 10,000 tonnes to 290,000 to 300,000 tonnes due to lower availability of quality zinc concentrate feed sources and the longer-than-planned roaster maintenance downtime during the quarter. Turning to our steelmaking coal business on Slide 12, and if you all remain on mute that would be appreciated. In the second quarter, sales were 6.2 million tonnes in line with our guidance range and our average realized price includes around 2 million tonnes of sales to Chinese customers, similar to the first quarter, at high CFR China prices. The CFR China prices are around $314, $315 a tonne. Our LPO operations set a new all-time quarterly production record thanks to the expansion that we did last year. Adjusted site cash cost of sales were CAD 64 per tonne, which was at the high end of our guidance range as anticipated and CAD 4 per tonne lower than a year ago. Our transportation costs of CAD 42 per tonne were above our full year guidance range, which was expected and higher than a year ago as a result of higher fuel surcharges and tariffs. As I mentioned earlier, wildfires are currently impacting our operations in B.C., and rail services have been disrupted, which is expected to negatively impact our third quarter sales volumes and our annual production volumes and annual transportation costs in steelmaking coal. Our third quarter steelmaking coal sales are now expected to be reduced by 500,000 to 800,000 tonnes, and we expect 5.7 million to 6.1 million tonnes of sales in the third quarter. We will continue to prioritize available spot sales volumes to China, which is expected to continue to result in favorable price realization. We continue to target 7.5 million tonnes of sales to China in 2021, which is unchanged from previous guidance. Our annual production guidance range has been lowered by 500,000 tonnes to 25 million to 26 million tonnes. We have increased our annual transportation cost guidance range by CAD 3 per tonne to between CAD 39 and CAD 42. Again, it is important to view this cost increase in the context of current steelmaking coal prices, which have risen by CAD 100 during the quarter. We have not increased our adjusted cash cost of sales guidance for the full year. However, upward pressure on input costs due to cost inflation and the impact of the B.C. wildfires are expected to result in costs coming in at the higher end of the range. In the second quarter, our steelmaking coal business unit delivered an adjusted EBITDA margin of 41%. In the third quarter, we expect our financial performance to reflect the sharp increase in prices that occurred in the latter half of Q2. Slide 13. As I indicated earlier, our Neptune port project is in the ramp-up phase. Since the first steelmaking coal was unloaded using a new double railcar number on April 19, we've continued on fully commissioning the double dumper and then moved on to the site-wide ramp-up. August and September are anticipated to be big months for train handling and vessel loading. We are seeing excellent train handling times at Neptune, with the combination of the double and single dumper indicating that the terminal will be capable of processing in excess of 18.5 million tonnes per annum. Terminal throughput paused for the first two weeks of July as a result of the rail disruption due to wildfires. This should not affect the site-wide ramp-up, and the pause gave us the opportunity to complete preventative maintenance. Slide 14 shows a photo of the new indexer for the double dumper, which is used to position advanced trains in the dumper. You can see the drive system and the arm that comes down between the cars, which is world-class technology. Slide 15 shows the largest cape-size vessel ever loaded at Neptune Terminal, which is 300 meters long and loads up to 200,000 tonnes. A group of us went to see it, climbed up on it, and watched the loading. It was very exciting. We're pleased to see the project move into the site-wide ramp-up phase, as Neptune is a key component of our long-term low-cost and reliable supply chain for our steelmaking coal business. To see more of the latest progress at our Neptune upgrade project, we have posted our latest quarterly photo gallery with our quarterly conference call materials in the Investors section of teck.com, with a link to it in our Q2 press release. Turning to our Energy business unit. Results for the second quarter, which are summarized on slide 16. Our realized price and results reflect a material improvement in Western Canadian select prices compared with Q2 last year. However, this was partially offset by higher unit operating costs and lower production due to operational issues in the mine. There has been a slower-than-planned ramp-up of contract overburden stripping, as well as challenges around managing groundwater inflow from deep subsurface aquifers. Subsequent to the end of the quarter in July, we encountered additional challenges that will require mining a shallower main scope than planned, resulting in lost ore and the need for additional overburden stripping. The ramp-up to two-train operation has therefore been delayed until 2022. As a result of the operational issues and mining challenges, we have lowered our 2021 production guidance range by 2 million to 4 million barrels to 6.8 million to 8.1 million barrels for the year. We've also increased our 2021 adjusted operating cost guidance range by CAD 12 per barrel to CAD 40 to CAD 44 per barrel. And with that, I will pass over to Jonathan for some comments on our financial results.

Jonathan Price, CFO

Thanks, Don. I will start by addressing the details of the second quarter's earnings adjustments on slide 17. The most significant adjustment is a $44 million in environmental costs on an after-tax basis. This primarily relates to a decrease in the rates used to discount our decommissioning and restoration provisions for closed operations, due to a tightening of our credit spreads. Share-based compensation expense was $24 million in the quarter and commodity derivatives were $20 million. After these and other minor adjustments, bottom line adjusted profit attributable to shareholders was $339 million in the quarter, which is $0.63 per share on a diluted basis. Now the changes in our cash position during the second quarter are on slide 18. We generated $575 million in cash flow from operations, a significant increase compared with $300 million a year ago, reflecting higher commodity prices. We spent $1 billion on sustaining and growth capital, including $666 million on QB2, $138 million on the Neptune port upgrade project, and $203 million in sustaining capital. Capitalized stripping was $175 million, primarily related to the advancement of pits for future production at our steelmaking coal operations. This was higher than a year ago, primarily due to decreased stripping activities in Q2 2020 as a result of COVID-19. Debt proceeds, net of repayments on our US$2.5 billion project financing facility for QB2 were $272 million in the quarter, and we also grew a net $337 million on our US$4 billion revolving credit facility. We paid $77 million in interest and finance charges and $26 million in respect of our regular quarterly base dividend of $0.05 per share. After these and other minor items, we ended the quarter with cash and short-term investments of $312 million. Now turning to our financial position on Slide 19. We've maintained our strong financial position with current liquidity of CAD 6.1 billion including our current cash and the amounts available on our US$5 billion of committed revolving credit facilities. US$3.5 billion is available on our US$4 billion facility that matures in Q4 2024 and our US$1 billion sidecar that matures in Q2 2022 remains undrawn. Both facilities do not have any earnings or cash flow-based financial covenants and do not include a credit rating trigger, nor do they include a general material adverse effect borrowing condition. In fact, the only financial covenant is a net debt to capitalization ratio that cannot exceed 60%. At June 30, that ratio was 27%. Of our US$2.5 billion limited recourse project financing facility for the QB2 project, we have drawn US$1.8 billion as of June 30, of which US$224 million was withdrawn in the second quarter. Antamina entered into a new US$1 billion term loan agreement in July, of which our 22.5% share would be US$225 million if fully drawn. The loan is non-recourse to us and matures in July 2026. We have no significant note maturities prior to 2030 and investment-grade credit ratings from all four credit rating agencies. Importantly, we have significant potential for EBITDA generation from current steelmaking coal prices. Every US$50 per tonne increase in the quarterly index lagged by one month is estimated to increase our annualized EBITDA by almost CAD 1.5 billion. With that, I will pass it back to Don for closing comments.

Don Lindsay, President and CEO

Thanks, Jonathan. In closing, we remain focused on our copper growth strategy and on delivering strong operating results and strong free cash flow in the current favorable commodity price environment. We believe Teck is one of the best positioned companies globally to capitalize on the strong demand growth we see for copper, with one of the very best copper production growth profiles in the industry. Accelerating copper growth is the cornerstone of our strategy. 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 required for the low carbon transition. We're also continuing to strengthen our existing high-quality low-carbon assets through our RACE21 technology and innovation program, which is harnessing cutting-edge technologies to drive step-change improvements in productivity, efficiency, safety, and sustainability. At the same time, we strive to maintain the highest standards of sustainability, safety, and operational excellence in everything we do. We have a leadership team with the right mix of skills and experience to deliver on our strategy. And with that, we would be happy to answer your questions. Like many of you, most of us are on phone lines from home or other locations. So please bear with us if there is a delay while we sort out who will answer your questions. And with that, operator, over to you.

Operator, Operator

Thank you, Mr. Lindsay. The first question is from Orest Wowkodaw from Scotiabank. Please go ahead, your line is now open.

Orest Wowkodaw, Analyst

Hi, good morning. It's great to see the solid progress at QB2. I wanted to clarify if you are indeed increasing the headcount from around 10,000 to the planned 12,000. If that is the case, how should we view the COVID-related escalation costs at QB2? They were $150 million higher this quarter. Should we expect them to decrease significantly? Any insight would be appreciated.

Don Lindsay, President and CEO

Okay. Thank you, Orest. And I see you've done it again getting first in line, well done. So, the first part of your question, the answer is yes, that is true, but I'm going to turn it over to Red Conger for details. Red, over to you.

Red Conger, CRO

Good morning, Orest. I appreciate the question. We are absolutely aggressively increasing the headcount on site. We're going to three to a room as Don had mentioned. So that had been a constraint until now. As we're able to change the work rules associated with all of that protocols, et cetera, we're going to have less and less effect from the pandemic that you saw in the second quarter. The better we can manage all of that and the higher vaccination rates, et cetera, then the less additional COVID expenses we will have. So, we're very optimistic that we've seen the peak of those protocols that have affected cost and productivity. And just to add one thing to Don's comments earlier, he showed a picture of the pipeline, the small one for the concentrate and the big one for the water. One of the things that our team has done to keep us on schedule during this unprecedented second quarter that we just came through is when people report out and we have those problems that Don described, we reconstitute the crews to keep working on the most critical items. In that particular photo, the most critical item is the water pipe, not the concentrate pipe. We've got to get the water pipe complete so we can do commissioning and hydro testing, et cetera. We can finish the concentrate pipeline later. That’s just one example of how our team has flexed and responded during this, and now with more headcount on site more consistent work crews, et cetera, we can do that work in parallel.

Orest Wowkodaw, Analyst

Thanks, Red. Just to clarify, so are you allowed to take the headcount up to the maximum planned sort of peak levels now?

Red Conger, CRO

Here's the way we should think about it. Don mentioned the sales projects. So, we are now setting up work plans for the remainder of the construction that take into account all of the things that have changed since we made the plan just three or four short months ago. That plan will have the maximum employment levels possible that we can deploy to take advantage of every work front possible. That may be a slightly different headcount than what we had cited earlier. With good effort and a little luck, it could even be higher than what we had planned before. For sure, it will be the maximum amount of people that we can deploy. Again, I'll just remind you of some of the forward-looking things that the team has done. When we added the extra camp space when the pandemic first hit, that now allows us to do some different things with three to a room. Like I said, we're going to take full advantage of all of that and be very creative with these work plans.

Orest Wowkodaw, Analyst

Okay. And just finally, any guidance you can give us, Red, on sort of a run rate of COVID cost increases moving forward as you ramp up?

Red Conger, CRO

Orest, the forecast that we've provided you now is our very best estimate of what we think it's going to be at completion.

Orest Wowkodaw, Analyst

What that 150 is to completion that's not just a catch-up?

Red Conger, CRO

No, we believe that the forecast we have given you will represent the total cost at completion.

Orest Wowkodaw, Analyst

Great. Thank you, Red.

Operator, Operator

Thank you. The next question is from Matthew Murphy from Barclays. Please go ahead, your line is now open.

Matthew Murphy, Analyst

Hi. Just a follow-up on that last one. The $600 million estimate, how much of that would have been realized to date? And how much are you leaving for the rest of the project?

Red Conger, CRO

Yes, Matthew. The lion's share of that has not been incurred. Those are our estimates of how this is going to play out.

Matthew Murphy, Analyst

Okay. So, mostly yet to be realized. Okay. And I'm just wondering when you talk about the 60% complete, that's physical progress. From here on, how does the pace of the project compare to your original pre-COVID budget?

Red Conger, CRO

Yes. So that's total progress for the entire project to 60% number. So that includes engineering and everything. Just to reiterate what Don said, the pace of this will be different here forward than it has been. We intend to increase the pace of construction completion. A good example of that, Matthew, the second quarter that we just completed was our best pace project to date. We intend to continue to beat those – this third quarter that we are in now will be better than the second, and we'll get a peak here in the fourth quarter to early next year.

Matthew Murphy, Analyst

Okay. Thank you.

Operator, Operator

Thank you. The next question is from Greg Barnes from TD Securities. Please go ahead, your line is now open.

Greg Barnes, Analyst

Yeah. Thank you. I'm going to go back to you, again, Red. Just on a piece of completion, obviously, there's a critical point to get the project done by the second half of next year. Just easy numbers; you have to achieve about 3% to 3.5% completion rate per month from August on. Does that sound about right? And I guess, what was the number for Q2?

Red Conger, CRO

Here's the way to think about it. What we've been able to do is maintain the critical path through the grinding lines on schedule. Again, just using that same example I used on the two pipelines a minute ago, when we had all these reports of issues, quarantine issues, critical personnel not present, particularly in the last quarter, we made sure to reconstitute crews to do everything possible on the critical path. That critical path through the grinding lines has maintained the schedule. When I mentioned increasing headcount and other work fronts that we can open up, et cetera, we'll be picking up those other pieces that we had appropriately de-prioritized during these challenges. It’s not just about the percent complete; it is about keeping the critical path on schedule.

Greg Barnes, Analyst

Okay. So maybe this is a bit unfair read, but what is the target completion date for the first grinding line then?

Red Conger, CRO

Second half of 2022.

Greg Barnes, Analyst

Don, can I switch back to you? Just the pace of inflation that you're seeing in cost inflation on consumables, reagents and equipment from what you're seeing, is this cyclical, or is there a structural element going on?

Don Lindsay, President and CEO

I would say it’s cyclical. As I said in my comments, the source of this is the underlying increase in different commodities that make up things like steel and fuel oil, of course driven by your WTI price. The kind of cost that I would think of in the structural category might be, for example, if you had labor agreements that are locked in for several years at numbers that were dramatically higher than before. The good news is we've just settled at our two large mines for six years in a reasonable range higher than last time for workers' benefits. In a way that we think will be quite productive and have stability for six years. The short answer is cyclical.

Greg Barnes, Analyst

Well, you're not too concerned about 2022. I know it's early, but not too concerned about higher costs at this point next year?

Don Lindsay, President and CEO

Not really because we'll still be benefiting from the investments that we made at Elkview trying to curtail Cardinal River, as well as Neptune running at full capacity, which is a significant benefit. Those are strong positives that should help balance the increases in other inputs.

Greg Barnes, Analyst

Okay. Great. Thank you.

Operator, Operator

Thank you. The next question is from Lucas Pipes from B. Riley Securities. Please go ahead, your line is now open.

Lucas Pipes, Analyst

Hi. Good morning, everyone, and while it is tempting to continue to ask questions on QB2, I’ll try to switch to another topic. First, a kind of shorter-term question on met coal, and then my follow-up will be a longer-term one. In the short term, when I look at your year-to-date production figures and sales figures, it looks like a midpoint of guidance is baking in a ramp-up in the second half of the year. Is that kind of a stretch goal given what’s going in the province, or do you have a pretty good line of sight to get to those levels set? Thank you very much for that.

Don Lindsay, President and CEO

It’s a good question. I'm going to ask both Real Foley and Robin Sheremeta to give an overview. You have to take that into context with the dramatic effect of the wildfires in the last few weeks, and that’s a big factor we’re not depleting through that yet. So anyone's guess when that will be past us. But Robin, why don’t you start?

Robin Sheremeta, CEO of Steelmaking Coal

Sure. Just to reiterate that the wildfires are certainly causing us some uncertainty. On the bright side, as we came into this period we actually had considerable room at the sites. We had strong logistics through the first half, so we were able to move most of our rock to port. This gives us some flexibility to get through this period. We can’t run as fast when we're running to ground. So as we stockpile, we have to slow production rates down a little bit. The majority of our shutdowns are behind us now, and while there are some left to go in Q3, we're well over halfway done through the maintenance process here in the first half. So we’re in good shape from an operational point of view; it’s really just a matter of what kind of logistical constraints we see going forward now with rail. But we’re in good shape to hit our new guidance range of 25 to 26.

Don Lindsay, President and CEO

Thanks, Robin. Real, do you want to add any market color for the second half of the year?

Real Foley, CFO of Steelmaking Coal

Yes. Happy to do that, Don. Yes, Lucas, we're continuing to see the market being really strong whether it’s demand in China and they have their own supply issues both domestically in Mongolia and in markets outside of China. Demand is extremely strong as well. Steel prices are running at record levels. Steel production and hot metal production is back to pre-pandemic levels. So we’re continuing to see strong demand across the board for our products.

Lucas Pipes, Analyst

Very helpful. Thank you all for your perspective. Don, my follow-up is a longer-term question on the met coal market. In the past, we spent more time thinking about what is a reasonable met coal price. As you survey that market from both the supply and demand vantage point, what’s your view today? What is a reasonable price to underwrite as you do your internal planning or in conversations with investors? Thank you very much for your perspective.

Don Lindsay, President and CEO

Yes. So we always start by asking, well, where has it been in the last 10 or 12 years? The average price is actually in the range of $170 to $180, depending on whether you're using an inflation-adjusted number or not. In today’s pricing terms, it would be around $180. Then we assess, well, what’s going to happen in the next 10 years on supply and demand? It’s clear there are constraints on investment in new supply, not just involving capital provider willingness to supply capital, but also permitting issues. We’ve seen this in Canada where recently a project proposal, despite all the hard work for six years, was turned down and we've seen the same in Australia as well. I believe there’ll be less supply with roughly the same demand. The reason we say this is while we've all been bombarded in the last year or so with research reports on green steel and hydrogen-based technologies, it's quite clear that it's going to take a long, long time for those to have a meaningful impact on the total volume of steel produced globally. Remember, it’s about a 2 billion tonne market, and the kind of investment it would take to materialize the impact on that industry is trillions of dollars. We just don’t think that’s likely to happen anytime soon. Meanwhile, our core customers in Japan, Korea, China, and India are seeing strong demand with India's steel industry planned by the government to triple in the next 10 years. So I think the outlook from a price point of view is actually quite strong. Thankfully, we've seen the recirculation in the market after the disruption between China and Australia. That whole issue took a while to sort out in global markets, but it seems to have stabilized now. Commodity prices are likely to remain volatile, but with a reasonable expectation for our planning purposes, we're using the higher numbers and are not planning to grow our steelmaking coal business either. I don’t expect that to happen at our major competitors as well, and permitting for new projects remains challenging. Overall, I believe supply is going to be tight.

Lucas Pipes, Analyst

Very helpful. Really appreciate it and best of luck.

Don Lindsay, President and CEO

Thank you.

Operator, Operator

Thank you. The next question is from Carlos De Alba from Morgan Stanley. Please go ahead, your line is now open.

Carlos De Alba, Analyst

Great. Thank you very much. Good morning. So on the coal production, we heard about the temporary mining ban this weekend in B.C. I wonder if that adds any additional incremental risk to coal volumes in the third quarter or if that is already incorporated into your latest guidance? And on the cost front related to the water treatment, we noted an increase of $110 million per year you expect between 2021 and 2030. What drove that? And what should we expect going forward? Additionally, regarding the Neptune project, to what extent is Neptune helping you offset the higher coal transport costs? We also read in the release that you expect to see a little bit reduced throughput through Neptune, and that contributes to the higher transportation cost guidance.

Don Lindsay, President and CEO

Okay. Let’s get the first two parts of the question to Robin Sheremeta, and I believe the last part for Real Foley.

Robin Sheremeta, CEO of Steelmaking Coal

Thanks, Carlos. Just on the first question around production, pretty much the same answer I walked through earlier. We’ve got to get through this fire situation and see how we come out the other side, but we’ve tried to reflect that in the guidance of 25 to 26. So we did reduce the guidance by about 0.5 million. So that's pretty much the issue on the water treatment. The main reason for the increase in water CapEx over the period of 2022 to 2024 is really just a change in project timelines. We’re advancing some water treatment strategies as a result of consultation and some that can actually enhance our mine planning options. For example, we’ve advanced Phase 3 of the specific water strategy from 2025 to 2023. So we brought it in earlier, and that supports potentially lower cost boiling options over that time period. Ultimately, it's a shift in the timeline on those developments.

Real Foley, CFO of Steelmaking Coal

All right. Carlos, your question on Neptune. The increase in transportation cost is primarily due to the forest fires in BC. As a result of this, the train service to Vancouver was completely halted for over two weeks. It’s starting to come back to normal now. So what we did during that period is we diverted trains and vessels to Ridley terminals in order to continue delivering our coal to market. The fact that we have capacity through the three West Coast ports allowed us to do that and to capture the high pricing that we see in the market, now at over $200 and CFR China above $300. Overall, when we look at Neptune, yes, the site is ramping up. It is doing well. We expect that by the end of Q3, we'll be running at above 18.5 million tonnes of capacity and as such, delivering the cost savings that we expect to see going forward for the long term.

Carlos De Alba, Analyst

All right. Thank you. That's very clear. And I appreciate the color.

Operator, Operator

Thank you. The next question is from Abhi Agarwal from Deutsche Bank. Please go ahead, your line is now open.

Abhi Agarwal, Analyst

Morning. Thank you for the call. I have a couple of questions, please. The first one is on Neptune. As Real just mentioned, the transportation costs for the second half have been impacted by the ongoing wildfires. But post that, once the situation normalizes, is it fair to assume that transportation costs step down over the course of next year to the lower end of the CAD 35 to CAD 40 per tonne range?

Don Lindsay, President and CEO

Go ahead, Real.

Real Foley, CFO of Steelmaking Coal

Yes. If you look at the previous guidance that we had, it was at CAD 36 to CAD 39 for this year. We're expecting to be at least in that range for next year and possibly lower, as the volume going through Neptune will be much higher than what we would have seen this year. To put this in perspective, we're expecting volume through Neptune this year to still be somewhere around 13 million to 14 million tonnes. Next year should be about 18.5 million tonnes. We will see the benefits of the fact that Neptune is a cost-based throughput, as opposed to a commercial rate that we’re paying at other ports.

Abhi Agarwal, Analyst

Got it. Thanks a lot, Real. The next one is also on the steelmaking coal division. Can you give us a bit more color on the growth CapEx and the stripping CapEx increase for the division? Regarding the RACE21 CapEx uplift, can you quantify the improvement in productivity and the reduction in costs going forward? Thank you.

Don Lindsay, President and CEO

Robin, over to you.

Robin Sheremeta, CEO of Steelmaking Coal

I believe you were referring to capitalized stripping. It's not just about the timing of our mining sequence activities. At times, we mine in areas with a higher strip ratio, which prepares us for future production. That really explains the change in capitalized stripping. In terms of quantifying RACE21 benefits, it’s somewhat challenging to provide specifics because it involves a wide range of initiatives. However, all our capital investments are contributing to strong short-term economic advantages. One example is that we have kept our cost guidance consistent despite various inflationary pressures related to fuel and other expenses. Therefore, we are observing a positive response from those initiatives, but I cannot provide detailed breakdowns.

Don Lindsay, President and CEO

What I would add on that one is, in the beginning of RACE21, we were reporting the incremental EBITDA gains quarter-to-quarter, but it became difficult to do that as we navigated through the initial stages of the pandemic, alongside price volatility. We’ll focus on the different projects themselves and report on the incremental benefits at year-end with the commodity prices at that time, so you can gauge the value brought to the table. Suffice it to say, that people have been excited by the progress we’ve made.

Abhi Agarwal, Analyst

Thank you. Thanks a lot for the color.

Operator, Operator

Thank you. The next question is from Brian MacArthur from Raymond James. Please go ahead, your line is now open.

Brian MacArthur, Analyst

Good morning. So, can I just go back to the capitalized stripping on the coal? That’s up $105 million this year. Are you being proactive because you have to ramp back production due to sales and are trying to get ahead of the game? Or is there anything structurally really changed? I thought we sort of got the stripping down to a lower level. If you could just elaborate on that? And second, Don, I don’t know if you can make any comments on project satellite.

Don Lindsay, President and CEO

Sure. Robin, you go ahead and I'll come back on satellite.

Robin Sheremeta, CEO of Steelmaking Coal

Nothing structurally has changed. We're still operating right around that 10:1 strip ratio. We are a little lower on production, and we have strong raw coal inventories, allowing us to do stripping in areas that won’t release as much coal at the front end, but we can set ourselves up strongly over the next couple of years. So it’s just shifting some of the stripping around.

Don Lindsay, President and CEO

So we have the capability; it allows us to make that move. As for satellite, we're starting to think of it more as a copper growth division. Satellite, of course, has five projects and on top of that, we have QB3 and U. In our last major investor conference, we published some details and IRRs and NAVs on the key projects. We divided it into near-term, medium-term, and longer-term options. The two near-term ones are Zafranal and San Nicolas. In Zafranal's case, we need to see how things land in Peru. Now that Castillo is president, we need to wait and see how his cabinet gets appointed into firm. We don’t think we’ll be in a position to move forward until the fall, as we see how things unfold in Peru. We own 80% of that project. One thing for sure is, if we partner in some way, we’ll be doing it to retain an interest in that copper exposure, whether it’s by taking back shares or selling less than 80%. That process is ready to go, but it’s clear we can’t start it until Peru gets further along in their transition. For San Nicolas, we’ve had a lot of interest in the project, and we're sorting through that with different proposals. You’ll see more of that in the second half of the year. We’re also making good progress on QB3 and hope to share narrowed options for that project as well. I think Fraser, if I'm not mistaken that's the last question. We’re past the hour. Is that right?

Operator, Operator

Yes. Don, you can give some closing remarks if you would like to.

Don Lindsay, President and CEO

I want to draw people's attention that we will be holding our Annual Investor and Analyst Day. It will be a virtual session on September 21. Please mark the date in your calendar, and we look forward to seeing you. We’ll send out notices shortly, and a press release with further details will be issued closer to the date. Just as a final comment, last week Red and I visited five of our sites and were at the port before the week before. We took a number of people with us, and I can only say I wish all of you could have been there to see the exciting projects that are going on. We have so much talent and so many bright, hardworking people who are passionate about what they're doing. It was just inspiring to see all the progress we're making. We hope to share that with you on Investor Day and look forward to speaking with you on September 21. Thank you very much everybody for joining us today. Bye now.

Operator, Operator

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