Ladies and gentlemen, thank you for standing by. Welcome to Teck's Q4 2022 earnings release conference call. At this time, all participants are in listen-only mode. Later, we will conduct a Q&A session. To join the question queue, press star then one on your touchtone phone. Should anyone need assistance during the conference call, they may signal an operator by pressing star then zero on their telephone. This conference call is being recorded Tuesday, February 21st, 2023. I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead.
Thanks, Ariel, good morning or good afternoon, everyone. Thanks for joining us for Teck's Q4 2022 conference call. Please note, today's call contains forward-looking statements. Various risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward-looking statements. Please refer to slide two for the assumptions underlying our forward-looking statements. In addition, we will reference various non-GAAP measures throughout this call. Explanations and reconciliations regarding these measures can be found in our MD&A and the latest press release on our website. We know there's a great deal to digest this morning. We've got four press releases, which you should now have. The first on the spin-off of the steelmaking coal business. Second on the sunset for the dual-class share structure.
The third on the dividend and share buyback that was announced. Finally, of course, on the Q4 results. In addition, there's a copy of our presentation to go with the releases. If you do not have all five documents, they are available on our website. It's www.teck.com/separation. To allow time to discuss the strategic announcements we issued this morning, Jonathan Price, our CEO, will begin today's call with a brief overview of the Q4 results. We'll shift to the focus of the three strategic announcements, again, the separation of Teck into two independent publicly listed companies, the related transactions with our steelmaking coal joint venture partners and major customers, Nippon and POSCO, and the six-year sunset for Teck's Class A shares. We will conclude today's session with a question-and-answer period. With that, I will turn the call over to Jonathan.
Thank you, Fraser, and good morning, everyone. Starting on slide five, we are pleased to have achieved several financial records in 2022, including a record CAD 9.6 billion in adjusted EBITDA. This was driven by strong commodity prices, particularly steelmaking coal, which reached new heights during the year. Each of our business units made substantial contributions to our profitability in 2022. In the Q4, the resilience of our teams was demonstrated as we successfully managed through severe winter conditions and short-term production challenges, specifically at Elkview, Highland Valley Copper, and Trail. However, we did fall short of consensus analyst estimates for Q4 adjusted EBITDA and EPS.
Variance was driven by lower than consensus gross profit, which was partly because of the extended maintenance activities at Trail during the quarter, higher than consensus non-operating expenses, and the timing of the removal of Fort Hills from analyst models. Importantly, strong profitability enabled us to deliver record cash returns to our shareholders in 2022, including CAD 1.4 billion in share buybacks and CAD 532 million in dividends while continuing to strengthen our balance sheet through the repayment of CAD 1.3 billion of debt during the year. We are adding to this with our announcement that the board has declared a dividend of CAD 0.625 per share to be paid on March 31st. This consists of our base quarterly dividend of CAD 0.125 per share and a supplemental dividend of CAD 0.50 per share.
The board has authorized up to CAD 250 million share buyback. These returns to shareholders include a distribution of 40% of the proceeds from the sale of Fort Hills received earlier this month in accordance with our capital allocation framework. These returns bring total approved returns of over CAD 2.4 billion since the start of 2022. Looking at Slide six, we made significant progress against each of the four pillars of our copper growth strategy in 2022. We advanced our flagship QB2 copper growth project despite COVID-related productivity impacts and challenging weather and subsurface conditions. It is currently ramping up, and we look forward to doubling our consolidated copper production when it reaches full capacity by the end of 2023.
We also advanced the partner value for our industry-leading copper growth pipeline through joint partnerships at San Nicolas in Mexico and at NewRange Copper Nickel in Minnesota. I will come back to QB2 and our progress in copper growth in just a moment. As I mentioned earlier, we closed the sale of Fort Hills in February. Our exit from the energy business provides a step change towards the rebalancing of our portfolio to low carbon metals. We continue to balance copper growth with cash returns to shareholders, as demonstrated by our record cash returns in 2022. As of February 20th, we have CAD 8.2 billion of liquidity, including CAD 2.8 billion in cash. We also made significant progress against our sustainability goals during the year.
We secured 100% clean renewable power at QB2. I'm especially proud that we recorded our lowest ever High-Potential Incident Frequency rate last year. Full details of our performance will be in our 2022 sustainability report, which will be released on March 16th. Coming back to our progress on copper growth on slide seven. Our priority for 2023 will be the ramp up of QB2. We are in commissioning of Line 1 at the concentrator and making final preparations to feed water the mill. Construction and commissioning are progressing across all areas of the project. Construction is essentially complete in the pipelines, power, and mining areas. We expect QB2 to reach full capacity by the end of 2023. Our CapEx guidance for the project remains unchanged from previous disclosure.
We expect QB copper production of 150 tons- 180,000 tons in 2023, increasing to a range of 285 tons - 315,000 tons in 2024-2026. It is important to note that recent changes to IFRS will impact unit costs of QB2 this year. We are now required to recognize sales proceeds and related costs associated with products sold during the ramp-up and commissioning phase through earnings, rather than capitalizing these amounts. Once QB2 is at full capacity, we expect average net cash unit costs of $1.40- $1.60 per pound. Turning to slide eight. We are also making meaningful progress on other projects in our industry-leading copper growth pipeline. We initiated a feasibility study at San Nicolas last year and expect completion in early 2024.
We are targeting submission of the EIA in the H1 of this year. Transaction with Agnico Eagle is expected to close in the Q2 of 2023. We are continuing to advance feasibility study for QB mill expansion, representing a throughput increase of approximately 50% to QB. EIA permit application was submitted to the Chilean regulator in early 2023, and the feasibility study is expected to be completed later this year. At Zafranal, we successfully completed a comprehensive public participation session and responded to the SEIA observations last year. We are expecting receipt of the SEIA permit in the H1 of this year. Just last week, we closed the NewRange Copper Nickel LLC transaction with PolyMet to jointly advance both NorthMet and Mesaba. At Galore Creek, completion of the pre-feasibility study is targeted for the H2 of the year.
Overall, our progress in 2022 positions us well for our very exciting next chapter. With that, we'd like to move from the Q4 results and discuss the transaction we announced today. The spin-off Teck steelmaking coal business to shareholders and the creation of two world-class independent companies. Starting on slide 10. This is a significant and exciting day for our company, our shareholders, and our people, as we take a major step forward to unlock value for Teck shareholders by establishing a path to separate our steelmaking coal and base metals businesses. As independent companies, Teck Metals and Elk Valley Resources or EVR, will have simplified portfolios, allowing for heightened strategic and financial focus, and the ability to pursue their own tailored capital allocation strategies.
We are confident this plan positions both companies for greater success while supporting a sustainable future for the benefit of our employees, communities, and indigenous peoples in the areas where we operate. Importantly, this separation will provide investors with choice for allocating their portfolios between two businesses and commodities with unique fundamentals and value propositions. We will realize our full potential at Teck Metals as a premier growth-oriented producer of critical metals essential for the energy transition. EVR will be a pure-play, high-margin steelmaking coal producer. Teck Metals will retain a significant portion of the steelmaking coal cash flows during a transition period to fund our copper growth. Concurrent with the separation, we announced agreements, two of our steelmaking coal joint venture partners and major customers to exchange their minority interest in the Elkview and Greenhills operations for interest in EVR.
Notably, Nippon Steel's CAD 1 billion cash investment implies an CAD 11.5 billion enterprise value for our steelmaking coal assets. Lastly, we also announced today a sunset of the dual-class share structure, which will modernize Teck Metals' governance structure. I turn into slide 11. I want to provide some context on the rationale for this transaction and why Teck is taking this step now. We recognize that the investment landscape has changed over the last 10 to 15 years. Previously, broad-based demand growth across all commodities to support global development drove investor preferences for miners with diversified strategies, who as a result, were often rewarded with premium valuations. In recent years, the investor basis for base metal and steelmaking coal businesses have become increasingly divergent. This proposed separation responds to that changing landscape.
It will allow investors to optimize their exposures to each of base metals and steelmaking coal through the creation of two world-class pure-play companies with compelling but different value propositions. Critical role in electrification and the energy transition will drive continued demand growth and premium valuation. High quality steelmaking coal will remain an essential input for steel production necessary to support decarbonization infrastructure over the long term. Into slide 12. Following the separation, Teck Resources will become Teck Metals, a premier growth-oriented base metal company. Teck Metals is focused on copper growth, and we are well-positioned to capitalize on the strong demand generated by the accelerating transition to a low-carbon economy. Foundation of our portfolio is our high quality, low cost and long life operations, which are located in well-established mining jurisdictions in the Americas.
We have significant growth potential and resource optionality through our industry-leading pipeline and copper development projects anchored by QB2. With the ramp-up of QB2 this year, we expect our copper production to double in the near term. The vast long life deposit at Quebrada Blanca can support multiple expansions. We currently have a little over 8 billion tons of reserves and resources at QB2, and the ore body is open in multiple directions for further potential increases. Beyond QB2, we have an attractive suite of additional projects diversified by geography, scale, and time to development. We have the potential to add more than 1.5 million tons of annual copper equivalent production to our current portfolio. Teck Metals has the potential to become one of the top 10 copper producers in the world.
Cash flow from the transition capital structure provides Teck Metals with continued funding to make prudent investments in growth, balancing disciplined returns to our shareholders and while maintaining our financial resilience. This transaction will unlock the full potential of our industry-leading copper growth portfolio, which is significantly undervalued relative to our peers. Into slide 13. EVR will be a pure-play, world-class Canadian steelmaking coal company. High quality, long life assets that are high margin operations focused on long-term cash generation and providing cash returns to shareholders. The existing Elk Valley operating team will continue to lead EVR and ensure continuity of operating principles and responsible environmental and social stewardship. The team will be led by President and CEO Robin Sheremeta, who is currently Teck's Senior Vice President of Coal.
CAD EVR will own four producing steelmaking coal operations in the Elk Valley of British Columbia and the recently expanded coal handling facilities at Neptune Terminals in North Vancouver. Its high quality, low emissions, hard coking coal product is sought after by the world's largest steelmakers as they work to reduce their own emissions. This is demonstrated by the agreements with Nippon Steel and POSCO we announced today. The significant participation by two of our major customers emphasizes the long-term and critical importance of high-quality steelmaking coal. As I mentioned earlier, the CAD 1 billion investment by Nippon Steel implies an enterprise value of approximately CAD 11.5 billion, further validating the EVR value proposition.
Importantly, underpinned by its extensive reserve base with over 30 years of reserve life, EVR has significant equity value accretion potential as the transition capital structure is paid down, as shown in the graph in the bottom right. I turn into details of the transaction on slide 14. At the highest level, the separation is a spin-off of Teck's steelmaking coal business to shareholders. Teck Metals will retain substantial access to steelmaking coal cash flows in the form of a royalty and preferred shares. The separation will be implemented by way of a distribution of the equity common shares of EVR to existing Teck shareholders. Shareholders will receive one common share of EVR for every 10 shares of Teck Resources, together with a share of a total cash distribution of CAD 200 million.
Shareholders can elect to maximize the amount of cash or EVR common shares they receive, subject to pro-ration through a Dutch auction process. In consideration for the transfer of the steelmaking coal assets to EVR will issue a gross revenue royalty and preferred shares together called the transition capital structure, in which Teck Metals will maintain an 87.5% interest. Further, in exchange for their minority interest in the Elkview and Greenhills operations and an additional CAD 1.1 billion cash investment by Nippon Steel, Nippon Steel and POSCO will own a combined 12.5% interest in both EVR common shares and the transition capital structure.
Payable quarterly, the royalty will be based on steelmaking coal revenue, generally equivalent to 90% of EVR's free cash flow and payable until the later of an aggregate amount of CAD 7 billion in royalty payments have been made or year-end 2028. EVR will also issue CAD 4.4 billion of redeemable preference shares with a 6.5% cumulative dividend. Teck Metals will continue to be listed on the Toronto and New York Stock Exchanges. EVR has applied for a listing on the TSX. By looking at the planned capital structure for EVR in more detail on slide 15, cash flow from operations will be prioritized for use to ensure the resiliency of operations, including capital investments and fixed annual contributions. Term environmental obligations. While the TCS is in place, 90% of free cash flow will go to the royalty and preferred share redemptions.
Once the TCS is extinguished, 100% of free cash flow is retained by EVR. The remaining free cash flow will go towards an initial base dividend of CAD 0.20 per share and supplemental shareholder returns made up of at least 50% of the free cash flow after TCS payments. Importantly, EVR will be well-capitalized at launch, with CAD 1 billion in cash and working capital at no debt. Teck Metals is expected to retain investment-grade credit ratings based on preliminary indications. Slide 16 provides detail on the sensitivity of the proceeds from the transition capital structure to changes in steelmaking coal prices. TCS is leveraged to hard coking coal prices to provide flexibility and resiliency for EVR, while also providing Teck Metals with continued access to steelmaking coal cash flows during the transition period.
This will allow Teck Metals to prudently invest in our industry-leading copper growth portfolio while delivering cash returns to shareholders. TCS is forecast to provide Teck Metals with not less than CAD 12 billion pre-tax proceeds over time. Because of the leverage to hard coking coal prices, a higher price environment would both accelerate payments and provide upside participation for Teck Metals through the royalty. Assuming a $185 per ton long-term benchmark hard coking coal price and a Canadian US dollar exchange rate of $1.30, TCS would be fully paid in approximately 11 years. If long-term prices stay at current spot levels, TCS could be paid in only seven years while providing CAD 34 billion in combined royalty payments and preferred share redemptions on a 100% basis over that time. Turning to slide 17.
Another important step announced today is the proposed six-year sunset for the multiple voting rights attached to the Class A shares of Teck. This will modernize Teck Metals' governance and provide a simplified and competitive terminal structure. On the effective date, each Teck Class A common share will be exchanged for one new Class A common share at 0.67 of a Class B subordinate voting share. Terms of the new Class A common shares will provide that on the sixth anniversary of the effective date of the dual-class amendment, all new Class A common shares will be automatically exchanged for Class B subordinate voting shares, which will be renamed common shares. At which point, the Class A common shares carrying multiple voting rights will be eliminated.
Based on the 7.8 million Class A common shares currently outstanding and the exchange premium, the additional Class B shares issued on the effective date of the amendment represents approximately 1% dilution. The separation transaction and the dual class amendment are subject to 66 and 2/3% approval by Class A and Class B shareholders, voting separately by class. The dual class amendment is subject to approval by a majority of Class B shareholders other than Temagami Mining Company, Sumitomo Metal Mining, and Dr. Keevil. Those votes are expected to be held at Teck's annual and special meeting of shareholders on or about April 26th, 2023. To Teck shareholder and court approvals, the separation is subject to customary conditions, including approval by the TSX.
We expect that the transaction will be completed in the 2nd quarter of 2023, at which time Teck Metals and EVR would begin operating as separate companies. Before we turn to Q&A, I want to start where I began. We could not be more excited about this transformational transaction that will unlock significant value for our shareholders. We strongly believe this transaction is the best pathway to separate and realize the full potential of the two businesses. It will increase the strategic and financial focus for both organizations, allowing the two entities to pursue tailored growth and capital allocation strategies to realize their full potential.
It will enable Teck Metals to unlock the value of our world-class copper growth portfolio and capitalize on the opportunities created by the energy transition, funded by steelmaking coal cash flows during the transition period, and position EVR as a pure-play, high-margin steelmaking coal producer with exposure to strong steel fundamentals and a significant equity value appreciation potential as the transition capital structure is paid. The separation will provide investors with the flexibility to optimize portfolio allocation between base metals and steelmaking coal, with each company providing exposure to different commodity fundamentals, capital return policies, and value propositions. The dual-class sunset will modernize Teck Metal's governance structure. As we move forward, our purpose and values, which are deeply embedded, will ensure health and safety and sustainability are at the forefront of everything we do across both businesses.
This includes our unwavering commitments to become net zero by 2050 and nature positive by 2030, and ongoing support to the people and communities where we operate for decades to come. With that, operator, please open the line for questions.
Certainly. To join the question queue, please press star then one on your touch tone telephone. You'll hear a tone acknowledging your request. We ask that you please limit yourself to one question and one follow-up. If you are using a speakerphone, please ensure you lift the handset before pressing any keys. If you wish to remove yourself from the question queue, you may press star then two. The first question comes from Orest Wowkodaw of Scotiabank. Please go ahead.
Hi, good morning, congratulations on the proposed transaction. I'm wondering, Jonathan, if you can give us some color in terms of some of the options that were being evaluated and why ultimately the spin-out was the chosen, I guess, avenue to separate the business versus just an outright sale of the coal business?
Orest, thanks very much for your question. You know, this is something that's been under consideration by the board of directors at Teck for a number of years now, and we've worked very hard through a range of alternatives to get to this point that we're announcing today. Ultimately, we decided that a separation via a spin-out of steelmaking coal business to Teck shareholders was the optimal means of creating the two great companies, Teck Metals and Elk Valley Resources. It sets both companies up for success. For Teck Metals, of course, this allows us to continue to use cash flows from the coal business to fund our unrivaled copper growth portfolio, and continue to develop and deliver the copper that the world is gonna need for electrification and decarbonization.
In the case of the steelmaking coal business or Elk Valley Resources, that will be a world-class standalone company with high margins, long life reserves and producing a product that the world needs for decades to come to produce steel required for the infrastructure for decarbonization. Ultimately, the creation of these two separate companies, we believe will give investors a choice to allocate funds within their portfolios based on their priorities and based on the different strategies and capital allocation frameworks that these companies will have going forward. Orest, it's been an extensive process as you would imagine, conducted over an extended period of time with all alternatives on the table. Ultimately, the board and the management team concluded that this was the optimal way forward.
Thank you. As a follow-up, on your slide 16 that talks about the illustrative sensitivities to the proceeds, how should we think about the sort of your OpEx and CapEx assumptions moving forward here? Does this assume kinda 23 guidance levels for both stay flattish moving forward, or does this assume kind of a, I guess, revision here to the norm with respect to CapEx and OpEx? I'm just wondering, you know, in terms of backing into the 11-year TCS payment on the base case.
I think what you'll see in that, Orest, and I'll start with referencing the coal prices used there that, you know, they reflect the near-term consensus prices over the coming years, and then we make a long-term assumption then of $185 per ton for hard coking coal. It would be fair to say that the operating costs somewhat follow that profile. In the near years, they reflect elevated costs as a result of the inflationary environment that we're working in. As we've said in our quarterly, we expect elevated costs to retain to remain through 2023 and of course, you know, potentially into 2024.
Beyond that, we would expect to see some reversion and reduction in unit costs in the steelmaking coal business, which of course is going to be required if we're gonna see the sort of reversion in coal prices that we highlight in the deck. From a capital expenditure perspective, we do expect, you know, elevated levels to remain through the current year and in the near years, in particular, as we continue to make heavy investments in water management and water treatment in the coal business. Beyond that, the investments in water management and treatment should decline, and we'd expect to see our sustaining capital revert back towards historical long-term levels.
Orest, that's the long answer I know, but we do see some continued elevated, unit costs and capital costs in the near years, but we do expect to see something of a reversion, in the years beyond that.
Our next question comes from Greg Barnes of TD Securities. Please go ahead.
Yes, thank you. Jonathan, can you talk about the timelines for all of this to really unwind? It said seven years -11 years on the TCS and six years on the sunset on the Class A's. Was there some reason you pushed them out that long, or is it just maximizing the opportunity?
Starting with the TCS, Greg, you know, what we're trying to achieve here is getting a balance between continuing to fund the copper growth portfolio for Teck Metals, and of course, to realize the full value of the EVR business, against, you know, the desire ultimately to separate the two companies. That's a balance that I think is struck well through the timelines here. Of course, as you note, ultimately, that will be a function of predominantly hard coking coal prices, but, you know, also the underlying cash flow generation of the EVR business. With respect to the sunset provision, on the Class A shares, ultimately, that was the subject of a negotiation between the majority Class A shareholders and a special committee of Teck's board of directors.
We think that the six-year sunset provides Teck Metals with good cover to continue to deliver on arrival copper growth pipeline, but ultimately provides a fixed timeline for reversion to a model capital governance structure.
Secondarily, both these transactions require votes from shareholders. Is either one of the votes dependent on the other or they go ahead independently of each other? Does one not approve of the other?
Yeah. The votes for the separation, Greg, and for the changes to the A-class share structures are independent of one another.
One will go ahead if the other is not approved.
That's correct. Yes.
Thank you.
Our next question comes from Lucas Pipes of B. Riley Securities. Please go ahead.
Thank you very much. Good morning, everyone. My first question is on the capital return profile of Teck Metals. You mentioned discipline. How do you envision balancing capital returns at Teck Metals with the desire to grow that business? Thank you very much.
Yeah. Thanks for the question, Lucas. Essentially the approach to capital allocation will remain unchanged at Teck Metals as it has been in Teck for the last number of years. We will continue to advance our copper growth pipeline. We will continue to invest in the development of those copper projects throughout the Americas. However, we will continue to focus on balancing that investment in growth against strong cash returns to shareholders, as well as maintaining the foundation of a strong balance sheet.
I think that's something we did very well through 2022, where we invested significant capital in QB2 and bringing that towards completion, whilst ultimately approving and announcing around CAD 2.4 billion of returns to shareholders, through a combination of dividends, buybacks, and also buying back CAD 1.3 billion of our debt, to improve the balance sheet foundation that we have. So that will remain unchanged. Just as a reminder, the way the capital allocation framework operates is that the first 30% of available cash flow is automatically returned to shareholders, by way of dividends and buybacks. Beyond that, the balance of 70% could also be returned to shareholders or could be allocated to the new growth options in the portfolio.
That will be the same allocation framework for Teck Metals going forward.
That's very helpful. Thank you. A quick follow-up on Nippon Steel and POSCO respectively will control 10 and 2.5% of both the EVR and TCS following the separation. Is that right?
Yeah. That's absolutely correct, Lucas. Look, we couldn't be more excited by the investments that we've had here from Nippon Steel and from POSCO. They are both world-class steelmakers. They have been long-term customers of our business. It's great to continue to have their involvement in the business here. In particular, you know, the CAD 1 billion of cash received from Nippon, I think is such a strong endorsement both for the quality and valuation of EVR, equivalent to an enterprise value of CAD 11.5 billion, but also the long-term outlook for the steelmaking coal business. As I said, we couldn't be happier with the investments that we've received.
Our next question comes from Brian MacArthur of Raymond James. Please go ahead.
Good morning, thank you for taking my questions. Can you just tell me what happened in this scenario? I realize there's a minimum CAD 250 in the coal business. I understand there's a sunset in 2028. What happens if, you know, coal business has a really tough year, go down to the CAD 250, so you don't kick out anything for the quarter, then the coal price goes up a lot? Is there a catch-up mechanism to get back that cash flow in the quarter you missed? Do you just plain lose it because you tap out at the low end? That makes sense to you, if you see what I'm saying.
Well, I wasn't quite sure, Brian, about the 250 that you were referencing here, but essentially, there wouldn't be a catch-up in the quarter. The, you know, the cash flows will flow to the TCS and to Teck Metals when available. Sorry, you mean the cash balance in?
Yeah, the cash balance, the CAD 250. Say it goes to CAD 150, right? Technically for a quarter, I guess you don't. I assume you pay the pref, but you don't pay the royalty. The next quarter, your cash balance goes up 'cause the coal price is volatile. Do you actually make up that lost payment, I guess, is what my question is, or does it just, you know, the time clock keeps moving to 2028 and then or the CAD 7 billion, and you either make it or you don't make it?
Yeah. Look, you would still operate on the CAD 7 billion of royalty and the CAD 4.4 billion of pref shares, they would be unchanged. I guess in the scenario you're painting, it would just take slightly longer to recover those cash flows, once the coal business has recovered its cash position back to CAD 250 million. There's no permanent loss of recovery of cash flows to Teck Metals. It really just extends the duration.
Perfect. Thank you. The second question, just to be very clear on the A shares, you're spinning out these new shares in coal. They don't have A's and B's, right? They're just common shares in the new vehicle, so there's no protective right there.
That's exactly right. They'll just be a single class of common shares at EVR.
Thank you very much. I'll get back in line.
Thanks, Brian.
Our next question comes from Timna Tanners of Wolfe Research. Please go ahead.
Hey, good morning, everyone. Thanks for the detail. Just trying to process it all still, but, wondered on the coal, spin, if you could talk a little bit more about, you know, could there be further partners, any offtake agreements, or is this just purely a stake? Why just Toronto listed? You know, is there any price embedded in the CAD 11.5 billion, or is that simply in this conclusion from the amount that was paid by or that will be paid by Nippon Steel?
Yeah. Thanks. Thanks for the question, Timna. I mean, this is just a straight spin of the coal business here. We don't have plans for further investment into that business, and we don't have plans for further offtakes associated with that business. As I said, we're incredibly excited by the investment we have secured from Nippon and POSCO, but nothing in the works beyond that at this point in time. You know, the CAD 11.5 billion enterprise value, of course, reflects the long-term outlook for the business based on typical production, operating costs and capital assumptions. Of course, there is an embedded long period of steelmaking coal price in that as well. We think it's an absolutely fair valuation for the business.
We were very happy to see Nippon Steel confirm that with their CAD 1 billion investment for 9%.
Okay, thanks. Just on the last question, just wondering if it would be just Toronto listed or why that decision? The second question was just on QB2, just to clarify, it sounds like there's really not any update on QB2 from when we heard from you last in terms of aside from the comment on the accounting for costs. Is there anything we're missing or is it exactly the same guidance as before in terms of volumes and cadence?
Yeah, sorry, I missed your question on the TSX. Yes, EVR will be listed on the TSX only. There's no magic behind that. That's just where we, you know, where we've elected to have that. You know, it's a Canadian company and a world-class mining company, and we think we'll trade very well on the TSX. With respect to QB2, that's in very good shape. We are in touching distance of first production. I'm gonna hand over to Red Conger briefly, who can just give you a slightly more update or detailed update on the status and when that first production is expected.
Yeah. Good morning, Timna . We're really in an exciting part of the project right now. We're commissioning all of the equipment from the seashore all the way up to the concentrator at elevation. We're really happy with the desalination plant and how that's running, and we're pushing water up the hill now to the concentrator. At the concentrator, we've run all of the motors, the big mills, so a lot of those pieces and commissioning require lengthy runs of eight, 12 hours. Consistently, we've done all of those successfully. There were a couple of items with key conveyor belts where one, we're resplicing it right now. We weren't happy with that configuration. Another conveyor where we're doing a little extra work on the tensioning mechanism. It's ready to go.
We've already crushed rock in the primary crusher and, you know, It's imminent, pushing rock through those grinding mills and getting all the rest of the equipment going. Very exciting time for us on the project.
Okay, great. Thank you.
Our next question comes from Emily Chieng of Goldman Sachs. Please go ahead.
Good morning, Jonathan, and thanks for taking my question. My first is just around the Teck Metals business. It sounds like there's going to be a lot of copper growth there in the portfolio, but how are you thinking about the zinc assets? Do they at some point become non-core, or is there still investment there ahead?
Hi, Emily. Thanks very much for that question. No, zinc remains absolutely core to Teck Metals going forward as it is today in the portfolio. What we've said about zinc is we don't expect that to be an area of growth to the same extent as we're focused on copper. Certainly we'd like to maintain our current levels of production there or thereabouts in Teck Metals going forward. Obviously, we have a, you know, large position in Antamina, which we expect to continue to operate for a long time. Red Dog, as we've said before, the current open pit mine comes toward end of life in the early 2030s. You know, we're working now on the extensions beyond that, which would involve us going underground at Red Dog.
That is something that, it looks very attractive given the quality of the resources, that we have there. We would fully intend to maintain the Trail smelting and refining operations that we have. It will remain very much a core business for us. It's a very strong cash generative business for us. You know, people would take it at about CAD 1 billion of EBITDA a year, and doesn't consume a great deal of capital. It's a solid contributor to the group and will continue to be a core part of Teck Metals going forward.
Great. That makes sense. A follow-up is just around the dual-class share structure collapse discussion there. During this sunset period, does this mean what does this mean for the voting rights of the Class A shareholders? Does this essentially preclude Teck from any M&A during this period?
There will be no change to the voting rights until the end of the six-year period. As is today.
Great. That's very clear. Thank you.
Our next question comes from Lawson Winder of Bank of America. Please go ahead.
Hi. Good morning, Jonathan and team. Thanks for the update and congratulations on an interesting transaction. I wanted to get your thoughts on the way that the Class A shares are being converted. Effectively, each class share is being converted, plus they're getting 0.67% of a Class B. Yeah, I'd love to hear your views on how that kind of valuation gets arrived at.
Look, ultimately, Lawson, that was a negotiation between the majority holders of the Class A shares and the special committee of the board. You know, it reflects consideration for valuable voting rights, essentially, that will be foregone through this sunset. But importantly, this represents only 1% dilution of Teck shares overall. In that context, we think that the valuation struck here benchmarks very well against precedents.
Okay. That's fair. I obviously understood that you can't say a lot there. I also wanted to follow up on QB2 and just get an idea for how the ramp-up to first concentrate production might look. From when you feed first ore to the mill to when you have first concentrate, like, how long will it take for that to flow through the process?
sorry. The timing from first ore to the mill to first concentrate?
Yeah, exactly. Thank you.
Brad, do you wanna add a bit of color to that?
Yeah, Lawson, think about the H1 of this year as the, as the ramp-up period, and, as we get toward the end of the year, the facility will be running at full speed. You know, that guidance range that we provided, would have copper production commensurate with that.
Maybe I'll ask another way. Do you expect to produce concentrate in Q1?
Yeah. We'll make first copper in Q1 for sure.
Okay. Okay, fantastic. Thanks for clearing that up.
Our next question comes from Carlos de Alba of Morgan Stanley. Please go ahead.
Yeah, thank you. Good morning, Jonathan and team. Just on the transaction, EVR, given the potential environmental and remediation considerations of that business, does the authorities in Canada have to approve the transaction, or have you discussed with them, you know, these the spin-off plans so that they are aware and there's no potential issues down the road? Second question is just to clarify, the EVR will start with no debt, right? So basically, debt-free, going forward.
Yeah. I'll just address the second question first. You're exactly right. EVR will be debt-free. Talking just about, you know, the environmental and external approvals you asked about. There are no required approvals for the separation. There is an approval required from the TSX for the listing. Aside from our shareholdings approval, we don't require anything from regulators or government. We have engaged with both provincial and federal government regarding this transaction, and we've also critically engaged with the indigenous groups who are present in the Elk Valley and very much involved with our steel making coal business there. We don't require approvals from them, of course, we will continue to maintain very strong and productive relationships with them going forward.
All right. Great. Thank you.
Our next question comes from Dalton Baretto of Canaccord. Please go ahead.
Thanks. Good morning, Jonathan and team, and congratulations. My first question is on the proceeds from EVR into Teck Metals. Jonathan, can you tell me if there are any restrictions on the use of proceeds in Teck Metals or do you have full carte blanche into how you use those funds?
Yeah, hi, Dalton. Thanks for the question. No restriction at all on the use of proceeds that Teck Metals receives from EVR. As mentioned previously, our focus will be to deploy those to assist with the growth of our copper portfolio while balancing returns to shareholders and maintaining a strong balance sheet. We will use those proceeds in a manner that's very consistent with our strategy.
Okay. Then when you're running Teck Metals, does the strategy remain the same, or will you look to be more aggressive on things like M&A to accelerate the growth profile?
Look, the strategy will remain the same, Dalton. The focus is on copper growth. The focus of our copper growth is through our organic pipeline of projects whilst returning cash to shareholders. No change in that respect. Of course, you know, we've maintained for a number of years what has been a key part of our strategy, which is to use cash flows from the steelmaking coal business to support that capital allocation strategy.
Okay, thanks. Maybe one last one. You know, if you're harvesting, call it 90% of the free cash flow.
Back into Teck Metals from EVR. Teck Metals doesn't really look very different as a business today when you consider where those funds are coming from. What kind of gives you comfort that you will rerate on the back of this?
I mean, one point of clarification there. While 90% of the free cash flow from EVR goes to the transition capital structure, 87.5% of that goes to Teck Metals and 12.5% goes to Nippon and POSCO, just for clarification there. We are creating two entirely separate businesses here with separate listings, with separate management teams and separate boards. We do recognize, of course, that, you know, through the transition capital structure, this is, as it's described, a transition, which will go on for a number of years until we see a complete separation or financial independence of the two companies.
Of course, we think, you know, as that is paid down, then that will create value accretion or equity accretion, for EVR, and will increasingly have, Teck Metals being as an entirely independent, base metals company.
Thanks, Jonathan. That's all for me.
Our next question comes from Christopher LaFemina of Jefferies. Please go ahead.
Thank you, operator. Thanks for taking my questions. I have a couple of questions about changing control provisions. I think I read somewhere that in the case of EVR and a change of control, the royalty payment that Teck Metals would receive would increase from 90%- 92.5% of the free cash flow. What happens in the event that Teck Metals becomes a potential acquisition target? Is there any change of control around Teck's ownership in EVR? Any sort of poison pill there that would reduce the value to a potential buyer of Teck if you were to be acquired? Sorry. The first question is around, am I right about the change in control on EVR? Secondly, change of control on Teck if Teck were to be acquired. Thank you.
You're correct on both fronts. In the first instance, there is a step up from 90%- 92.5%, and there would be no implications with respect to any acquisition or sale of Teck Metals.
Okay. Thank you.
Our next question is a follow-up from Orest Wowkodaw of Scotiabank. Please go ahead.
Hi. Thanks for taking the follow-up. Jonathan, just curious, given the the spin-out of the coal business, do you obviously have a lot of copper growth options internally. Do you see advancing those, some of those growth options quicker than you would have previously? I'm just wondering if, you know, given now you've got very clear focus on coal cash flow coming into the business to fund copper, whether we should anticipate that you may bring forward some of those internal copper projects?
Look, Orest , I mean, I think, you know, in one sense here, there's no real change to the strategy for Teck Metals, which is to develop that copper growth pipeline. This transaction per se doesn't signal a change or an acceleration of that. You know, of course, we're always looking at the optimal pace of development of the projects we have in the portfolio and the optimal sequence of those projects, recognizing that we can't do everything at once. You know, as you know well, permitting can be one of the greatest restrictions in terms of the timing for development. As I mentioned at the top of the call, you know, we're advanced our focus and study that permits across a range of our projects here.
Given, you know, the focus on critical minerals from a number of governments around the world, it could be that permitting timelines are reduced somewhat. As I mentioned, you know, this transaction in and of itself doesn't change the strategy because we've already been very focused on the development of the project portfolio.
That's perfect. Thanks. Can you just remind us what's your current plan for the timing of the QB Mill Expansion?
We have submitted a permit application this quarter, and we are in the process of completing a feasibility study, which will be done by the end of this year. Therefore, we've said that, you know, there's the potential for an approval for the QB mill expansion in early 2024.
Great. Thank you so much.
Welcome.
Our next question comes from Alex Terentiew of Stifel. Please go ahead.
Yeah, good morning, everybody. I know there's a lot of details in here, and I so appreciate that you guys did do in this call earlier today. Question for you on the Teck coal spin out EVR. I know you mentioned that you expect Teck Metals to retain investment-grade credit rating, how do we think about or how will the cash flows from that be allocated to Teck? I'm just trying to think of in terms of, you know, EBITDA calculations and any covenants on your ratios that we could think of for Teck going forward.
Yeah. I will invite our CFO, Crystal Prystai, to just talk a little bit about how those cash flows will be treated. We have had received preliminary indications from the three credit rating agencies that cover us, Fitch, Moody's and S&P. Their preliminary indications are that we will maintain investment-grade ratings for Teck Metals. I'll just let Crystal briefly explain how those cash flows are treated.
Hi, Alex. Thanks for your question. Just in the context of the treatment on our financial statements, maybe that's the most important place to start. We will, in Teck Metals, deconsolidate our interest in the coal business unit on closing of the transaction. In our unadjusted profit figures, you won't see the results from the coal business unit reflected there. Given the recurring nature of these cash flows coming into Teck Metals, we are planning to adjust our EBITDA for both the royalty and the prop share dividends and redemption. You should expect to see those coming through our adjusted EBITDA calculations as well as adjusted ETF, and you could model it that way.
Okay, great. Thank you.
Our next question comes from Lucas Pipes of B. Riley Securities. Please go ahead.
Thank you very much, Operator. Thank you for taking my follow-up question. I believe Nippon and POSCO are receiving rights to the coal. Is that in exchange for their prior interest? How should we think about those off-take rates? Thank you very much.
Yeah. Both, you know, Nippon and POSCO have been joint venture partners in Elkview and POSCO as well in Greenhills. It's a part of what's happened here is a conversion of those interests to their interests in equity in the transition capital structure here. They will retain off-take agreements, long-term off-take agreements with EVR. I won't talk about commercial terms of those contracts, but, you know, substantially similar to the sort of agreements that we've had with them in the past. No significant change there.
All right. I appreciate it. Thank you. Again, best of luck.
Thanks, Lucas.
This concludes the question and answer session. I will now hand the call back over to Mr. Phillips for closing remarks.
Thanks, Ariel. Thanks, everyone. Just before I hand it over to Jonathan for his closing remarks, just wanna say that again, lots to digest. I'm sure there will be plenty of other questions. Please reach out to me or Helen or indeed anybody on the IR team. We'll be happy to do our best to get in touch with you and have a conversation, and we will be delighted to help out. With that, Jonathan, over to you for any final remarks.
Yeah. Thanks, Fraser, and thanks everyone for joining the call today and for the good questions. You know, we at Teck couldn't be more excited about this transformational transaction that we've announced today. We believe it will unlock significant value for our shareholders. We do believe that this transaction structure is the best pathway to separate and realize the full potential of both of these great businesses. As I mentioned, it will increase strategic and financial focus for both organizations, allowing the two entities to pursue tailored growth and capital allocation strategies into the future. Teck Metals, this is about unlocking the value of a world-class copper growth portfolio and capitalizing on the opportunities presented by the energy transition, continuing to be funded by steelmaking coal cash flows through the transition period.
Of course, we set up EVR as a pure play, high-margin steelmaking coal producer exposed to strong long-term steel fundamentals, and we have the potential for strong equity value accretion, as the capital structure is paid down. Critically, this separation provides our investors with flexibility to choose and optimize their portfolio allocation between Teck Metals and steelmaking coal, given that both companies provide exposure to different commodity fundamentals and capital return policies. Finally, of course, the dual-class share structure will modernize Teck Metals' governance structure. With that, thank you very much. We look forward to following up this conversation with you beyond this call. Yes, once again, thank you. Very exciting day for Teck.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.