Ladies and gentlemen, thank you for standing by. Welcome to Teck's third quarter 2020 earnings release conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question- and- answer session. This conference call is being recorded on Tuesday, October 27, 2020. I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead.
Thanks very much, Melanie. Good morning, everyone, and thank you for joining us for Teck's third quarter 2020 results conference call. Before we begin, I would like to draw your attention to the caution regarding forward-looking statements on slide 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. We'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.
Thanks very much, Fraser, good morning, everyone. Thank you for joining us this morning. I will begin on slide three with our third quarter highlights. I will be followed by Ron Millos , our retiring CFO, who will provide additional color on our financial results. We will conclude with a Q and A session where Ron and I, and several additional members of our senior management team, would be happy to answer any questions. Before I start, I do want to say that after 25 years with Teck, this is expected to be Ron's last quarterly conference call. I just want to personally, and on behalf of our whole team, thank Ron for his many outstanding contributions to Teck over his 25 years with the company. We wish him the very best in his retirement. Thank you, Ron.
Jonathan Price , Teck's new Senior Vice President, Chief Financial Officer, will join me in presenting our fourth quarter 2020 results in February. These continue to be what I guess many have called unprecedented times as the world adapts to a new normal with COVID-19. Despite the ongoing challenges, our financial performance recovered strongly from the second quarter that clearly was very significantly negatively impacted by COVID-19. Despite the decline in realized steelmaking coal prices that you will have seen, we did post gains in profitability and operating cash flows. We made significant progress during the quarter on the execution of our major projects, including advancing the Neptune Terminals upgrade in line with the schedule and the budget, and also safely ramping back up construction at our QB2 project.
We've also made progress in reducing costs throughout the supply chain improvements in our cost reduction program and as a result of RACE21. Our adjusted site cost of sales in steelmaking coal is expected to be below CAD 60 per ton in December, or around $45 per ton at the mine site. Across our business, our people have adapted to the new normal of operating through the pandemic, staying focused on health and safety while continuing to responsibly produce materials that are essential to the global economic recovery. Turning to our financial results on slide four. In the third quarter, revenues were CAD 2.3 billion, and gross profit before depreciation and amortization was CAD 703 million. Bottom line adjusted profit attributable to shareholders was CAD 130 million, or CAD 0.24 per share on both a basic and a fully diluted basis.
While these results reflect the negative effect of COVID-19 on the prices and sales of the products compared to the third quarter last year, they also represent a strong recovery from Q2 2020, which was significantly negatively impacted by the pandemic. I'll now run through some key updates for the quarter, starting with our steelmaking coal business on slide five. We are continuing to successfully restructure our cost base due to our planned decline in strip ratio and due to the Elkview plant expansion and due to the closure of our Cardinal River operations as well as our cost reduction program, CRP, and our RACE21 programs. Our adjusted site cost of sales are expected to decrease over the remainder of 2020 and to be below CAD 60 per ton in the month of December. Our strip ratio was 11.4 to 1 in 2019 last year.
We expect it to decline to around 10 to one throughout the fourth quarter and into 2021. We completed the major expansion of our Elkview Operations plant in Q2, despite the challenges of the pandemic. That plant now has the capacity to produce 9 million tons annually, which enables us to replace higher cost production from our Cardinal River operations with a higher quality coal produced at a lower cost than our Elkview Operations. At the same time, we're nearing the end of the major capital deployment phase for Neptune, which will end next quarter, and the water treatment facilities at both Elkview and Fording River. That's three capital projects that will be coming to an end by the end of next quarter. Turning to our Neptune upgrade project on slide six.
We continue to advance the project in line with the previously announced capital estimate and schedule. The planned five-month shutdown of terminal operations was successfully completed in September, and all the different things that we wanted to achieve and accomplish during that five months were achieved. Major equipment deliveries are now complete with all equipment currently on site. A number of us went to have a visit a week or so ago to see the new ship loader now in place, and we were thrilled to see it arriving on the special ship called Jumbo on October 8th as it sailed into Vancouver's Lions Gate Bridge. You see a picture here, and I tell you, it was a beautiful sight. The Neptune upgrade will of course secure for us a long-term, low-cost, and reliable supply chain solution for our steelmaking coal business.
We expect construction to be completed next quarter, that's Q1 of 2021, and the terminal capacity to increase as the new equipment comes online. It does start to increase before the quarter is over. We made solid progress during the quarter of our QB2 project on slide seven. QB2 is a key component, of course, to Teck's copper growth strategy. It's a big part of us rebalancing the portfolio, and copper will ultimately be our largest business. We currently have over 7,000 people on site and are targeting over 9,000 people on site by the end of the year. All major contractors have remobilized, and work is progressing well across the project, and it is in line with our ramp-up plan.
Construction of additional camp space that's being built to manage the COVID-19 impacts will provide additional capacity as it begins to come online in Q4 of 2020, this quarter. We are aiming to achieve overall project progress of approximately 40% by year-end. As a result of COVID-19, we expensed CAD 107 million of costs related to the project's suspension of construction and CAD 23 million of interest that would have otherwise been capitalized for the project in the third quarter. To the end of September, we've expensed total costs of CAD 272 million and CAD 103 million of interest that would have been capitalized for the project. We recommenced capitalization of borrowing costs on the QB2 project in the third quarter, consistent with the return to active construction on the project.
Assuming the ramp-up proceeds through the fourth quarter as currently planned, the aggregate estimated impact from the suspension is expected to be approximately $350 million-$400 million U.S., excluding interest, with a scheduled delay of approximately five to six months. As well, the additional camp space has an incremental cost of $45 million U.S. above that. First production at QB2 is expected in the second half of 2022. Turning to slide eight. At Teck, our approach to safety and sustainability are core to the success of our business. Robust COVID-19 protocols remain in place at all of our operations. We continue to focus on preventative measures and controls, and compliance, and integration into our new normal. Year to date, our high potential incident frequency is 31% lower than the same period in 2019 at 1.1 per million hours worked.
In September, together with the AES Corporation, we entered into a long-term power purchase agreement to provide 100% renewable power for our Carmen de Andacollo operation in Chile. This agreement is expected to eliminate approximately 200,000 tons of greenhouse gas emissions each and every year. It is our goal to be the leading diversified mining company when it comes to sustainability and ESG rankings and performance. I'm proud to say our efforts on sustainability have been recognized by a number of organizations. In 2019, Teck was named to the Dow Jones Sustainability World Index for the tenth consecutive year, and we were the top-ranked mining company in the index. We are also the top-ranked diversified metals mining company on Sustainalytics and are highly ranked on MSCI in comparison to our peers. We are an ICMM member company.
I just finished three years as chair. We have been recognized as a strong performer by ISS, FTSE4Good, and others. We were proud to announce yesterday that Teck has been named to the Forbes World's Best Employers 2020 list, which is an employee-driven ranking of multinational and large companies from 45 different countries. They looked at topics including COVID-19 response and willingness to recommend an employer to friends or family. Now, while we are, of course, proud of our performance, we do know that there is more work to be done on ESG issues as they become much more pertinent to many stakeholders. I will now run through highlights of our third quarter by business unit, starting with steelmaking coal on slide nine. Third quarter steelmaking coal sales were 5.1 million tons, which was within our guidance range.
We had planned mining and production outages at our operations in the third quarter to correspond with anticipated reduced demand related to COVID-19. We reduced the logistics capacity in accordance with that by using the planned five-month shutdown at Neptune Terminals, and that was completed in September. As a result, our Q3 production of 5.1 million tons was 22% lower than the same period last year. That affects costs as you would expect. Our adjusted site cost of sales at CAD 67 per ton reflected that lower production and lower sales volume. Transport costs were higher than the same period a year ago, primarily due to the lower volumes through Neptune during the planned five-month shutdown of terminal operations. On August 25th, we announced that we signed an agreement in principle with Westshore Terminals for the shipment of 32.25 million tons starting on April 1st in 2021.
Together with the Neptune upgrade and our contract with Ridley Terminal, this will provide much greater flexibility and optionality for Teck shipments and contribute to reduced costs and improved performance and reliability throughout our steelmaking coal supply chain. Looking forward, we expect strong sales of 5.8 million-6.2 million tonnes in Q4 of 2020, up from the 5.1 in Q3. We expect our adjusted site cash cost of sales to decrease over the remainder of the year and to be below CAD 60 per tonne in December, supported by the restructuring of the cost base in our steelmaking coal business unit. Turning to our copper business unit. Our third quarter results are summarized on slide 10. Antamina performed well at full production rates in the quarter, following a temporary suspension of operations due to COVID-19 that happened in Q2 of 2020.
Production was lower than the same period last year at both Highland Valley and Carmen de Andacollo. At Highland Valley, production was impacted by harder than expected ore, following a change in mine sequencing earlier in the year in support of reduced waste movement, as well as maintenance challenges. Production is expected to be higher in Q4 due to increased mill throughput and higher ore grades. The decrease in Andacollo was primarily the result of lower ore grades, which were expected in the mine plan, and also reduced mill throughput due to longer than anticipated maintenance shutdown. Notwithstanding the reduced production where you would expect cost to go higher, we actually had significantly lower total and net cash unit costs in the same period last year, this was supported by our cost reduction program and the contribution from RACE21.
Looking forward, we've lowered our copper production guidance range for the second half of 2020 to 140,000-155,000 tonnes, which is down 5,000 tonnes from before, and that's due to the lower production at Highland Valley. Our zinc business unit results for the third quarter are summarized on slide 11. As a reminder, Antamina's zinc-related financial results are reported in our copper business unit. Red Dog sales of zinc and concentrate were 175,300 tonnes, which was in line with our guidance range. Red Dog zinc production was significantly improved from Q2 2020. Climate change, I have to say, is affecting site conditions, which limited our ability to discharge treated water. However, operating restrictions due to excess water were resolved in the third quarter, and we completed a raise at the tailings facility earlier than originally planned, which provided us with additional flexibility for water storage.
We also installed a new water treatment plant to increase the water discharge capacity when permit limitations allow. At Trail, refined zinc and lead production was higher than the Q3 of 2019. Looking forward, we continue to expect to ship all concentrate during the Red Dog shipping season. In fact, it will complete in just a matter of days. The repair to the loading arm on one of the two shipping barges was completed by the end of July. We expect sales of Red Dog zinc and concentrate of 145,000 to 155,000 tonnes in the fourth quarter, which reflects our normal seasonality. We have lowered our guidance for our net cash unit costs in the second half of 2020 to $0.30-$0.40 USD per pound, from previously $0.40-$0.50 USD per pound. That's definitely headed the right direction.
Our energy business unit results for the third quarter are summarized on slide 12. Our realized prices and operating results were significantly impacted by both lower production and a material decline in benchmark oil prices compared with Q3 of 2019. As previously announced, the Fort Hills partners safely and efficiently reduced operations to a single train facility in the second quarter, which helped reduce negative cash flows in the third quarter in light of COVID-19 and the very low Western Canadian Select prices. Production was also negatively impacted by extreme wet weather, which resulted in soft pit conditions starting in June and continuing into July. Looking forward, the Fort Hills partner decided to restart the second train and to ramp up production to around 120,000 barrels per day by the end of the year, and that was earlier than had previously been anticipated.
On October 23rd, just five days ago, the government of Alberta announced that it will not issue monthly production limits for the December 2020 production month. In December 2020, that means that operators will be able to produce above their previously issued production limits without having to purchase curtailment credits or to apply for special production allowances. The curtailment rules have been extended to December 31st, 2021. However, the government of Alberta will only issue ministerial orders to limit production when they feel it is needed. If required, ministerial orders will be issued with 30 to 60 days notice to allow time for producers to respond and plan accordingly. The Fort Hills partners continue to monitor the business environment and assess plans to maximize cash flow, including the potential to increase production and lower costs.
We've lowered our guidance for adjusted operating costs in the second half of the year to CAD 35-CAD 38 per barrel of bitumen, down from the previous CAD 37-CAD 40 per barrel. Of course, what we're all looking forward to is to getting to that level that we were in in December 2018, which was the last month when Fort Hills was allowed to run at full capacity and in that month it averaged 201,000 barrels a day at a cash cost of CAD 23 per barrel. We're looking forward to getting back there sometime in the future. With that, I'll pass it over to Ron Millos for some comments on our financial results. Ron, over to you.
Great. Thanks, Don. I'll speak to the changes in our cash position during the third quarter. That's on slide 13. We received net proceeds of CAD 540 million from debt in the quarter, and that was made up of net draws of $49 million on our revolver and $341 million on the QB2 project financing facility. We generated CAD 390 million in cash flow from operations. We spent CAD 589 million on capital projects, and that included CAD 246 million on QB2 and CAD 89 million on the Neptune facility upgrade. Our stripping activities used CAD 110 million, and that was lower than our Q3 2019 due mainly to the planned mining and production outages at our steelmaking coal operations in the quarter. We paid CAD 104 million in interest and financing charges and CAD 54 million on expenditures on investments in other assets.
Lease payments totaled CAD 41 million. We paid CAD 27 million in our regular CAD 0.05 quarterly base dividend. After these and other minor items, we ended the quarter with cash and short-term investments of CAD 403 million. Turning to the impact of COVID-19 in our business on slide 14, as Don mentioned earlier, while our third quarter financial results reflect the negative effect of COVID-19 on the prices and sales of our products compared with the same period last year, we saw a strong recovery compared with Q2 of this year, which was significantly negatively impacted by the pandemic. In the second quarter, all of our mines had recovered from COVID-19 production disruptions. In the third quarter, we expensed CAD 130 million related to COVID-19 on a pre-tax basis, which is half of the amount expensed in Q2.
Of course, we expensed CAD 107 million in other operating income expenses related to the temporary suspension of construction and remobilization at QB2 project and CAD 23 million in additional finance expense representing interest that would have otherwise been capitalized if construction on QB2 had not been suspended. While we have certain increased costs associated with operating our mines at full production in the new normal environment with COVID-19, such as medical testing, safety equipment, supplies, and additional transportation and accommodation costs for social distancing, they are costs of operating in this environment and are not adjusted for in adjusted earnings calculations. On a year-to-date basis, we expensed a total of CAD 434 million related to COVID-19, and that included CAD 103 million of interest that would otherwise have been capitalized.
We recommenced capitalization of borrowing costs in the QB2 project in the third quarter, and that was consistent with our return to active construction on the project. Barring any further negative developments around COVID-19, we do not expect significant COVID-19 specific costs on a go-forward basis. Slide 15 summarizes the latest results of our cost reduction program. To the end of September, we've achieved approximately CAD 270 million of operating cost reductions and CAD 500 million of capital cost reductions. These reductions are against what we were expecting to spend back at the end of June 2019 when we started looking for cost reduction opportunities. We've made pretty good progress against our targeted reductions of CAD 1 billion. The reductions are spread throughout the company with the majority at the operating business units.
It also includes satellite projects, the exploration projects, our IT systems, and our admin and marketing costs throughout the company. The realized and remaining targeted cost reductions from our cost reduction program have been included in our guidance since we announced the program in October last year and are reflected in our current guidance as well. Turning to our financial position on slide 16. We have a strong financial position with current liquidity of CAD 6.8 billion, and this includes our cash balance and the amount available on our $5 billion of committed revolving credit facilities. $3.8 billion is available on our $4 billion facility that matures in the fourth quarter of 2024, and our $1 billion sidecar that matures in the second quarter of 2022 is undrawn.
Both of these facilities do not have any earnings or cash flow-based financial covenants, do not include a credit rating trigger, and do not include a general material adverse effect borrowing condition. The only financial covenant is a net debt to capitalization ratio that cannot exceed 60%, at September 30th, that ratio was 23%. For our $2.5 billion limited recourse project financing facility for QB2, we've currently drawn about $860 million, of which $341 million was drawn in the third quarter. Going forward, project funding will be from the project financing until the project reaches a specific ratio of project financing to total shareholders funding, Teck's next contributions to project capital for QB2 are not expected until the first half of 2021. We have no significant note maturities prior to 2030, investment grade ratings from all four of the credit rating agencies.
Overall, our financial position is in good shape to allow us to continue to weather the challenges around COVID-19 and to complete the Neptune facility upgrade and the QB2 project. With that, I will turn it back over to Don for his closing comments.
Thank you, Ron. To wrap up on slide 17, despite the ongoing challenges, our financial performance did recover strongly in Q3, following a second quarter that was obviously negatively impacted by COVID-19. We believe that Teck has quality operating assets in stable jurisdictions, and we are advancing a corporate growth strategy that is funded and is being implemented. We continue to progress our four key priorities to create shareholder value and position Teck for decades to come. Those are the QB2 project, RACE21, Neptune, and our company-wide CRP, Cost Reduction Program. We believe Teck is well-positioned to generate shareholder value as the world adapts to the new normal with COVID-19. With that, we would be happy to answer your questions.
I should say, like many of you, most of us are on phone lines from home, so please bear with us if there is a delay while we sort out who will answer each question. Now, operator, over to you for questions.
Thank you. Please press star one at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. The first question is from Orest Wowkodaw of Scotiabank. Please go ahead, your line is now open.
Hi, good morning. Don, I was hoping we could get a bit more color on the cost guidance in coal. I find the languaging in the MD&A fairly confusing because on one hand, you say that you expect onsite costs in coal to exit this year sub CAD 60 a ton. In the disclosure, it also talks about kind of preliminary 2021 site cash guidance to be in line with H2 levels, which are CAD 60-CAD 64. Can you help explain how we should interpret that?
Yeah. I'll turn it over. Turn it over.
Robin, in just a minute. You should have the context that we haven't finished our budgeting for 2021 yet, so we didn't want to put out formal numbers very specifically until we've done that. That process is ongoing. There are always a number of different factors with any operation that come at you throughout the course of the year, so we want to make sure that we've examined all those things before we put out very specific guidance. For sure, the cost structure of the business has been materially reduced. While it'll be plus or minus a couple of bucks going forward, we are at a level that's substantially lower than it was before, and the starting point going into 2021 is pretty good. With that, Robin, over to you.
You bet. Thanks, Orest. As Don said, we're going through a budget process right now. There's a lot of things like haulage and there's plant maintenance outages that normally occur in Q2 and Q3 that we have to take into account. We've also got two new water treatment facilities coming online this year with Fording River South going to be completed at the end of Q1, as well as the Elkview Saturated Rock Fill, which is just going online now. Those things all have to be rolled into a budget. I'll give you a few important data points that'll help you kind of frame a view around this. Our strip ratio, and this is a key cost driver, we're coming down to around 10:1 through this last quarter.
We will go through 2021 at that 10:1. We see ourselves over the next few years staying at 10:1. Again, that's an extremely important cost driver for us. You remember our strip ratio through 2019 was 11.4:1. It's going to be around 11.1:1 through 2020. Now that we've got the expansion in Elkview behind us, we see that strip ratio stabilizing. That's one really important data point. Don also mentioned the closure of Cardinal River. From a structural point of view, that was our highest cost operation, lower quality coal, and that tonnage and more actually has been created through the LP expansion, which is now successfully executed, and we're running at a pace of 9 million per year at that operation. That's one of our lowest cost operations in the business and at a higher quality coal.
That's another factor you have to take into account because it's both cost and it gives us greater value on the product side. The other thing that we probably haven't talked much about, but through this time, through the COVID time, we've maintained our mine plans and the key assets. We've got healthy raw coal inventories now going into 2021. If you remember, that was one of the constraints that we actually suffered through here over the last couple of years when we were driving to produce into the high price market. That's behind us. We now have healthy raw coal inventories. Our mine plans are very stable. That's why we're able to maintain the 10:1.
The other piece of the puzzle is we've had trouble with full clean coal inventories as well, and three of the four operations now are pretty much down to stable levels, and that means that's no longer a constraint for us. Another reason we've got a pretty strong base going into 2021. I guess I'll end on one last positive note. We're driving RACE21, that strategy through coal, and we're seeing significant value right now. Just to illustrate it, we saw record high mine productivities in Q3 above anything we've seen previously. That'll be sustained forward, and that's the kind of structural change that's occurring that supports a very strong cost base going into 2021.
Again, I don't want to get specific numbers out at this point as we go through the budget, but suffice to say, we're operating off a much, much better cost base than we have through this two-year transition phase.
Robin, just on that, for all the reasons you cite here, I guess I'm not understanding why costs are not going to remain below CAD 60 a ton in 2021.
Well, Q4, one aspect about Q4 is we don't have plant shutdowns in that quarter. It's typically a quarter where that's all behind us, and we on average will operate at a lower cost normally in Q4 than we do over a full year. Quarter- to- quarter, you're going to have different impacts on your cost base. That's why we're confident we'll end the year below CAD 60, but that doesn't mean that every quarter forward in 2021 will be at that same level.
Okay. Thank you very much.
As you can assume, it is certainly our objective to stable those CAD 60 if we can, if it's at all possible, but we don't want to over-represent right now until we're finished the budgeting process.
Yeah. Okay. Thanks, Don.
I might add just on that haul truck productivity comment that Robin made, that we actually had really high record haul truck productivity during spring runoff. For those of you who've ever been a foreman in the pit and seen what the road conditions are like at that time of year, that's an incredible statement to be able to make. RACE21 is certainly helping us a lot. Next question, please.
Thank you. The next question is from Carlos de Alba of Morgan Stanley. Please go ahead.
Hi, good morning. Thank you. My question, maybe Don, is on Highland Valley Copper. Just on two points there. First, given the guidance for the fourth quarter, is it expected then that the hard ore that you will process in Q3 and the resulting in lower output, is a thing of the past and going forward, that is normalized and production should stabilize beyond the fourth quarter guidance that was provided? Also on that operation, the molybdenum production in the third quarter declined significantly year-on-year due to particularly lower grades. What can you comment in terms of the moly grade going forward at Highland Valley? Thank you.
Okay. I think both of those questions can go to Dale Andres, please.
Thanks, Carlos. Just to start on the first question with hardness. Basically, there are two factors that led us to change the mine plan and the sequence for the year. One, due to reduced stripping around COVID in the second quarter, where we focused more in on the valley pit, and as well as some geotechnical constraints that limited our flexibility for the various ore sources that we feed to the mill. We found ourselves in a particular area in the pit that was harder than expected, an area that we didn't quite have as much hardness data around, and that's the reason for the lower guidance for the quarter. We do expect higher production and throughput going into the fourth quarter and into 2021 as well.
While we won't completely be out of that area in 2021, we do have other areas that will blend and mix with softer ores. We don't anticipate to have the same kind of issues as Q3 going forward. Just on moly, again, it's due to the change in mine sequence. Originally, more ore is planned from other areas in the mine, and when we change the mine sequence, that directly affects the moly production and grades. Again, we don't anticipate that as low as we've had for moly. We do anticipate that strengthening going forward as well. We'll issue updated guidance for 2021 on Q4 as we finish the budgeting process as well.
Excellent. Thank you very much. Good luck.
Thanks.
Thank you. The next question is from Curt Woodworth of Credit Suisse. Please go ahead.
Thank you. Good morning. Question on coking coal. Curious what you're seeing on the demand side, given some of the port restrictions announced in China. It seems like if you look at the domestic price in China, it's up about CAD 15 a ton to CAD 200, yet the Australian price has done a quick U-turn, given they're out of the market. It seems like the arc is extremely wide, and potentially India is coming back to the market. Just curious what you're seeing with respect to that, and do you have any sense at a consumer level how you're viewing coking coal inventories? Because obviously, there's limited data for us to look at. Thank you.
Thank you for your question. I thought this would actually be the first question of the day. There are some exciting developments there, but I'll turn it over to Réal Foley .
All right. Thanks, Curt. Maybe I'll start with your second question with respect to inventories. You'll recall that steel production was actually turned down and blast furnaces were shut down a lot quicker with the pandemic. As a result of that, inventories of steelmaking coal were also brought down very quickly. Going into this quarter, and from the second half of the third quarter, really, we've seen blast furnaces restart again. As those blast furnaces are restarting, the steelmakers are trying to replenish inventories as well. Orders have been trending up, and that is reflected in our Q4 sales guidance.
Just a note of caution on that, demand is not yet back to pre-COVID levels. Just want to qualify that also. Your first question on what is happening with the coal market overall and the impact of the heightened seaborne import restrictions. The first thing, I guess, to say is there's been no official announcement on those restrictions, but they appear to be mainly directed toward Australian coal. We're continuing to see China steel production run at record high levels. You're quite right, the steel makers require steelmaking coal. We are starting to see a few sales to China above original expectations, and that is coinciding well with our operations ramping up through the quarter, as Robin was just explaining. When we look at China per se, there's three sources of steelmaking coal for China.
Seaborne market is one, Mongolia is another, of course, domestic coal, where the majority of the coal comes from. On the seaborne side, the impact of the pandemic has reduced supply from the main supply areas, Australia, U.S., Canada, and Mozambique are all down, and it's a total of around 20 million tons August year to date. Australia alone is down around 10 million tons August year to date, that annualizes roughly at 15. When we look at IHS Markit data for October, steelmaking coal vessel loadings are actually trending down somewhere around 4.5 million tons month-over-month. There is likely an impact from that reported ban. The other point to make is there is vessel queues at the China ports.
Around 6 million tons of coal is sitting in queues right now at the port. We have not seen any Australian cargoes that are waiting at Chinese ports being diverted to other ports. As you mentioned, with the coal prices having come down quite a bit, actually close to $30 since the beginning of October, it's quite difficult to resell some of those cargoes as the loss would be quite large on top of the extra cost to move the coal. There is also another part to this. If we look at December 2019, the stats were showing that only around 120,000 tons were imported into China from the seaborne market at that time. However, again, IHS Markit data shows that around 4.8 million tons of coal was offloaded in December of 2019, did not make it into the stats until early 2020.
That could happen again, and we are hearing in the market that there's been at least one Australian coking coal vessel that was discharged after the ban. How long will the ban last? We don't know, but back when Mongolia imports were banned in 2016 and 2017, they lasted less than one month. Another point to keep in mind is, of course, there is inventory in China. We're estimating that there is somewhere around 45 million-50 million tons of coking coal and coking coal equivalent in the supply chain in China right now. That is equivalent to about four weeks at the rate that China is running right now. They are, of course, consuming some of that inventory as time goes. The other two areas for supply of steelmaking coal into China are Mongolia.
It's logical for Mongolia to benefit from the possible loss of Australian coal imports. The market is expecting that Mongolia is trying to recover the lost exports during the early months of the pandemic when the China border was shut. Mongolia exports were down 10 million tons September year-to-date, but they also reached a new record high in September, just around 3.9 million tons in the month. If Mongolia can keep running at record high levels for the remaining three months of the year, imports from Mongolia in 2020 would still be down somewhere around six million tons year-over-year. The other point is that Mongolia imports have never run at this kind of level for three consecutive months. The previous record was in August 2019, and it was one month at around 3.75 million tons.
Ending with domestic, China domestic production is virtually flat September year to date. Expectations are that China domestic production will be flat for the full year 2020 compared to 2019. Their production in 2019 was right around 480 million tons, and we're seeing more aggressive safety and environmental inspections ongoing in China. Hence, the belief in the market that supply production of coking coal from Australia will be flat for the full year. We're also expecting that the improved sentiment and the potential disruptions related to weather in Australia in the fourth quarter and also in early 2021 should support increased activity in the steelmaking coal market. We are seeing that as shown with our guidance for Q4.
It's a long answer, I know, but there's a lot of moving parts. As I said right at the outset, there has been no official announcements about this. There is also expectations that port import quotas will reset at the beginning of 2021. Same thing again, the quotas are talked about a lot in the market, but there is really no official announcement about that.
Réal, any further color on the Chinese domestic price and the spread between that and the seaborne price, and whether any of that will find its way to a non-Australian seaborne supplier?
Yeah. Good question, Don. The current arbitrage is somewhere around CAD 70 or just under that, actually. We're starting to see a few sales to China above original expectations. Yes, if Chinese steelmakers become pinched for steelmaking coal, they could very well continue looking to the seaborne market for more supply from regions other than Australia, and that could very well continue to push price up.
Thank you. I appreciate all the granular data. That's very fascinating. Maybe a quick one for you, Don. As we're kind of coming out of COVID, obviously the base metal performance I think has been pretty remarkable, certainly within both copper and zinc. With respect to portfolio construction, can you give us an update on Project Satellite? Has there been any more traction there with regards to divestiture potential? I guess similarly with Fort Hills, as you see some additional capacity coming on, and there's been some consolidation in energy, is there any potential for looking at monetizing that asset, potentially ahead of when you would get back to your more baseline level of the 200 barrels a day and 23 cost structure? Thank you.
Yeah. First on Project Satellite, we continue to add value where we can on the five different assets. As you know, there's still travel restrictions, so whether you wanted to do a sales process or not, it would be difficult for people to do site due diligence and so on. We certainly like the way the direction the market is taking. As you point out, copper and zinc have performed pretty well. The market looks stronger than it was when we had launched the Zafranal sale process before, so that should be a benefit. We're not in a rush because we can't really do everything we'd want to do until you have much freer travel than we have today. Certainly, the assets are getting more valuable. At some point, we'll engage in some sort of a transaction to get that for shareholders.
In terms of Fort Hills, I think the partners will have to come up with the plan on how to ramp up Fort Hills to the next level. As I said in my comments, that will be looking at different market conditions and operating parameters. The objective would be to get back to full production, and thereby lower the cost per barrel quite significantly as it goes up. I think you'll see some version of that. Suncor is the managing partner, obviously, and you'll see announcements from them on that in due course.
In terms of where it stands within the Teck portfolio construction, I think you called it, we have said for more than one year now that if we get through some of these issues in the market in terms of getting it back running at full capacity and people have better visibility on the pipelines. It's clear that we're not going to be paid for it in Teck Resources, then we will engage in a transaction, where it gets owned differently, whether it's an outright sale for cash, whether it's contributed into another company, taking back shares in some sort of consolidation play. It's not lost unless there's some consolidation going on in the sector.
You can assume conversations are taking place, but I wouldn't anticipate you'd see anything in the near term, not until we've been able to ramp up and demonstrate what the asset can do. When Fort Hills first started up, that first eight, nine months, it was absolutely a terrific operating performance for a startup and got to a point where it was running above capacity. As I've been told, 80% of projects of that scope never hit design capacity at all, and this one got there pretty quickly and had room for debottlenecking on top of that. I think we want to be sure we can demonstrate that value before we engage in any transaction. Alberta has removed the caps sooner than people expected, and we've started up the second train now, so it's heading in the right direction.
Great. Thanks very much for your time.
Thank you. The next question is from Greg Barnes of TD Securities. Please go ahead.
Yes, thank you. Just a question for Don or Réal. Do you have the ability to meet additional demand from China for Canadian coal? You said they're coming to you. Does the guidance imply that you are meeting some of that demand, or is there upside to that number, the guidance number?
Réal, I'll turn it over to you, but Greg, as you might expect, I'm putting a lot of pressure on Réal.
Yeah. Thanks, Greg. Yes, we are starting to see some of that demand. We are making a few sales into that demand. As we look at the fall quarter, keep in mind that the guidance that we've provided is based on the fact that overall demand for steelmaking coal in the world, not only in China but in the world, is not back to pre-COVID-19 levels. The guidance is we feel is appropriate. Let's keep in mind, too, that there remains a risk to the recovery with the second wave that we're seeing with the pandemic in a number of places in the world getting hit pretty hard right now.
Sure. I just want to go back to Orest's question on the costs for 2021. Does that also include some conservatism on what volumes could be next year? Obviously, you don't have any guidance out there yet, but it does look challenging into 2021 still. That would obviously have an impact on the unit costs if volumes aren't back up to that 26, 27 million ton level.
I'll let Robin talk about initial production plans, directionally, Greg, we want to be going into 2021 at full production or very close to it. Go ahead, Robin.
Yeah, not much to add to that, Don. That's the plan. Like I said, we go into 2021 quite strong with healthy raw coal inventories, a stable mine plan, record productivities, all those things set us up. If the market supports full production, the plan obviously is to meet that demand.
Okay. Just a follow-up question finally for you, Robin. In the MD&A, it says something about regulatory changes coming shortly that will increase water management costs over and above the CAD 350 million-CAD 400 million that is planned for 2021 through 2024. What is that all about?
Yeah, I'd probably defer to Peter for that one.
Yeah, unfortunately, Greg, there's not much more we can say on that in light of the ongoing prosecution, but we do expect some additional regulatory requirements in the near future that will complement measures that we're already taking under the Elk Valley Water Quality Plan. To the extent that those represent a significant change in our spending plans, we'd probably make an announcement when those are finalized.
Okay, fair enough. Thank you.
Thank you. The next question is from Jackie Przybylowski of BMO Capital Markets. Please go ahead.
Hi. Thanks very much. I have a couple of questions I guess I just want to ask. First, your dividend policy. I know when you initiated the dividend formula last summer, you had mentioned for last year, you would either provide an update on your dividend in November or in February. In fact, I guess it came in February last year or this year. Do you have a sense of what the policy is going to be on that going forward? Can we expect a dividend announcement next month, or are you more likely to update the market in February on that?
It would be February. The decision was made to wait until the year is complete before determining any supplementary capital returns. We have the capital allocation model that's published, and I believe we keep it in the IR appendix in every presentation so you can see how the decision-making flows on that one. If there's capital available for further returns above the base dividend, then we have in the past surveyed shareholders to determine whether buybacks or cash dividends are preferred, and then the board makes a decision at that stage. Basically nothing has changed from what's been-
Okay. Thanks. To follow up on Greg's question about coal, if you do see, and I know you mentioned that there's still some risks to the volumes and outlook, but if you do see higher demand for coal, say from China through Q4 or through 2021, are there still mechanisms like you've had in the past to push the mines to raise volumes? Could you bring in contract labor or something like that to sort of produce more than what you normally would for a short period to take advantage of that high demand? Is that still possible?
Robin?
Yeah. It's less possible than it might have been when we had six operating mines. We're down to four now, so the flexibility around that is incrementally less, I guess, than it was before. There's still opportunity. I think there's some latent capacity in the one mine right now, but it's pretty marginal.
That's why I was asking with the change to the number of mines. Yeah, that makes sense. Thanks. Maybe just one final question. I know it's difficult for you guys to comment on the water treatment costs. We've seen some press releases, press reports recently about some more stringent water treatment protocols, whether it's through Canada or in some of the U.S. states like Montana. Is there potentially more that Teck would have to do to keep selenium levels under control, beyond what you guys have already envisioned in the water treatment plan? Is there something you can talk to on that?
Yeah, I think we start with Peter on that one, and then maybe Robin.
Yeah. I think what we have to do over the long term is going to depend very much on the results of our current program and ongoing environmental monitoring. We're obviously committed to protecting water quality as far down as the transboundary impacts of our operations, including Lake Koocanusa . There is Montana rulemaking that's still ongoing. We're primarily regulated in BC, and the BC government hasn't yet announced a recommended water quality objective for Lake Koocanusa . They recently announced that they remain committed to a science-based process, and that BC will only commit to a standard once that science-based process has been fulfilled. Obviously, there's ongoing consultation with the Ktunaxa Nation Council .
We're participating in the regulatory process on both sides of the border, and from a good news perspective, annual average selenium levels in Lake Koocanusa have been stable since 2014, and we expect to see reductions in those levels as treatment capacity comes online. As Robin said earlier, the Elk Valley Saturated Rock Fill is being commissioned and the Fording active water treatment facility is coming online very shortly. Difficult to say, Jackie, what the future holds, but I think we believe that our current spending estimates are reasonable, subject to the additional regulatory actions that Greg spoke about, which may require some additional spending.
Okay. That's helpful.
The good news, Jackie, is in the next three or four months, our capacity to treat water is about to go up dramatically from 7.5 million liters a day currently to 47.5 million liters. That's the Elkview SRF will be finished shortly and ramping up, it'll be finished under budget and ahead of schedule. Then the Fording River active water treatment plant will be coming online in the next quarter. That'll really increase the capacity for water treatment and will demonstrate how the other plants, not plants, SRFs are coming, will continue to help that. We're looking forward to getting that capital deployment, which makes the company a better company behind us. We're past 9:00 now, I'm going to call a close and just make a couple of final comments.
I do want to say how exciting October 8th was. For those of us in the company, because in the morning, we had pictures sent to us from Chile with SAG mill number one being almost rolled into place, and that's just a significant threshold of construction to see things, that large piece of equipment to get in there. That afternoon, we saw the ship loader coming in from Vietnam, arriving into the harbor, sailing underneath the Lions Gate Bridge. These are two big pieces of equipment and two initiatives that we have that are really going to make the company that much stronger for decades to come. On the coal side, the Neptune initiative is going to lower costs by quite a few dollars for decades to come on a lot of tons and just make us a stronger, more competitive steelmaking coal business.
Of course, QB2, when finished, is going to double on a consolidated basis of copper production and change the look of our portfolio. This is what we're working towards, making the company a much stronger company. Commodity prices will be what they will be, but certainly the underlying assets will be much stronger. Final comment, I do want to say thank you to Ron Millos once again, for a tremendous 25 years of contribution to making this company what it is today. We very much wish you all the best in your retirement. Thank you for your tremendous service. With that, operator, we'll close the meeting.
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