Ladies and gentlemen, thank you for standing by. Welcome to Teck's second 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 Thursday, July 23rd, 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, Lori, and good morning, everyone. Thanks for joining us for Teck's second 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. I would also like to point out that we use various non-GAAP measures in this presentation. You can find explanations and reconciliations regarding these measures in the appendix. With that, I will turn the call over to Don Lindsay, our President and CEO.
Thank you, Fraser. Good morning, everyone. Thank you for joining us today. I will begin on slide three with our second quarter highlights, followed by Ron Millos, our CFO, who will provide some additional color on the financial results. We will conclude with a Q&A session. These continue to be challenging times as the world works its way through the COVID-19 pandemic. At Teck, we remain focused on protecting our people and communities while continuing to operate responsibly and safely to support the economic recovery in the wake of the pandemic. We took steps during the quarter to further strengthen our financial position and reduce costs and position Teck to significantly improve margins towards the end of 2020 and early 2021 as we complete our major capital projects.
We were also pleased to be recognized as one of the Best 50 Corporates in Canada, ranked by Corporate Knights for the 14th consecutive year. Turning to our financial results on slide four. In the second quarter, revenues were CAD 1.7 billion and gross profit before depreciation and amortization was CAD 453 million. Profitability was impacted by the significant negative effect that COVID-19 had on both prices and demand for our products, as well as abnormal costs because of the pandemic. Bottom line adjusted profit attributable to shareholders was CAD 89 million or CAD 0.17 per share on both a basic and a fully diluted basis. Details of the second quarter's earnings adjustments are on slide five. The most significant adjustment was CAD 147 million of COVID-19 expenses in the quarter on an after-tax basis, which was primarily related to the suspension of our QB2 project.
We also had a CAD 69 million adjustment for environmental costs, which relates to the impact of remeasuring our decommissioning and restoration provisions for our closed operations using a current credit-adjusted risk-free discount rate. In addition, we had adjustments of CAD 38 million for inventory write-downs and CAD 17 million for share-based compensation. This was partially offset by commodity derivatives and taxes and other items, which were CAD 20 million and CAD 21 million, respectively. With these and other minor adjustments, bottom line adjusted profit attributable to shareholders was CAD 89 million or CAD 0.17 per share on both a basic and fully diluted basis. I'll now run through key updates for the quarter starting on slide six. The COVID-19 pandemic obviously had a significant negative impact on our business in the quarter.
While all of our operations are currently producing with comprehensive virus prevention measures in place, the economic impacts of the pandemic have reduced demands and prices for our products. We expensed CAD 260 million in costs associated with COVID-19 in the second quarter on a pre-tax basis. This includes CAD 151 million of QB2 demobilization, remobilization, and care and maintenance costs and CAD 75 million of borrowing costs that would otherwise have been capitalized had QB2 construction not been suspended. Ron will speak to these items in a few minutes. Looking at our key updates in our steelmaking coal business on slide seven, we continue to focus on increasing margins, not volumes. Our second quarter sales were 5 million tons. Pandemic continued to negatively impact supply and demand, particularly outside China. I'll just ask if everyone could please go on mute, [Tad], so we can eliminate the paper shuffling.
Thanks very much. Chinese steel production returned to pre-pandemic levels during the quarter and established new average daily record highs in both May and June. We are shifting to a lower cost base due to a declining strip ratio, also due to the Elkview plant expansion, which was completed through the Cardinal River closure, and as well as our cost reduction and RACE21 programs. Our adjusted site cost of sales are expected to decrease over the remainder of 2020 and to the end of the year, we expect to be below CAD 60 per ton. Our strip ratio was 11.4: 1 in 2019. We now expect it to decline to below 10 : 1 by 2021 as planned. We completed the major expansion of our Elkview operations plant in Q2 despite the pandemic.
The plant now has the capacity to produce 9 million tons annually, which will enable us to replace that higher cost production from Cardinal River with higher quality coal product at lower cost from our Elkview operations. As planned, Cardinal River completed its final production in June after 51 years of mining, the operation is now transitioning to closure. I'll come back to our steelmaking coal business in just a few minutes. Turning to QB2 on slide eight. QB2 is a key component of Teck's future growth as we rebalance our portfolio. Construction activities are ramping back up with over 3,000 people currently on site and robust COVID-19 prevention protocols in place. We are planning to continue a gradual ramp-up of the construction workforce over the next three months towards the pre-suspension workforce level as conditions allow.
We expect to have approximately 4,000 people on site by the end of July and approximately 8,000 people on site by the end of October. We are also aiming to achieve overall project progress of close to 40% by year end. The impact of the suspension on cost and schedule will depend on the length of the suspension and the ramp-up period that I just described. I'll provide more detail on QB2 in a few minutes. Looking at progress on our Neptune facility on slide nine, we continue to advance the project which will secure a long-term, very low cost, and reliable supply chain solution for our steelmaking coal business unit. Major equipment deliveries remain on track. COVID-19 related issues have not substantially impacted works on the critical path. The project remains in line with the previously announced capital estimate and the schedule.
Terminal operations were suspended for five months, as we previously announced, starting in May, in order to improve productivity and safety at the terminal as we advance construction. Completion of construction is still expected in Q1 of 2021, just about eight months away. Turning to key updates on our financial position on slide 10. We have a strong financial position to weather the effects of the pandemic, and we took steps to enhance it even further during the second quarter. This includes adding a $1 billion , two years unsecured revolving credit facility, bringing the total committed credit facilities now to $5 billion . We also issued $550 million of 10-year notes due July 2030, bearing interest of 3.9% per annum. We used the net proceeds to purchase near term notes and to repay amounts drawn on our CAD 4 billion revolving credit facility.
This is a conservative approach that we think is prudent during these COVID-19 times, and it reinforces our commitment to maintaining very strong liquidity and our investment grade credit profile. We also continue to focus on our cost reduction program. We have achieved significant reductions as of June 30th, including approximately CAD 250 million in operating cost reductions and CAD 430 million of capital cost reductions, and Ron will provide further details later in the presentation. Looking at our guidance on slide 11, we have issued updated guidance for the second half of 2020, which revises to reflect the continued uncertainty around the extent and duration of the impact of the pandemic on both demand and prices for our commodities. We've also changed the categories under which we present our capital expenditures guidance. Going forward, we will present capital expenditures in three buckets.
Sustaining capital, then growth capital, and finally, capitalized stripping, which you've all been getting used to for the last five years. We will continue to report QB2 capital expenditures and external funding separately. Spending previously characterized as major enhancement capital is now primarily considered sustaining capital. New mine development is now included in growth capital. The Neptune upgrade project and RACE21 are considered both growth capital. You'll find all the details of our updated guidance in the guidance tables in our press release. I will now run through highlights of our second quarter by business unit, starting with steelmaking coal on slide 12. As I mentioned earlier, Q2 steelmaking coal sales were 5 million tons. This is higher than originally expected, despite steel makers cutting production faster than during global financial crisis in 2008 and 2009.
Our adjusted site cost of sales increased to CAD 68 per ton, reflecting the COVID-19 impacts to our production cost. Production averaged around 80% of plan in the quarter due to the pandemic. We reduced our workforce by up to 50% for physical distancing requirements starting on March 25th. We ramped back up to 75% on April 10th. On May 12th, we returned our workforce levels to 100%. Looking forward, we expect 5 to 5.4 million tons of sales in Q3 given the impact of the pandemic on supply and demand, particularly ex-China. Adjusted site cost of sales are expected to decrease over the remainder of 2020, as I'd mentioned. We expect to end the year below CAD 60 per ton of site costs.
Our production guidance for the second half of the year reflects the estimated impacts of the pandemic and the suspension of terminal operations at Neptune. Turning to our copper business unit. Our Q2 results are summarized on slide 13. Copper production of 59,000 tons in the quarter reflects the 43-day temporary suspension of operations at Antamina to support Peruvian COVID-19 response efforts and to facilitate a change in workforce. Antamina has since then ramped up to full production, which is ahead of our original expectations, and we now expect to achieve full production in the complete third quarter. At Highland Valley, after initially reducing on-site workforce by 50% and scaling back operations, we have now gradually ramped back up to full production rates. In Chile, at our Carmen de Andacollo and Quebrada Blanca operations, we have generally maintained production levels while reducing the on-site workforce where possible.
Significantly lower total cash unit costs before by-product credits than in the same period last year reflect our cost reduction program, or CRP, and also favorable exchange rates. Lower by-product credits resulted in slightly lower net cash unit costs after by-product credits in the same period. Turning to QB2 on slide 14. As I said earlier, we are planning to continue a gradual ramp up of the construction workforce over the next three months towards the pre-suspension workforce level as conditions allow. The impact of the suspension on costs and schedule will, of course, depend on the length of the suspension and on that ramp-up period. In the second quarter, we expensed CAD 133 million of costs associated with the QB2 project suspension, and also CAD 75 million of interest for the project that would have otherwise been capitalized if construction had not been suspended.
As of June 30th, we have expensed a total of CAD 165 million due to the suspension, excluding interest. Looking forward, in the third quarter, we expect to continue to expense some costs associated with the project suspension, as well as some interest that would have otherwise been capitalized. Assuming the ramp-up proceeds through the third quarter as currently planned, the aggregate estimated impact from the suspension is expected to be approximately $260 million-$290 million , excluding interest, with a scheduled delay of approximately five to six months. In addition, we expect to construct more camp space at an incremental cost of $25 million-$30 million to ensure that we can maintain necessary physical distancing protocols to protect the health and safety of our construction workforce.
If we are not able to ramp up through the third quarter according to the current plan, each additional month of partial suspension impact is expected to have an additional cost impact of approximately CAD 25 million-CAD 35 million and one month of additional scheduled delay.
Please hold. We are attempting to reconnect to the conference.
Operations to a single train facility during the quarter, which helped with the unprecedented low Western Canadian Select prices. Production was also negatively impacted by extreme wet weather, resulting in flooding in the mining area in June and early July. However, we expect to remain within the full-year production guidance that we provided in Q1 of 2020. As a result of lower realized prices, we recorded inventory write-downs of CAD 23 million in the second quarter. Please note that adjusted operating costs are lower in the quarter because of inventory write-downs, which are adjusted out. For the first half of the year and including CAD 46 million in inventory write-downs, our site production costs are within our previously issued annual guidance of CAD 37- CAD 40 per barrel of bitumen for the period. Looking forward, our guidance for production, operating costs, and capital spending is unchanged from the disclosure provided last quarter.
Fort Hills partners continue to monitor market conditions and may adjust the operating plans with Fort Hills accordingly. With that, I will pass it over to Ron Millos for some comments on our financial results. Ron, over to you.
Excuse me. Thanks, Don. I'll start by addressing the changes in our cash position during the second quarter, which was shown on slide 17. We've generated CAD 300 million in cash flow from operations in the quarter. We issued $550 million of the 10-year notes and used the net proceeds to repurchase $268 million of the notes maturing in 2021, 2022, and 2023, used the balance to reduce draws on our $4 billion revolving credit facility, resulting in the transactions being leverage neutral. In the second quarter, we had a net reduction of $32 million on the draws against our revolver, we did draw $388 million on the QB2 project financing. That accounts for most of the increase in our total debt, which totaled CAD 6.2 billion at the end of June versus CAD 5.5 billion at the end of March.
Our capital spending was CAD 889 million in the quarter. Of that, CAD 97 million was stripping activities, and the largest single piece was CAD 446 million on QB2. We paid CAD 78 million in interest and finance charges and CAD 52 million on expenditures on investments and other assets. We repaid CAD 40 million of lease liabilities and paid CAD 26 million for 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 336 million. Turning on to the COVID expenditures on slide 18. In terms of the accounting, what we're doing is costs related to capital projects that do not qualify for capitalization are expensed as incurred in our other operating income expense line item. These are primarily the demobilization, remobilization, care, and maintenance costs.
Costs not directly related to the production of our products are expensed as incurred in cost of sales, but they're not included in our costing of inventory, so they're not flowed through our future earnings when the products are ultimately sold. They're basically expensed in the quarter incurred. Again, borrowing costs on capital projects that are temporarily suspended are charged against finance expense as they're no longer allowed to be capitalized while the project is down, and that's primarily QB2. We've deducted all of our COVID-19 related costs that are expensed from our profit attributable to shareholders in our adjusted earnings table to assist readers in analyzing, understanding our operating results absent the effects of the pandemic.
In the second quarter, we expensed CAD 260 million related to COVID-19 on a pre-tax basis, CAD 133 million of that related to the temporary suspension of construction at our QB2 project, and CAD 18 million was related to the temporary closure of Antamina and COVID-19 fund donations. CAD 75 million in additional finance expense was expensed rather than capitalized against QB2 during the construction period. We had CAD 34 million related to other incremental costs at our various operations. On a year-to-date basis, we've expensed CAD 304 million related to COVID-19, and that includes CAD 80 million of interest that would otherwise have been capitalized. Slide 19 summarizes our cost reduction program. To the end of June, we have achieved approximately CAD 250 million of operating cost reductions and CAD 400 million of capital cost reductions. Of that total, CAD 305 million was achieved in the second quarter.
Just as a reminder, these reductions are against what we were expecting to spend back at the end of June 2019 when we started looking at cost reduction opportunities. The reductions are spread throughout the company, with the majority at the operating business units. They include the satellite projects, the exploration projects, our IT systems, and our admin and operating costs throughout the company. The savings from our cost reduction program have been included in our guidance since we've announced the program back with our Q3 2019 results, and they are included in our current updated guidance as well. Turning to slide 20. We have a strong financial position to weather the effects of the pandemic, as Don mentioned earlier, we took steps to enhance it further during the second quarter by adding a new two-year unsecured revolving credit facility.
Together with the $4 billion revolving credit facility, which matures in 2024. Our $2.5 billion project financing facility for QB2, this new CAD 1 billion facility and the extension of debt maturities gives Teck significant liquidity as we complete QB2 and the Neptune terminal facility upgrade while we go through the COVID-19 situation. We have currently drawn CAD 195 million on our $4 billion revolver, and our current cash balance is CAD 430 million and amounts available on our lines of credit, we currently have CAD 6.9 billion of liquidity. Importantly, our facilities do not have any earnings or cash flow-based financial covenants. We do not include a credit rating trigger. There is no general material adverse effect borrowing condition. The only financial covenant that we have is a net debt to capitalization ratio that cannot exceed 60%, and at June 30th, that ratio was 22%.
For our QB2 project, we have currently drawn CAD 563 million on the CAD 2.5 billion limited recourse facility. Going forward, project funding will be from that project financing till the project reaches a specific ratio of project financing to total shareholders funding. Teck's next contributions are not expected until the first half of 2021, and of course, that is subject to the impact of the pandemic on the project schedule and timing of the capital spending. We do not expect COVID-19 impacts to prevent us from drawing on the project financing facility. As previously mentioned, we issued the CAD 550 million of notes that are due in July 2030. They bear interest of 3.9%, and we use the net proceeds to purchase CAD 268 million of the 2021s, 2022s and 2023s. The balance of those proceeds were used to reduce the draws on the $4 billion credit facility.
We've also given notice of our intention to redeem the remaining $13 million balance on the 2021 notes that were not tendered to our recent offer. That's expected to happen by the end of this month. After that will leave us with only $258 million of notes maturing until February 2023. After that, there are no notes due until the new 10-year notes mature in July 2030. The combination of these various transactions is obviously leverage neutral. We also have investment grade credit rating from the four credit rating agencies. Overall, our financial position is in good shape to allow us to weather the challenges around COVID-19. With that, I will turn the call back over to Don for his closing comments.
Thanks, Ron. To wrap up on slide 21, Teck has quality operating assets in stable jurisdictions. We're advancing a profitable growth strategy that is funded and is being implemented. We continue to progress our four key priorities with regard to QB2 project, RACE21, the Neptune upgrade project and our company-wide cost reduction programs to reduce spending. We are executing on these priorities to create value and position Teck for decades to come, and we are confident that our strategy will drive significant value over the long term as the world recovers from COVID-19. With that, we would be happy to answer your questions. I should say that, like many of you, most of us are on phone lines from home, so please bear with us if there's a delay while we sort out who will answer your questions. Operator, over to you for questions.
Certainly. Thank you. Once again, please press star one on your telephone keypad if you have a question. The first question is from Orest Wowkodaw from Scotiabank. Please go ahead.
Hi, good morning. Last quarter, you warned that you were seeing customers defer contracted coal volume. I'm just curious if you're still seeing that, whether customers, I guess, outside of China, are still deferring and whether the guidance for Q3 assumes a higher proportion of spot sales, in that number?
Okay. Thanks, Orest. Good question. I'll turn that over to Réal. Réal Foley?
Yeah. Can you hear me, Don?
Go ahead. There you are.
Can you hear me?
Yes, we can.
Okay. Thank you. Thanks for the question, Orest. Actually, we're seeing quite the opposite right now. You're right. In Q2, we had deferred sales, now some of the customers that had deferred sales are actually bringing some back into Q3. There's a couple of reasons for this, actually. First, if you look at the steel price, it is back to nearly where it was at the beginning of 2020, pre-COVID-19. As steel production is coming back, of course, demand for our customers' products is increasing, and we are seeing some increased production in some areas. As steel mills reduced production during Q2, they were also a lot quicker to reduce their inventory as well than they did during the global financial crisis in 2008, 2009. They basically leveraged the technical learnings from that period.
Of course, as production is starting to ramp up for steel products, they need to import steelmaking coal from the market, and this is what we are seeing from our customers. Your last question on the ratio of spot to contracted sales, our ratio remains very similar, around 40% of the contracted sales and the balance is spot sales.
Well, that's great. Thank you. That's great to hear. Just finally on the cost for coal, you talked about an exit rate this year of on-site costs of less than CAD 60 a ton by year-end. That's certainly a big improvement from what we've seen in the first half of the year. Should we take that to mean that for costs for 2021, at least on-site costs, are going to average below that CAD 60 a ton?
I think you're meaning 2021. I'll turn that over to Ron.
Yeah, you bet. Appreciate the question, Orest. There's a number of things that have happened in the coal BU over the last few years. I've kind of walked the group through that a few times. I'm going to take the opportunity to take a shot at it again, just because it sets up for the structural change that's occurred. The first thing that I've spoken to a number of times is the strip ratio. You know that's a key cost driver for us. For the last three years, we've been transitioning from the Coal Mountain closure and setting up for the expansion of Elkview, where we want to go from seven to nine million tons. To do that, we had to run a higher strip ratio through 2019. That was around 11.4 to one.
We're going to come in around 10.7 :1 in 2020. In the second half, we're actually going to be mining at less than 10 :1 , and that'll continue then through into 2021 and forward. That key structural change of getting the strip ratio established at a 10 to one average or below was the biggest part of getting our cost structure adjusted. The second key piece of that was bringing Cardinal River into closure. That's been done, as mentioned. Just to put that in perspective, that operation ran at almost double the cost of sales as the BU average. Bringing that to closure actually reduces our cost per ton by about CAD 3 a ton. That's for cost of sales, sorry. That's been established. The third piece of the puzzle was getting Elkview expanded. We've successfully done that.
Elkview now is capable of nine million tons per year. When the market comes around, we're well-positioned now with that operation, which is low cost and produces a higher quality product. I know this has been talked about a few times, again, but that will generate about CAD 160 million of EBITDA annually, if the price of coal is at CAD 150 and I think our exchange around CAD 135 or CAD 138. That structural shift from shutting down high cost tonnage and replacing it and more with low cost tonnage has had a significant structural change. The fourth component that we're executing through 2020 is RACE21. We know and have spoken to a number of times the kind of value that that can create across the company and certainly within the coal BU.
When you combine all those things together, when I say we will exit 2020 at CAD 60 a ton or lower, we will be less than CAD 60 a ton going into 2021 and be able to sustain that. We've got significant opportunity to build on that performance just with the work being done in RACE21. Pretty excited about both the second half of this year and 2021. If you look at cost of sales below CAD 60 a ton, that's roughly $44 a ton . On an operating basis, we're going to be operating at a good cost.
That's excellent. Thank you very much for the color.
Thank you. The next question is from Greg Barnes from TD Securities. Please go ahead.
Yes, thank you. I just want to continue on the coal side. On Neptune, Don, it sounds like it's on track for completion Q1. I just want to understand more about the rail capacity through Vancouver to get the volume of coal to Neptune that you want. Has the work been done to open that up? Is that being done as we speak, or has it been completed, and will it be ready by the time that Neptune's ready?
Yes, it is, and I should say, just before I turn it over to Ian Anderson, that we had a terrific visit to site at Neptune just last week, and it is impressive what they've been able to accomplish so far, and it gave us a lot of confidence. Ian, are you there? If not, Réal.
I'll take that, Don. Greg, I guess one thing to say is we've also had visits with CN as to some infrastructure upgrades that they are doing to address the increased tonnage. This is on schedule, progressing very well and, at this point, we have no concern with capacity being sufficient to maximize the volume throughput through Neptune, which is our overall goal to ensure that we have long-term competitive supply chain.
Great. Thanks, Réal. Don, secondarily, guidance on QB2 construction now. Just to be clear, by October, assuming everything goes according to plan, you will be back at full construction on the project.
That's the plan. Obviously, everything's subject to the wrap up from here. We're actually about 3,400 people on site today, and we think we'll be at 4,000 by the end of the month, which is not that far off, of course. Between now and then, one of the key criteria is to get them to their room, and we've developed protocols, just as has been done with the health authorities elsewhere in the country to do that. If all goes according to plan, yes, we'd be at full strength by October and starting to get that 3%-4% completion per month thereafter. It isn't done yet, obviously. There's still a way to go, but we're encouraged. We come from the denormalization levels at about 400 people on site. We've come from 400 to 3,400, headed the right direction. It's still a way to go.
Okay. Again, according to plan, the five to six month delay in the construction schedule will mean that we get the ore in the mill, hopefully by the end of 2022? Is it slipping into 2023 now?
Yeah. End of 2022. We said a delay of five to six months. We'd initially said Q2 of 2022. You should think in terms of a couple of quarters, that's right.
Okay, great. Thank you.
Thank you. The next question is from Curt Woodworth from Credit Suisse. Please go ahead.
Hey, good morning, Don. First question is just on portfolio construction. When you kind of evaluate the copper supply landscape today, you look at Codelco and others in terms of challenges to meet mine production. I wonder if you could give us an update on Project Satellite and any monetization efforts there. I would think with sort of the recovery we've seen in the markets, there would maybe be some more momentum on that front.
Yeah. I'll turn it over to Andrew Golding in just a minute. Yeah, we remain constructive on the copper market for the long term, which is why we have portfolio-rich and opportunities to develop. As we've said in the past, if market conditions are appropriate and interest is there, we could sell outright or contribute to another company, take back shares, that sort of thing. There are two projects of the five that are advanced enough that we think it's appropriate to look at potential transactions when the market is right, but we're not quite sure the market's all the way there yet, though copper, of course, has had quite a run. Why don't I stop there and turn it over to Andrew with any other thoughts that you may want to share?
Can you hear me, Don?
Yes.
Okay, good. I don't really have a great deal to add to what you said there. Clearly, there are some significant logistical constraints as a result of COVID-19 in advancing fieldwork. For that matter, if we wanted to conduct any form of sales process, that would be logistically extremely challenging right now. We are in very good shape for when it becomes logistically more practical to take potential buyers, interested parties to sites. We continue to get a lot of interest. These are very good projects by world standards, and obviously, backdrop of a positive copper market. These are things we would hope to advance, COVID notwithstanding, in 2021.
Okay, that makes sense. Just to follow up, maybe for Réal on the coking coal market, it seems like there's been some increased activity out of India, but then there's been some reports around quota restrictions being potentially exhausted in China. I was wondering if you could just provide a little bit more granular outlook in terms of what you're seeing, perhaps regionally, in terms of the demand trends you're seeing in coking coal. Thank you.
Yeah. Thanks, Curt. Let's look at maybe China first to address one part of the question on the import restrictions. The China economy is really continuing to recover and showing well, and the steel industry is producing very strongly right now with achieving record production in both May and June. They're running a high level, and as a result, the seaborne coking coal imports into China have also been very strong with May year-to-date up 11 million tons year-over-year. There's a couple reasons for that. Reduced Mongolian coking coal imports are one thing. They're down 9 million tons year-over-year. Lower domestic coking coal production, they're actually down 3 million tons year-over-year. The seaborne price is still lower than the domestic coking coal price. Today, it's around CAD 60, and it's been above CAD 50 for a while now.
Then we're seeing sustained demand, increasing demand from the coastal steel mills. That is all helping with the seaborne market. When we look at outside of China, depending on the market areas, there is definitely still risk with the pandemic. We are seeing some economies reopen, and as I answered one question earlier, we are seeing some companies bring back originally deferred tons into Q2. That's a result of reopening economies, but it is also a result of expected supply disruptions, ongoing supply disruptions this year, but also expected further production cuts as we're going through the year, whether it's related to COVID-19 or overall mine disruptions. When you look at the WoodMac figures, for instance, they're forecasting that seaborne exports this year will be down 30 million tons. That includes somewhere around 10 million tons from the U.S., little bit less from Australia.
Russia, Canada, Mozambique, somewhere in the 2 million-3 million ton range. For those other markets outside of China, the China steel exports are also a lot lower this year, which is continuing to support production as the economy recovers in those other parts of the world. In India, monsoon season will be over during the quarter, so we are expecting to see some demand come back as a result of that as well.
Great. Really appreciate it. Thank you.
Thank you. The next question is from Jackie Przybylowski from BMO Capital Markets. Please go ahead.
Thanks very much. I just wanted to get some more color from you guys on what's happening at Red Dog, if you don't mind. I know in the MD&A it says that there's a risk to grade, I guess, specifically, for the second half of the year if the water conditions continue to restrict access. Can you tell me a little bit about what is the risk to the guidance that you've given, and how much additional sorts of work might need to be done, or dollars might need to be spent to mitigate those risks? Thanks.
Okay. Thanks, Jackie. We'll turn that over to either Dale or Shehzad.
Yeah, it's Dale. Thanks, Don, and thanks, Jackie. Yeah, just to give you a bit more color on the issue. Due to changing climate condition. That is probably costing in the range of $25 million, that wasn't originally budgeted.
All right, thanks. That's sort of a one time, I guess both of those things are one time costs, after that you should have sufficient water capacity to manage going forward?
Yeah. Through future tailing stand lifts.
Yeah.
Other water management efforts. Exactly.
Great. If I could just ask one follow-up question on Red Dog. I noticed at the back of the MD&A where you talk about the costs. The royalties for Red Dog seem to be a credit to Teck this quarter. Can you just help me maybe interpret or explain what happened with the royalties in the zinc division this quarter? Thanks.
Ron, I'm not sure if you want to take that one. Ron Millos, are you there?
Sorry. My apologies. Coming off mute. It's a cash flow royalty-based calculation. I might have to dig into the numbers there on that one. It ties in with when we receive the receipts from the sales and when we pay our bills and stuff. In the first half of the year, we're generally buying a lot of supplies, and paying for those supplies, getting ready for the shipping season. Of course, we have no lower sales volume, so the revenue coming in is a lesser number. There's a good chance that it generally catches up in the latter half of the year, where you see the largest royalty payment would normally be in Q1, based on the Q4 results.
Okay. Got it. Thanks a lot, Ron. That's it for me.
Thank you. The next question is from Oscar Cabrera from CIBC. Please go ahead.
Thank you, operator, and good morning, everyone. I'm just wondering, in Q2, there's been reports coming out of different companies in Chile where there's been a reduced workforce.
2/3 reported by Antofagasta. Wondering, in the ramp-up assumptions that you're making for your labor force in the Q2 construction, what are your assumptions in terms of allowance by the government to do everything safely? Secondly, there's also been reports of labor just being reluctant to go back to sites without any strict policies on COVID-19. I just wonder if you can comment on that as well?
Okay. Thank you, Oscar. Good question, and I'll turn that over to either Alex or Dale. Alex, are you there?
Yeah, Alex here. Maybe I'll answer to Oscar here, and then Dale can chime in if he has any additional comments. Oscar, our priorities here continue to be the safety of our workforce and supporting the Chilean efforts to limit the transmission of COVID-19. The project team, Bechtel, we've been working very closely with the government, with our subcontractors, and with our unions, and they've done a really good job of developing and putting protocols in place to manage the workforce, the camp environment, and the transportation of workers to and from the site. Over the last couple of months, we've spent a fair bit of time ensuring that essentially the protocols that we've put in place are working well. The government's been up and inspected and are quite complimentary in terms of what we're doing.
We have a Trigger Action Response Plan in place to manage the situation should we see an outbreak. The protocols that we have in place there are to ensure that we have timely identification of symptoms, and particularly as we see some cases of workers that are arriving at site who may bring the disease with them. We're looking at testing, basically quarantine and medical treatment, and working with the government on that. We have a COVID committee that meets regularly to review the status of what we're doing and to approve all of the additional ramp-up changes that we're having. A lot of protocols in place and working very closely with both the government and our subcontractors and unions. We haven't seen any substantive challenges to date. Should we see challenges, we do have a response plan prepared to manage those.
With that, maybe I'll pass it over to Dale if he has any additional comments on that.
No, I think you've covered it off well, Alex.
Oscar.
Go ahead.
For those who have followed us closely through the beginning of the construction of this project, you may recall that during the first year, we had several delays related to permitting, and it was very slow in our permitting process. One of the silver linings to the COVID delay is that the federal government and local governments and the independent regulators and so on have been working very hard in getting through that. Yesterday, we actually got the final group of permits that had been outstanding. We're very pleased about that to be able to go forward with construction.
Great. That's helpful. Thank you, Don and Alex and Dale. Just if I may, going back to the coal market, it sounds like you are more optimistic on the fundamentals of metallurgical coal. We haven't seen prices move above CAD 110 a ton based on Platts, and this is for the last month or so. I was just wondering if you can comment on this notion of Chinese restocking in the first half of the year to make sure that they're having enough materials to process in the second half, so we have more disruptions? That is the bearish argument. The bullish argument is that there is enough demand on the second half, and hence that's why all of the things that you have pointed to would suggest a higher coking coal price in the second half of the year.
Can you just add more color on that, please?
Those are interesting concepts, Oscar. That's just one of the things about the commodities markets. You can always create a scenario, both bullish or bearish, based on a number of factors like you've listed. Réal, I'm going to turn it over to you if you want to take a shot at answering that.
Yeah, sure. Thanks, Oscar. Yes, the price is holding around CAD 110 right now. We are seeing positive signs out there in terms of demand, whether it's out of China or markets outside of China. Of course, there is still uncertainty with the pandemic. We've seen reductions on both the demand and the supply side. The market is still trying to find the balance for sure, but we are cautiously more optimistic about Q3 than we were, say, at the beginning of Q2. We are seeing changes. With respect to restocking, we have not really seen restocking in China right now, because China steel industry is running at record high levels. When you look at what is happening in terms of supply, the increase in seaborne supply is just about balancing the reductions from Mongolian imports, but also domestic coking coal production.
I don't know if that answers your question.
Yeah. No, that does, Réal. Thanks very much, and congratulations for a strong performance under challenging situations.
Thank you.
Well, operator, I think we've got time for maybe one more question here before we hit the top of the hour.
Certainly. The next question, and last question, is from Alex Hacking from Citi. Please go ahead.
Hi. Good morning. I just wanted to clarify something on the Q2 CapEx. I think when you put out the update a few months ago, you said that the sensitivity to the peso, I think you had republished at 775 as the underlying assumption, is that if the peso went to 850, there would be about a CAD 240 million benefit on the CapEx. Should we assume that that relationship is linear? Obviously, copper has strengthened, the peso has strengthened. If the peso were to go back to 700, would it be fair to assume a CAD 240 million headwind there? I am just trying to understand how that relationship works. Thanks.
Okay. That would be for Alex, please. At the time that we published, the peso was CLP 850, actually, which is why we did that sensitivity. It's right close to the CLP 775, CLP 770 or so right now. Alex, over to you.
Yeah, certainly. Thanks. Sorry. Thanks, Alex. In general, as the exchange rate changes, the exposure to the exchange rate is somewhat different. In general, the relationship is close to linear. Obviously, the lower the peso becomes against the U.S. dollar, the less exposure you have to the Chilean peso. Inside a a couple hundred peso to the U.S. dollar exchange rate, the relationship, you can assume that it's close to linear with just around 70% or 69% of our to-go capital exposed to the Chilean peso.
Thank you.
Thank you.
Well, I think that was the last question. I just want to say thank you to everybody for joining us for the call today. We're very pleased to get Q2 behind us. Q2 2020 was a tough one for sure. Things have improved significantly. We're delighted to have the Elkview plant expansion complete and got that done despite COVID-19. We're delighted to be ramping up slowly but surely at QB2, and look forward to getting back to full strength there in October. We're looking forward to continued global recovery from the pandemic throughout Q3 and Q4. We'll speak to you again in October. Thanks very much, all. Meeting adjourned.
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