Earnings Call: Q2 2021

Jul 27, 2021

This conference is being recorded. Ladies and gentlemen, thank you for standing by. Welcome to Teck's 2nd Quarter 2021 Earnings Release Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. This conference call is being recorded on Tuesday, July 27, 2021. I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead. Thanks very much, Laurie. Good morning, everyone, and thanks for joining us for Teck's Q2 2021 call. Before we begin, I would like to draw your attention to the caution regarding forward looking statements that's on Slide 2. This presentation contains forward looking statements regarding our business. This slide describes the assumptions underlying those statements. Various risks and uncertainties may cause actual results to vary. TEC does not assume any obligation to update any forward looking statement. I'd also like to point out that we use various non GAAP measures in this presentation. You can find explanations and reconciliations regarding these measures in the appendix. With that, I will turn the call over to Don Lindsay, our President and CEO. Well, thank you, Fraser, and good morning, everyone. I will begin on Slide 3 with our Q2 highlights, followed by Jonathan Price, our CFO, who will provide color on our financial results. And we'll then conclude with a Q and A session where Johnson and myself and several additional members of our senior team We'll be happy to answer any questions. So solid performance at our operations in our priority project Against the backdrop of improving market conditions made for a very positive Q2 of 2021. At our QB2 project, We had our best quarterly progress to date and this is despite the largest COVID-nineteen case surge so far in Chile. Let me review a few numbers just to describe how it was. During the Q2, the number of COVID-nineteen cases skyrocketed to a high of around 8,900 per day in Chile. Thankfully, recently the number of cases has declined is now averaging about 1500 per day. Critical care bed occupancy is still high though at 88%, But it is down from the peak of 99%. And in the Terra Paco region where QB2 is located, that number is 49%. And there is currently a daily average of 30 cases compared with a high of 251. Chile has done a very commendable job with their vaccination program. Of this total population of 19,000,000 people, around 85% have had their first dose and 74% have had their second dose. And at QB2 itself, More than 60% of the project workforce is fully vaccinated with over 80% of the workers having received at least one dose. Most recent wave of the pandemic has had a much larger impact on QP2 than the first wave. When construction restarted last year following the temporary We had nowhere near the challenges that we have had in these past 3 months. All of the restrictions, protocols and testing that have been so important in the prevention of the spread of COVID-nineteen are also a large burden that has put the QB team QB2 team to the test, but our team has risen to that challenge. The substantial progress in the second quarter has been hard won And it's remarkable under these challenging conditions. Just a bit more color on what it's like for those of you who may be sitting in an investment center, Perhaps in New York where it's wide open, what we're dealing with now is when an individual has symptoms that are taken off their project and they're taken to hotels on the coast where we've secured them permanently for quarantine purposes. They are PCR tested, the results are returned in about 4 days. They are then contact traced And the contact individuals are also taken off the project and put in quarantine hotels and they are PCR tested. If they test negative, they return to work. If they test positive, they quarantine for 14 days. At the peak in Q2, we had 350 individuals in quarantine and monthly averages were very high. So you can imagine what that does to your crew consistency, To your productivity and the construction weekly plans, especially when the affected individuals are mission critical people like supervisors or crane operators welders and then you combine that with absenteeism running at 12% during the quarter, it is a huge challenge. And so that is why we are immensely proud of the progress that we made during that quarter. And now we are very excited Because just in the last couple of weeks, we've now got things down to just about 3 active cases and we are able already putting 3 people to a room project up to date, heavily influenced by COVID and we hope for the next 12 months an entirely different project where we can make full progress. We continue to expect 1st production at QB2 in the second half of twenty twenty two, which is next year and QB2 is expected to double our copper production by 2023. At the same time, our Neptune facility upgrade is ramping up to full capacity across the site. The equipment there is performing according to or better than planned. I was there a week before last. It is exciting to see. And this upgrade is a key component of securing a long term low cost much, much lower cost and reliable supply chain for our steelmaking coal business. We saw a significant improvement in our financial results in the Q2, reflecting spot price increases in all of our key commodities. Adjusted EBITDA was up 104% compared with Q2 last year. Our operations performed well during the Q2. Production was in line with plan across our business units and we met our quarterly sales guidance in steelmaking coal and in zinc. At the very end of the quarter though, our rail logistics were impacted by the wildfires in British Columbia and the situation remains very difficult And the provincial government declared a state of emergency last week. We extend their deepest condolences to all those who have been directly affected. While the wildfires did not impact our 2nd quarter results, they are currently impacting transportation at our operations in BC. Rail services have been disrupted, which is expected to negatively impact our steelmakingcoal business. Our 3rd quarter steelmakingcoal sales are now expected to be reduced by 500,000 to 800,000 tonnes with guidance revised to 5,700,000 tonnes to 6,100,000 tonnes for the quarter. Our annual production guidance as that range has been lowered by 500,000 tonnes to between 25,000,000 and 26,000,000 tonnes. And we have increased our annual transportation cost guidance range by CAD3 per tonne At $39 to $42 per tonne. And I think it's important to view that increase in context and in our transportation costs, it's a result of the wildfires Within the context of current steelmaking coal prices, while we're raising our cost guidance range by CAD3, The Australian FOB price during the quarter rose by US100 dollars That's just a little bit of context for you and it is due to the wildfires cost increase. We do have contracts in place to ship through all 3 West Coast ports and that gives us the flexibility to divert some trains and vessels to Ridley terminals, which is clearly very economic for us. At the same time, like others in the industry, we are seeing signs of cost inflation across the business more generally. We have noted increases in the cost of certain key supplies, including mining equipment, fuel, tires and explosives, driven largely by price increases for underlying commodities such as steel, crude oil and natural gas. For our operations, the largest impact is on our fuel costs. While the impact on our second quarter results slight as we delivered an adjusted EBITDA margin of 39%. We expect these price increases to put modest upward pressure on our cash unit costs in the second half of the year. Despite this, we have not changed our guidance for full year total cash yield costs in copper and zinc and adjusted site cash cost of sales in steelmaking coal and we have lowered our guidance for full year net cash unit costs in zinc. Finally, we were very proud to be named for the best 50 corporate citizens in Canada, which is the 15th consecutive year that we have been ranked as one of the top 50 companies in Canada for corporate citizenship. Now turning to an overview of our Q2 2021 Financial results on slide 4. Our financial results are significantly improved compared to Q2 last year, supported by improved commodity prices. Copper prices reached all time record highs in the quarter with average prices 81% higher than in Q2 last year. Our realized steelmaking coal prices benefited from around 2,000,000 tonnes of sales to customers in China that were priced at premium CFR China prices. Revenues were up by almost 50% from a year ago to 2,600,000,000 Profitability improved even more with adjusted EBITDA increasing 104% to 989,000,000 bottom line adjusted profit attributable to shareholders increased 281 percent to €339,000,000 which is $0.63 per share on a diluted basis. And Jonathan will review our financial results in more detail in a few minutes. I'll now run through some second quarter highlights by business units, starting with copper on Slide 5. Our copper business unit had a strong Q2 with a 3 85% increase in EBITDA compared to the same period last year, driven by substantially higher copper prices. Production was higher than in the same period last year and when Antamina had temporarily But the increase in cost is primarily due to higher workers' participation and royalty expense resulting from increased profitability at Antamina and this had a $0.20 per pound impact compared to a year ago as well as higher consumables costs and the strengthening of the Canadian dollar. Despite those cost pressures, we delivered an adjusted EBITDA margin for the copper business unit of 67%. We've maintained our annual production operating cost guidance in Coffman. Turning to an update on our QB2 project on slide 6. As I mentioned earlier, the project has continued to effectively advance construction with the best quarter of progress to date despite the significant ongoing wave of COVID-nineteen in Chile. We continue to maintain and enhance our extensive COVID-nineteen protocols in order to protect health and safety of our workers and the communities in which we operate. Pre screening and on-site testing have been key to our success in managing COVID. And in fact, we have screened out 1300 positive cases, more than 1300 positive cases that otherwise would have gone to site. Additionally, in coordination with the government, we successfully rolled out a vaccination campaign for our workers right on-site. With COVID-nineteen cases in Chile declining, coupled with the country's and the project workforce's high rates of vaccination, we are aggressively ramping up towards peak workforce levels. The critical path, which is the grinding circuit, remains on plan And we are still on track for first production in the second half of next year. Based on the solid pace of construction through that last quarter, We expect to achieve 60% overall completion in early August, so either next week or very early part of the week after. Our capital cost estimate remains at $5,260,000,000 including contingency and escalation and our estimate for COVID-nineteen capital impacts, which are tracked separately has been updated to US600 $1,000,000 as a result of the forecast impacts of the second wave of COVID-nineteen. Slide 7 provides an aerial view of the concentrator area where we are making strong weekly construction progress. The grinding lines shown in the background currently remain the critical of the longest path for the project and we have made significant progress here with all 6 mills now in place. And behind that you can see the tower for the coarse horse tacker that has been erected where the stockpile dome will go up. We continue to advance the structural steel of the grinding building and the mechanical installation of the stage flotation reactor cells, which you can see in the middle left of the photo in green, Just to the left are the 14 large 650 cubic meter flotation cells in blue. In the foreground, you can see where we've advanced construction and mechanical installation of the copper and bulk concentrator thickeners and the regrinding facilities. And lastly, in the middle right, You can see the advanced stage of the on-site power substation. Slide 8 shows the starter dam of the tailings management facility We have raised the dam elevation significantly in the quarter. We are continuing to utilize the Teck mine fleet and some of our new fleet of Cap 794s, which are performing well. Slide 9 shows our progress in advancing the jetty from the onshore work front And we have 2 additional offshore work fronts now to advance the jetty from a jackup barge in temporary island where we've commenced pile driving. As the pipeline right of way and platform development is now effectively complete, we are focused on advancing the pipe stringing, welding placement and backfill. Slide 9 shows the pipeline trench, the welded water pipe on the right and the string concentrate pipeline on the left ready for welding. In the back right, you'll see our port workings. To see more of the latest progress on QB2, I encourage you to watch a video of the project and view our latest quarterly photo gallery, which we have posted with our quarterly conference call materials in the Investors section of tech.com, And you will find links to them in our Q2 press release. Next, our zinc business unit results for the Q2 are summarized on Slide 11. And as a reminder, Antamina zinc related financial results are reported in our copper business unit. Red Dog had a strong performance in the quarter with production increasing by 67% compared with the same period last year And as we have previously flagged, lower 2020 production volumes at Red Dog resulted in lower material available for 'twenty for sale and higher unit cash cost sale for zinc mining operations in the first half of this year. We are now through that. Red Dog sales zinc and concentrate were 39,000 tonnes, which was in line with our guidance and total cash unit costs of US0.61 dollars per pound reflect higher treatment charges and the higher cost of inventory for sale related to the lower 2020 production volumes. And sale was impacted longer than planned annual zinc roaster maintenance, which is now behind us. Looking forward, Red Dog shipping season commenced on July 19 And our Q3 sales guidance for Red Dog Zincan concentrate is 180,000 to 200,000 tonnes. For 2021, we expect higher production at Red Dog. We've increased our full year zinc and concentrate production guidance range by 20,000 tonnes to 605,000 to 630,000 tonnes. And we've lowered our full year net cash unit cost guide range by $0.05 per pound to $0.35 to $0.40 per pound. We've also lowered our full year refined zinc production guidance range for Trail by 10,000 tonnes to 290,000 to 300 Turning to our Steelmaking Coal business on Slide 12. And if you could all remain on mute, that'd be appreciated. In the second quarter, sales were 6,200,000 tonnes in line with our guidance range and our average realized price includes around 2,000,000 tonnes of sales to Chinese customers similar to the Q1 at high CFR China prices. And just as a reminder, The CFR China prices are around $3.14 $3.15 a tonne. And our Elkview operations set a new all time quarterly production record, thanks to the expansion that we did last year. Adjusted site cash cost of sales were CAD64 per tonne, which was at the high end of our guidance range as anticipated and CAD4 per tonne lower than a year ago. Our transportation costs of CAD42 per tonne were above our full year guidance range, which was expected and higher than a year ago as a result of higher fuel surcharges and tariffs. And as I mentioned earlier, wildfires Currently impacting our operations in BC, rail services have been disrupted, which is expected to negatively impact our 3rd quarter sales volume And our annual production volumes and annual transportation costs in steelmaking coal. Our 3rd quarter steelmaking coal sales are now expected to be reduced by 500,000 to 800,000 tonnes and we expect 5,700,000 tonnes to 6,100,000 tonnes of sales in the 3rd quarter. We will continue to prioritize available spot sales volumes to China, which is expected to continue to result favorable price realization. We continue to target 7,500,000 tonnes of sales to China in 2021 and that is unchanged from previous guidance. Our annual production guidance range has been lowered by 500,000 tonnes to 25,000,000 to 26,000,000 tonnes. And we have increased our annual transportation cost guidance range by CAD3 per tonne to between CAD39 $42 Again, it is important to view this cost increase in the context of current steelmaking coal prices, which have risen by $100 during the quarter. We have not increased our adjusted site cash cost of sales guidance for the full year. However, Upward pressure on input costs due to cost inflation and the impact of the BC wildfires are expected to result in costs coming in at the higher end of the range. In the Q2, our steelmaking coal business unit delivered an adjusted EBITDA margin of 41%. And in the Q3, we expect our financial performance to reflect the sharp increase in prices that occurred in the latter half of Q2. Slide 13, as I indicated earlier, our Neptune Port project is in the ramp up phase and since the first steelmaking coal was unloaded using a new double railcar dumper on April 19, we're continued on fully commissioning the double dumper And then moved on to the trade wide ramp up, August September are anticipated to be big months for train handling and vessel loading. We are seeing excellent train handling times at Neptune with the combination of the double and single dumper indicating that the terminal will be capable processing in excess of 18,500,000 tonnes per annum. Terminal throughput paused The first two weeks of July as a result of the rail disruption due to wildfires, this should not affect the site wide ramp up The pause gave us the opportunity to complete the preventative maintenance. Slide 14 shows a photo of the new indexer for the double dumper, which is used to position advanced trains in the dumper and you can see the drive system and the arm that comes down between the cars which is world class technologies. Slide 15 shows the largest Capesize vessel ever loaded at Net 2 Terminal, which is 300 meters long and loads up 200,000 tons and a bunch of us went to see it and climb up on it and watch the loading. It was very exciting. We're really pleased to see the project move into And to see more of the latest progress at our Neptune upgrade project, we have posted our latest quarterly photo gallery with our quarterly conference call materials in the Investors section of tek.com with a link to it in our Q2 press release. Turning to our Energy business unit results for the Q2, which are summarized on Slide 16. Our realized pricing results reflect a material improvement in Western Canadian Select prices compared with Q2 last year. However, This was partially offset by higher unit operating costs and lower production due to operational issues in the mine. There has been a slower than planned ramp up of contract overburden stripping as well as challenges around managing groundwater inflow from deep subsurface aquifers. And subsequent to the end of the quarter in July, we encountered additional challenges that will require Mining a shallower mines boat than planned, resulting in lost ore and the need for additional overburden stripping. The ramp up to 2 train operation has therefore been delayed until 2022. As a result of the operational issues and the mine challenges, We have lowered our 2021 production guidance range by 2,000,000 to 4,000,000 barrels to 6,800,000 to 8,100,000 barrels for the year. We We've also increased our 2021 adjusted operating cost guidance range by CAD12 per barrel to CAD40 to CAD44 per barrel. And with that, I will pass it over to Jonathan for comments on our financial results. Thanks, Don. I will start by addressing the details of The 2nd quarter's earnings adjustments on slide 17. The most significant adjustment is a €44,000,000 in environmental costs on an after tax basis. This primarily relates to a decrease in the rates used to discount our decommissioning and restoration provisions for closed operations due to a tightening of our credit spreads. Share based compensation expense was €24,000,000 in the quarter and commodity derivatives were €20,000,000 After these and other minor adjustments, bottom line adjusted profit attributable to shareholders was €339,000,000 in the quarter, which is $0.63 per share on a diluted basis. Now the changes in our cash position during the Q2 are on Slide 18. We generated $575,000,000 in cash flow from operations, which is a significant increase compared with $300,000,000 a year ago, reflecting higher commodity prices. We spent €1,000,000,000 on sustaining and growth capital, including €666,000,000 on QB2, €138,000,000 on the Neptune port upgrade project and €203,000,000 in sustaining capital. Capitalized stripping was €175,000,000 primarily related to the advancement of pits for future production at our steelmaking coal operations. This was higher than a year ago, primarily due to decreased stripping activities in Q2 2020 as a result of COVID-nineteen. Debt proceeds net of repayments on our US2.5 billion dollars project financing facility for QB2 were €272,000,000 in the quarter and we also drew a net €337,000,000 on our US4 billion dollars revolving credit facility. We paid $77,000,000 in interest and finance charges and $26,000,000 in respect of our regular quarterly base dividend of $0.05 per share. After these and other minor items, we ended the quarter with cash and short term investments of 312,000,000 And now turning to our financial position on Slide 19. We've maintained our strong financial position With current liquidity of CAD6.1 billion including our current cash and the amounts available on our US5 $1,000,000,000 of committed revolving credit facility. US3 $500,000,000 is available on our US4 $1,000,000,000 That matures in Q4, twenty twenty four and our US1 $1,000,000,000 sidecar that matures in Q2, 2022 remains undrawn. Both 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 capitalization ratio that cannot exceed 60% and at June 30 that ratio was 27%. Of our US2.5 billion dollars limited recourse project financing facility for the QB2 project, We have drawn US1.8 billion dollars as of June 30, of which US224 million dollars withdrawn in the 2nd quarter. Antamina entered into a new US1 $1,000,000,000 term loan agreement in July, of which our 22.5% share would be US225,000,000 if fully drawn. The loan is non recourse to us and matures in July 2026. We have no significant loan maturities prior to 2,030 and investment grade credit ratings from all 4 credit rating agencies. Importantly, we have significant potential for EBITDA generation from current steelmaking coal prices. Every U. S. Dollars 50 per ton increase in the quarterly index lagged by 1 month is estimated to increase our annualized EBITDA by almost CAD1.5 billion. With that, I will pass it back to Don for closing comments. Thanks, Jonathan. In closing, we remain focused on our copper growth strategy and on delivering strong operating results and strong free cash in the current favorable commodity price environment. We believe Teck is one of the best positioned companies globally to capitalize on the strong demand growth we see for copper with one of the very best copper production growth profiles in the industry. Accelerating copper growth is the cornerstone of our strategy. In the process, we expect to continue to reduce carbon as a proportion of our total business, while continuing to produce the high quality steelmaking coal required for the low carbon transition. We're also continuing to strengthen our existing high quality low carbon assets through our Race 21 technology and innovation program, which is harnessing cutting edge technologies to drive a step change improvements in productivity, efficiency, safety and sustainability. At the same time, we strive to maintain the highest standard of sustainability, safety and operational excellence in everything we do. And we have a leadership team with the right mix of skills and experience to deliver on our strategy. And with that, we'd be happy to answer your questions. Like many of you, most of us are on phone lines from home or other locations. So please bear with us if there is a delay while we sort out will answer your questions. With that, operator, over to you. Thank you, Mr. Lindsay. And the first question is from Orest Wowkodaw from Scotiabank. Please go ahead. Your line is now open. Hi, good morning. Nice to see the solid progress at QB2. I was just curious, Did I hear correctly that you're now able to take the headcount up from 10,000 approximately up to the plan 12,000? And then I'm wondering if that is the case, how we should think about the COVID related escalation costs At QB2, I mean, they were $150,000,000 higher this quarter. Is that just wondering if we should anticipate those coming down materially? Any color would be very helpful. Okay. Thank you, Orest. And I see you've done it again, getting first in line well done. So the first part of your question, the answer is yes, that's true. But I'm going to turn it over to Red Conger for details. Red, over to you. Good morning, Orest. Appreciate the question. We are absolutely aggressively Increasing the headcount at site, we're going to free to a room as Don had mentioned. So that had been a Constraint up until now. And as we're able to Change the work rules associated with all of that, the protocols, etcetera, we're going to have less and less effect from The pandemic that you saw in the second quarter. So the better we can manage all of that and the higher vaccination rates, etcetera, then the less additional COVID expenses we will have. So we're very optimistic that we've seen the peak of those protocols that we've had to take that have affected cost and productivity. And just to Add one thing to Don's comments earlier. He showed a picture of the pipelines, The small one for the concentrate, the big one for the water. One of the things that our team has done to keep us on schedule during this Unprecedented second quarter that we just came through. When people report off and we have those problems that Don described, We reconstitute the crews to keep working on the most critical items. And so in that particular photo, the most Critical item is the water pipe, not the concentrate pipe. We've got to get the water pipe complete so we can do commissioning, hydro testing, etcetera. And we can finish the concentrate pipeline later. So that's just one example of How our team has flexed and responded during this and now with more headcount on-site, more work crews, etcetera, we can do that work in parallel again as we had originally planned to do. Thanks, Red. Just to clarify, so are you allowed to take the headcount up to the maximum plan sort of peak levels now? Here's the way we should think about it. Don mentioned the sale projects. So we are Now setting up work plans for the remainder of the construction that take into account All of the things that have changed since we made the plan just 3 or 4 short months ago. And so that plan will have the maximum employment levels possible that we can deploy, Take advantage of every work front possible and that may be a slightly different headcount than what we I had cited earlier and with good effort and a little bit of It could even be higher than what we had planned before, but for sure it will be the maximum amount of people that we can deploy. Again, I'll just remind you some of the forward looking things that the team has done. When we added the extra camp space when the pandemic first hit, That now allows us to do some different things with 3 door room. And like I said, we're going to take Full advantage of all of that and be very creative with these work plans. Okay. And just Finally, any guidance you can give us, Red, on sort of a run rate of COVID cost increases moving forward as you ramp up? Orest, what the forecast that we've provided you now is our very best estimate of what we think it's going to be at completion. So that's what that $150,000,000 is to completion. That's not just a catch up. No, the forecast that we have given you, We believe we'll be the total cost at completion. Great. Thank you, Brad. Thank you. The next question is from Matthew Murphy from Barclays. Just a follow-up on that last one, the $600,000,000 estimate, how much of that would have been realized to date and how much are you leaving for the rest of the project? Yes, Matthew, the lion's share of that has not been incurred. So Those are our estimates of how this is going to be played out. Okay. Okay. So yet mostly yet to be realized. Okay. And I'm just wondering when you talk about the 60% complete, That's physical progress? And from here on, I mean, how does the pace of the project compare to your original Pre COVID budget? Yes. So that's total Progress for the entire project is 60% number. So that includes engineering And everything. And again, just to reiterate what Don said, the pace of this We'll be different here forward than it has been. So we intend to increase the pace Of construction completion. Yes. So you and a good example of that, Matthew, The Q2 that we just completed was the best pace project to date. That was our best Quarter 4 construction completion to date and we intend to continue to beat those This Q3 that we're in now will be better than the second, and we'll get a peak Here in the Q4, Q4 to early next year. Okay. Thank you. Thank you. The next question is from Greg Barnes from TD Securities. Please go ahead. Your line is now open. Yes. Thank you. I'm going to go back to you again, Red. Just on the pace of completion, obviously, it's a critical point to get The project done by second half of next year. Just easy numbers, you have to achieve about 3% to 3.5% completion rates per month From Augustin, if that sounded about right. And I guess what was the number 52? Well, but here's the way to think about it. What we've been able to do is maintain the critical path through the grinding lines on schedule. So again, just using that same example I used on the 2 pipelines a minute ago, When we had all of these report off issues, quarantine issues, critical personnel Not present particularly in the last quarter. We made sure that we reconsisted reconstituted Crews to do everything possible on the critical paths. So those That critical path through the grinding lines has maintained the schedule. And so now when I mentioned increasing headcount, other work fronts So we can open up, etcetera, that will be picking up those other pieces That we very appropriately deprioritized, if you will, during these challenges. So It's not just what is the percent complete, because like you said, that's kind of a mathematical thing. This has all been very targeted at, okay, we're going to get the first grinding line of the concentrator Running in the second half of twenty twenty two and the second one right after that, and That's the program. That's how we're doing it. And that's why we're making such a big deal about keeping the critical path On schedule. So maybe this is a bit unfair, Ed, but what is the target completion date for the first grinding line then? Back in the half of twenty twenty two. Don, can I switch back to you? Just The pace of inflation that you're seeing, cost inflation on consumables, reagents, equipment, From what you're seeing, is this cyclical or is there a structural element to this going on? I would say it's cyclical. I mean, as I said in my comments that the source of this is the underlying increase in different commodities that make up things. So Steel and fuel oil, of course, driven by your WTI price. The kind of cost that I would think of in the structural category might be, for example, if you had labor agreements that We're locked in for several years at numbers that were a dramatic change. And the good news is we've just settled at our 2 largest mines for 6 years in a reasonable range, higher than last time, the workers benefit. But In a way that we think will be quite productive and have stability for 6 years. So Yes, the short answer I would say is cyclical. So you're not too concerned about 2022. I know it's early, but you're not too concerned about Higher costs at this point next year? Not really, because we'll still be benefiting from the investments that we made at Alfeu shutting down Cardinal River, Neptune running at full capacity at stage, which is a significant benefit. So those are strong positives that should help balance the increases in other inputs. Okay, great. Thank you. Thank you. The next question is From Lucas Heights from B. Riley Securities. Please go ahead. Your line is now open. Hey, good morning, everyone. And while it Tempting to continue to ask questions on QB2. I'll try to switch topic. First, on met coal, one Just kind of shorter term question and then my follow-up will be a longer term one. But in the short term, when I look at your year to date production figures, sales figures, It looks like midpoint of guidance is baking in a ramp up in the second half of the year. And is that a kind of Stretch goal given what's going on in the province or do you have a pretty good line of sight to get to those levels? Thank you very much for that. Yes, it's a good question. I'm going to ask both Rael Foley and Robin Schiramedha to give answers to that. But the overview You have to take that into the context with what the dramatic effect of the wildfires in the last 2 or 3 weeks and That's a big factor and we're not completely through that yet. So it's anyone's guess when that will be passed us. But Robin, why don't you start? Sure. And yes, just to reiterate that the wildfires are certainly causing us some uncertainty. I mean, on the bright side, as we came into this period, we actually had considerable room at the sites. Logistics was strong through the first half, so we were able to move most of our rock sorry, clean coal to port. So that gives us some flexibility to get through this period. We can't run as fast when we're running to ground. So as we stockpile, we have to slow production rates down a little bit. But the majority of our shutdowns are behind us now. There's some left to go in Q3, but We're well over half done through the maintenance process here through the first half. So we're in really good shape From an operational point of view, it's really just a matter of what kind of logistics constraints we see going forward now with Rail. But we're in good shape to hit our new guidance range of 25 to 26. Thanks, Robin. And Riel, do you want to add any market color for the second half of the year? Yes, happy to do that, Don. So yes, Lucas, we're continuing to see the market Really strong, whether it's demand in China, and they have their own Supply issues with both domestic mines in Mongolia and on markets outside of China, Demand is extremely strong as well. Steel prices are running at record levels. Steel production, hot metal production is back to pre pandemic levels. So we're continuing to see strong demand across the board for our products. Very helpful. Thank you all for your perspective. On my follow-up, I mentioned a longer term question on the Coal market and we in the past, it seems like we seems like a lifetime ago, we spent more time thinking What is a reasonable met coal price? And Don, as you kind of survey that market from both the supply and demand Vantage Point. What's your view today? What is a reasonable price to underwrite As you do your internal planning or in conversations with investors? Thank you very much for your perspective. Yes. So we always start and say, well, where has it been in the last 10 or 12 years? And the average price is actually in the $170,000,000 to $180,000,000 range Whether you're using an inflation adjusted number or not, in today's pricing terms, it would be 180. And then we see what's going to happen in the next 10 years on supply and demand. And it's pretty clear that there are constraints on investment in new And not just capital providers' willingness to provide capital, but also permitting issues. And we've seen it right here in Canada where Recently, a project proposal, even though they've done all the hard work for 6 years and so, but it was turned down and we've seen the same in Australia as well. So I have a view that there'll be less supply, but roughly the same demand. And the reason why we say that is, Well, each of us has been bombarded in the last year or so with research reports 2 or 3 weeks on green steel and hydrogen based technologies and so on. It's pretty clear that it's going to take a long, long time for that to have a meaningful impact on the total volume of steel Produced globally. And remember, it's about a 2,000,000,000 tonne market. And the kind of investment it would take to make a material impact on that size of industry It's 1,000,000,000,000 of dollars and we just don't think it's going to happen for quite a while. So meanwhile, our core customers in Japan and Korea and China and India Are seeing strong demand. India's steel industry, of course, is planned by the government to basically triple In the next 10 years. So, we think that the outlook from a price point of view is actually quite strong. We've thankfully seen the recirculation in the market that we had the disruption between China and Australia and that whole issue. And it took a while to sort that out in the global markets, but it seems to have done that now. So it's much There's always going to be volatility in commodity markets and Tumacacol is no exception. But for our planning purposes, we're We're at the higher numbers and we're not planning to grow our steelmaking coal business either, right? So we don't see that happening at our major competitors and new projects because difficult to permit. So I think supply is going to be tight, That helps. Very helpful. Really appreciate it and best of luck. Thank you. Thank you. The next question is from Carlos de Alba from Morgan Stanley. Please go ahead. Your line is now open. Great. Thank you very much. Good morning, everyone. So on the coal production, we heard about the temporary mining ban This weekend in BC. So I wonder if that adds any additional incremental risk to coal volumes in the 3rd quarter Or if that is in a way already incorporated in your latest guidance. And on the cost front there, but related to the water treatment, So we saw an increase of EUR 100,000,000 per year expected between 2021 and 2030. What drove that? And what should we expect going forward? And then finally, I guess, On the other end of the coal business, on Neptun, to what extent is Neptun helping you offset the higher coal Transport cost, because we also read in the release that you expect to see a little bit reduced Throughput through Neptune and that is contributing to the higher cost transportation guidance. Okay. I think we'll go the first two parts of the question to Robin Sharma and I believe the last part for Rheo fully or Yes, I guess real fully. Thanks. Thanks, Carlos. Just on the first question around production, Pretty much the same answer I walked through that really we've got to get through this fire situation and see how we come out the other side. But we've tried to reflect in the guidance of $25,000,000 to $26,000,000 So we did reduce the guidance by about $500,000 So that's pretty much the issue on water treatment. Main reason for the increase in water CapEx over the period of 2022 to 2024 is really just a change in project timelines. We're advancing some water treatment strategies as a result of consultation and some that can actually enhance our mine planning options. So Just for an example, I'll view Phase 3 of the SRF that we've got there. We've advanced that from 25 to 23. So we pulled that in earlier and that supports potentially lower cost spoiling options over that time period. So it's really just a shift in the timeline on those developments. All right. And Carlos, your question on Neptune. So the increase in the transportation cost is really due mainly To the forest fires in BC. So as a result of this, the train service to Vancouver was Competing halted for over 2 weeks, and it's starting to come back to normal now. So what we did during that period is we diverted trains and vessels to Ridley terminals In order to continue delivering our coal to market, the fact that we have capacity through the 3 West Coast ports actually allowed us to do that and to capture the high pricing that we see in the market now with FOB About 200 in CFR China, above 300. And overall, when you look at Neptune, Yes, the site is ramping up. It is doing well. We're expecting that by the end of Q3, we'll be running At above 18,500,000 tons of capacity and as such delivering the cost savings that We're expecting to see going forward for the long term. All right. Thank you. That's very clear. I appreciate the color. Thank you. The next question is from Abi Agarwal from Deutsche Bank. Please go ahead. Your line is now open. Morning, all. Thanks a lot for the call. I have a couple of questions, please. The first one is on Neptune. As Riel just mentioned, the transportation costs for the second half have been impacted by the ongoing wildfires. But post that, Once the situation has normalized, is it fair to assume that transportation costs step down over the course of next year to the lower end of the CAD 35 to CAD 40 Go ahead, Real. Yes. So if you look at the previous Guidance that we had was at 36% to 39% for this year. We're expecting to be at least In that range for next year and possibly lower as the volume going through Neptune will be much higher Then what we will have seen this year. To put this in perspective, we're expecting volume through Neptune this year To still be somewhere around the 30,000,000 to 40,000,000 tons range, next year should be above 18,500,000 tons. So we will see the benefits of the fact that Neptune is the cost of throughput As opposed to a commercial rate that we're paying at other ports. Got it. Thanks a lot, Riel. The next one is also on the Steelmaking Coal division. Yes. Can you give us a bit more color on the growth CapEx and the stripping CapEx increase at the division? And regarding the RACE 21 CapEx uplift, is it possible for you to quantify the quantum of improvement in productivity and the reduction on costs Going forward? Thank you. Robin, over to you. Just want to I think you were talking about capitalized stripping on the first part of the question. Just that's simply Again, it's just the timing of mine sequence activities. So on occasion, we mine in higher strip ratio areas and it sets us up for future production. So That's really just the change in capitalized stripping. I apologize, what was the second part of your question was around quantifying raise 21 Benefits? Yes. I mean, it's a little difficult to give you a quantification in any kind of specifics because it's across a broad very broad range of initiatives. So I can tell you that everything that we have invested from the capital side is leading to actually quite short term and strong economic benefit. And maybe the one way to illustrate it is we've maintained our cost guidance despite a number of different inflationary With fuel and things like that and some of the reduction in production, yet we're still seeing strong cost performance. And I think You roll all that up, that's in a large part a reflection on the Race 21 initiatives that are in play right now. So we are seeing Good response on those, but I can't break that down into any kind of detail for you. What I would add Got it. Thank you very much. What I would add on that one is, at the beginning of race 21, we were reporting the incremental EBITDA gains Quarter to quarter, but it became difficult to do that during first of all with the COVID effects and having to Take some pretty dramatic actions in the initial stages of the pandemic and then the volatility of the prices. And so we're really focused on all the different projects themselves and we will report On the incremental benefits at year end at the commodity prices at that time, so you can get a good feel For the value that it's brought to the table, but suffice it to say that people have been pretty excited by the progress we've made. Thank you. Thanks a lot for the color. Thank you. The next question is from Ryan McArthur from Raymond James. Please go ahead. Your line is now open. Good morning. Sir, Can I just go back to the capitalized stripping on the coal that's up $105,000,000 this year? Is that You're just being proactive because you have to ramp back production because of the sales and you're trying to get ahead of the game and that will benefit us Next 2 years or is there anything structurally really changed because I thought we sort of got the stripping down to A lower level. If you could just elaborate on that. And second, Don, I don't know if you can make any comments on Project Satellite. Sure, Robin. You go ahead and I'll come back with that one. Yes, you bet. There's nothing structural has changed. We're still operating right around that 10:one strip ratio. And Really the situation, we are a little lower on production. We've got strong raw coal inventories. And so this allows us to do stripping in areas that Don't release as much coal at the front end, but are going to set us up very strongly over the next couple of years. So it's really just shifting some of the stripping around. Can we expect I mean, that will be one of the things that is sort of help offset, I assume, cap or cost Inflation going forward, is that sort of how you're looking at it right now? Sorry? Sorry, go ahead. Well, just anytime you can get ahead on stripping to some extent and set yourself with that kind of flexibility on the mine planning side is it just puts you in a much stronger position in the future. So we have that capability and it's allowed us To make that kind of move. Okay. Thank you. Okay. And then back on satellite, which we're really internally to think of it more as a copper growth division. Satellite, of course, has 5 projects in it. And on top of that, we have QB3 and EU. And so in the last major investor conference, we did publish some details And IRRs and NAVs and so on, on the key projects. So you can look in the appendix of our IR presentation To get those, we divide it into near term, medium term and longer term options. The 2 near term ones, of course, are Zafranal And Saint Nicholas and on Zafranal's case, as we've said before, we needed to wait to see how things landed in Peru. We now know Castillo is President and we still need to wait to see as his cabinet gets appointed and confirmed. So We don't think we'll be in a position to move forward in whichever direction, probably until the fall sometimes as We see how things go in Peru. We own 80% of that project. One thing for sure is that If we partner in some way that we'll be doing it in such way that we retain an interest in that copper exposure, whether it's by taking back shares But it's also clear that you can't start it yet until Peru gets a little further along in their transition. And then St. Nicholas, obviously, you'll see the numbers is a very high quality project. We've had a lot of interest. It's very exciting and We're sorting that sorting through that now dealing with different parties and their proposals. So you'll see more of that in the second half of the year. And then QB3 as well, we're making good progress there. And I would hope that we would be reporting to the market That will have narrowed the options for that project. You get some more detail on it between now and the end of the year as well. So You could see incremental decisions on all three of those between now and the end of the year. And I think, Fraser, if I'm not mistaken, that's the last question. We're past the hour, is that right? Yes. Don, you Okay. I do want to draw people's attention that we will be holding our Annual Investor and Analyst Day. It will be a virtual session on September 21, so please mark the date in your calendar and then We look forward to you joining us. We will send out save the date notices shortly and a press release with further details will be issued closer to the date. And just as a final comment, I have to tell you that last week, Rhett and I visited 5 of our sites and we are at the Port Polo Before, the week before and we took a number of people with us. And I can only say I wish all of you could have been with us To see the exciting projects that are going on, we have so much talent, so many really bright hardworking people who are so passionate about what they're doing. It was just inspiring to be there and see all the progress we're making. So we hope to share that with you on Investor Day And we look forward to speaking with you on September 21. Thanks very much everybody for joining today. Bye now.