Teck Resources Limited (TECKB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Teck Resources 2020 Investor and Analyst Day Conference Call, QB2 Update and Business Review. [Operator Instructions] This conference call is being recorded on Wednesday, April 1, 2020. I would like now to turn the meeting over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analyst. Please go ahead.

Thanks very much, Chris. Good morning or good afternoon, everyone, and thank you for joining us for Teck's business review and QB2 project update conference call. Before we begin, I would like to draw your attention to the caution regarding forward-looking statements on Slide 1. This presentation contains forward-looking statements regarding our business. This slide describes the assumptions underlying those statements. Various risks and uncertainty 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, and good morning or good afternoon, everyone. These are clearly difficult times and not just in the mining sector, but for all of us as we navigate the evolving COVID-19 challenge, both personally and professionally. And we regret that, as a result, we had to change the format of our Investor and Analyst Day from our usual detailed in-person meeting to a 1-hour conference call. Like you, we are all working from home and this is the first time that we've held a conference call with the entire senior management team dialed in remotely, so please bear with us in the event there are any hiccups. Given these changes, we're going to focus on the most important issues facing our company. And these are: First and foremost, our response to COVID-19; second, our Q1 performance. After a very difficult January and February, we had a pretty terrific March; and then, of course, our QB2 update, which I know many of you have been looking forward to. We will also update you on our 4 key priorities and how they're adding value to the company. And of course, we'll review our strong financial position. And then Alex Christopher, our Senior VP, Exploration Projects and Technical Services, will provide a project update on QB2. We will conclude with a Q&A session, where Alex and I, and additional members of our senior management team would be happy to answer any questions. Turning to our response to COVID-19 on Slide 4. There is nothing more important than the health and safety of our employees and contractors and the communities where we operate. And as the scale of the COVID-19 challenge became clear, one of our first steps was to establish a COVID-19 response team with senior representation from across our operating jurisdictions and all our business units. And this team has worked around the clock to coordinate our company-wide response. We also moved quickly to restrict travel to shift employees to remote work wherever possible. And all of our global corporate offices moved almost 3 weeks ago to work from home. And we put in place comprehensive measures at every one of our sites. We've also had very strong and positive coordination with our unions, and particularly our largest union, the United Steelworkers, on implementing these measures and keeping employees informed. And in all of this, we are following the most up-to-date direction from governments and public health authorities in each jurisdiction where we operate. We have implemented consistent protocols across all operations, some of which are shown on Slide 5. These measures include, for example, reducing on-site crew sizes, enhanced cleaning and disinfecting protocols, eliminating group meetings, for example, our crew meetings now take place over the radio. Of course, reducing occupancy on crew buses by at least half and then promoting preventative measures like the frequent handwashing that we all are accustomed to. And you can see some photos here of some of the measures being implemented from sites all across Teck. In addition to these company-wide protocols, we have taken additional enhanced measures on a site-by-site basis, as necessary, with highlights on Slide 6 and 7. For example, at our steelmaking coal operations and at Highland Valley Copper, we have reduced on-site crews by as much as 50% for a period of 2 weeks to support social distancing and all employees continue to be paid. We expect slightly lower production of 80% to 85% in the short term, and we will be reevaluating after the initial 2-week period. Trail Operations has likewise reduced their typical weekday shifts by about 33%, but they are able to maintain normal production levels. And at Fort Hills, as you're aware, the site has gone down to a single train facility and enhanced screening and other measures have been implemented. The challenges of our QB2 project with a total workforce of 15,000 commuting to camps from all over the country have required us to temporarily suspend construction on that project. Demobilization of workers is complete and went very well, and we are working to ensure that we are ready to restart as quickly as possible once it is safe to do so. At Antamina, we are continuing to operate under current government restrictions with reduced crews, which are staying in camp for an extended period to reduce travel. And overall, Antamina as well is also maintaining normal production levels. And then the unique fly in, fly out circumstances at our Red Dog operations in Northwest Alaska has necessitated more significant travel restrictions and modified schedules to maintain safe operations. So this is clearly still a very fluid situation, and the overall impact on our business will depend on the progression of the pandemic itself and the various measures in place. And as such, we have now suspended our 2020 annual guidance, as many others have, and we will provide a further update with our Q1 release later this month. Currently, all of our sites continue to operate with measures in place preventing transmission, in line with guidance from health and government authorities. And we are working to maintain production and sales to the extent possible in the short term, which is important to get our people back to work to support families and our communities. To date, there has been no material impact on sales or shipments of Teck products due to COVID-19. And in British Columbia, Alberta and Alaska, mining operations and supplies and services to support supply chains and port and rail operations have all been declared essential services that can continue to operate with appropriate preventative measures. COVID-19 has the potential to affect both our customers and certain of our suppliers, and we are closely monitoring potential impacts on demand for our products as well as our supply chain. On Slide 9, we are also reviewing the accounting treatment of expenditures that are incremental in nature and incurred specifically because of COVID-19, which we intend to disclose with our Q1 results. No COVID-19 specific expenditures will be charged to capital projects, if they do not add value. Those related to production of products will be expensed as incurred in cost of sales rather than being charged to inventories, and will flow through future earnings when the products are sold. COVID-19 expenditures not related to the production of products will be expensed as incurred in other operating expenses. And to assist readers in analyzing and understanding our more normal operating results, we intend to deduct all COVID-19 related costs that are expensed from our profit attributable to shareholders in our adjusted earnings table, so it should be quite clear to all. Turning now to a brief update on the first quarter of 2020 on Slide 10. In steelmaking coal, we achieved sales of 5.6 million tonnes, which exceeds our revised guidance range of 4.8 million to 5.2 million tonnes. We had lowered our guidance ranges, as you recall, with our Q4 2019 report in February due to rail blockades on top of what was a pretty severe winter weather in January. We expect to report adjusted site cost of sales of approximately $65 per tonne, which is helped by the higher sales volumes and lower spending under the cost reduction program, the CRP program. So this is well below previous expectations. Finished coal inventories at our mine sites were also reduced during the quarter, particularly [ in May ]. And that, of course, provides us greater operational flexibility. And the Elkview shutdown to complete the plant expansion is going well, and we expect completion of this in mid-April. The Elkview plant is being expanded from a capacity of 7 million tonnes to 9 million tonnes, which will enable us to replace higher cost production from our Cardinal River mine, which produced 1.4 million tonnes in 2019 with much lower-cost production from Elkview, when Cardinal River closes later this year. And taking into account both the cost savings and the higher average pricing that we get for Elkview coal. And if you assumed $150 million U.S. benchmark coal pricing and current exchange rate, the replacement of the Cardinal River tonnes should translate into an annual $110 million increase in EBITDA. And if you then add the additional 600,000 tonnes of expansion capacity to a total of 2 million tonnes at Elkview, that adds another $50 million EBITDA benefit. So in total, our investment in expanding the plant should translate into $160 million increase in EBITDA at $150 benchmark coal. Looking at our steelmaking coal logistics in the first quarter on Slide 11. After a difficult start to the year due to extreme winter weather in January and early in February and then rail blockades in February, it turns out our logistics supply chain performed very well in March. All 3 West Coast ports performed well after these challenges were behind us, and Westshore in particular, responded with a strong performance in March. CP Rail and CN Rail, both recovered well from the weather-related disruptions and the blockades early in the quarter. And our Neptune facility upgrade continues to advance, and completion of construction is expected in Q1 of 2021, and I'll speak to this in greater detail in just a moment. Turning to Slide 12. All of our base metal operations continued to operate at normal production levels, except Highland Valley operations, where we had some disruption due to our COVID-19 response. At Fort Hills, as you're aware, oil markets have been significantly impacted by COVID-19, not just from a safety perspective, but also from a significant reduction in overall global demand. In addition, significant incremental supply from Saudi Arabia and Russia is expected to be delivered to the market effective today, April 1. And although it's still volatile, these conditions could last anywhere from 6 to 24 months. At Fort Hills, the primary focus is safety related to COVID-19 and preventing the virus from getting into the work camp. And Suncor has responded well, implementing the appropriate measures to protect staff. In addition, as you saw in an earlier press release, the partners took the first step to reduce Fort Hills to the 1 train operation, and this will significantly reduce variable operating costs going forward to help preserve cash. The partners continue to further analyze capital and operating cost reduction opportunities. And as you might imagine, Teck, certainly, we're certainly looking at the potential shutdown of the operation. However, more work needs to be done, and we will update you as work progresses. Of course, when we're looking at any potential shutdown, safety is the most important factor. In the near term, our focus is clearly on managing the risks around COVID-19. But at the same time, we are continuing to advance our 4 key priorities to generate long-term value for shareholders as shown on Slide 13. And these are: first, our QB2 project, which will really help rebalance our portfolio; second, RACE21, our innovation-driven business transformation program; third, the Neptune upgrade; and fourth, our company-wide cost reduction program, or CRP, as we call it. And these key priorities, our COVID-19 response, and indeed, everything that we do continues to be underpinned by our focus on health and safety and sustainability leadership. As you likely know, we had planned to host our sixth annual investor presentation on our sustainability performance today. But given the current environment, we decided to postpone that event, and it will be rescheduled shortly, so we can go over things in much more detail. However, I do want to make a few high-level comments on sustainability on Slide 14. I am proud to say that our efforts on sustainability have been recognized by a number of organizations. In 2019, Teck was named to the Dow Jones Sustainability World Index for the tenth consecutive year. And for the first time, we were the top-ranked mining company on both the world and North American indices. We were also highly ranked on MSCI and Sustainalytics in comparison to our peers, and we were recognized as a strong performer by ISS, Vigeo Eiris, FTSE4Good and the Bloomberg Gender-Equality Index. And we are very proud to say that we are also the only mining company that's listed on the Global 100 Most Sustainable Corporations list. More broadly, our work is guided by our sustainability strategy, which we established in 2010. We refreshed it in 2015. And we just updated it again a few weeks ago in March of 2020. And we look forward to taking you through the details of this update to our sustainability strategy when we reschedule that call. Turning to our key priorities. Our first one is our QB2 project in Chile, which is a world-class copper project and a key component of Teck's future growth. QB2 will be a major step towards rebalancing Teck's portfolio with the ultimate goal of making the contribution from copper equivalent to steelmaking coal. You will have seen our announcement with the updated capital estimate and baseline schedule for the project, and Alex Christopher will provide a detailed update on QB2 shortly. Our second key priority is RACE21. Our innovation-driven business transformation program with a focus on transforming our business and generating significant value through to the end of 2021. Now the operational environment at our sites is currently quite dynamic, and it is focused on our response to COVID-19. So in the short term, we have reduced support from consultants and others involved, and we've reduced RACE21 deployment at sites. We have transitioned RACE21 team members to working remotely with a focus on locking in the improvements that we implemented in 2019, and on preparing and planning for additional improvement projects that are planned for 2020 and 2021 to generate additional value in our business when we can get at it again. This will help us to resume delivery of those projects quickly and efficiently as normal operations are restored. So there is a bit of a silver lining that we can be that much better prepared to review all the key projects that we've identified and get them launched quickly when we were able to do so. The schedule impacts as a result of COVID-19 will depend on when we can resume full RACE21 activities. We are continuing to target implementing projects that are aimed at generating a cumulative total of annualized EBITDA improvements of $500 million by the end of 2020, if we can get going relatively soon, and by $1 billion by the end of 2021. But needless to say, currently, there is some risk to this timing given COVID-19. That being said, this kind of environment just shows that RACE21 is more important than ever to the future of Teck, and we remain committed to the program and to transforming the company for the future. Turning to Neptune. The upgrade of our Neptune facility is our third key priority. And this project, Neptune upgrade project will secure a long-term, low-cost and reliable supply chain solution for our steelmaking coal business unit. And it is strategically important to Teck for the long term. We continue to advance the project and major equipment deliveries remain on track. To date, COVID-19 related issues have not substantially impacted works on the critical path, and we continue to monitor progress quite closely. Preparations are underway for the suspension of terminal operations for 5 months from May to September. And you will recall that we made the decision to proceed with the extended shutdown of Neptune in order to match port capacity, which reduced production and to improve productivity and safety as we advance construction. We expect a new ship loader and stacker/reclaimer and single dumper replacement to be commissioned around year-end of 2020 this year. And then completion of construction is still expected in Q1 2021, and then the new double dumper is expected to be commissioned in Q2 2021. The next few slides, we have some pictures showing construction progress at the Neptune upgrade project. In the photo on Slide 18, you can see the installation of rebar in the center cell of the dumper vault. To date, approximately 50% of the concrete pour for the dumper vault has been completed and work continues on the conveyor tunnel. Slide 19 shows one of the barrels of the double dumper being offloaded from a ship after arriving in British Columbia from China. Slide 20 shows the cage assembly of the dumper. This is the equipment used to both rotate the railcars upside down to dump the coal out of them and to move the train forward through the dumper. And I can say the assembly of the cage has gone well. Finally, Slide 21 shows the assembly of the quadrant beam ship loader in Vietnam. And the ship loader is undergoing final construction and is expected to arrive in Canada in early July. Finally, our fourth key priority is CRP, our company-wide cost reduction program. And you'll recall, in Q4 2019, we announced that we had achieved $210 million of capital and operating reductions, which exceeded our target for that quarter of $170 million. Then at the end of February with our quarterly results, we were expecting $400 million of capital and operating cost reductions in 2020 which would, in total, increase our target to approximately $610 million of previously planned spending through the end of 2020, and that compared to the original target of $500 million. But as you might imagine, since the end of February and in the context of COVID-19, we have intensified the focus on our cost reduction program all across the organization. So we are announcing today that we are further increasing our total targeted reductions to $1 billion of previously planned spending through to the end of 2020. As the world navigates COVID-19, investors, of course, are also focused on balance sheets and liquidity. And I want to emphasize that Teck has a very strong financial position. We currently, as of today, have around CAD 5.8 billion of liquidity. Our USD 4.0 billion revolving credit facility is committed through Q4 of 2024, and it does not have a cash flow base financial covenant, and it does not include a credit rating trigger, and it does not include a general material adverse effect borrowing condition. We have no significant debt maturities prior to 2035, that's 15 years out. And we have investment-grade credit ratings from all 4 credit rating agencies. And for our QB2 project, we have a prudent funding and financing plan in place. The USD 2.5 billion project finance facility and the QB2 partnering transaction with Sumitomo Metal Mining and Sumitomo Corporation, dramatically reduces our funding requirements for the project, and no contributions to project capital are expected from Teck until Q1 2021. So we are well positioned to weather the challenges around COVID-19 and to continue to progress our key priorities. So with that, I will now turn it over to Alex Christopher to provide the QB2 project update. And I should note that Alex will first speak to our capital and schedule update completed before our recent suspension of construction related to COVID-19, and he will then separately address the suspension impacts. We wanted you to have a clear line of sight on the project itself and -- before COVID-19, and then you can add whatever your estimate is. We've given the information to work with on what you think COVID-19 might be a cost on top of that. So with that, over to you, Alex.

Thanks, Don. Starting on Slide 25, construction execution is progressing on an area-based approach, with 6 major areas, including the mine, concentrator, tailings, pipeline, port and general infrastructure. All the major contractors are mobilized and the construction workforce continue to ramp up to over 7,800 workers prior to the recent suspension due to the current COVID-19 situation. So for clarity here, you'll note that we often refer to approximately 15,000 workers. So as we work on a 14-day on, 14-day off rotation, the 15,000 represents all of the workers, both those on shift and those on break. Whereas the 7,800 represents those that are on shift. Overall, progress stands at around 29%, with over 19% construction completion. And engineering, contract formation and procurement activities are approaching 100% and in closeout. The project had been ramping up construction progress towards achieving 5% monthly progress by midyear. And monthly progress in March was going very well before the construction suspension due to the current COVID-19 situation, and it was on track at over 3%. The critical path on the project continues to run through the concentrator grinding area that you see here in this photo. Earthworks are well advanced in all areas and are now greater than 50% complete with nearly 16 million cubic meters moved, with the majority of the remaining earthworks associated with the tailings management facility and the pipeline pump stations. Concrete installation is also progressing well at the concentrator and the port areas with over 30% or approximately 60,000 cubic meters placed to date. So with earthworks and concrete installation well advanced, the project has commenced structural steel erection and the placement of mechanical equipment, including the grinding mills and flotation cells at the concentrator. And you can see the placement of the shell components for SAG mill #1 here in this photo and just in the center portion of the slide. And I'll have some additional progress photos a little later on in the presentation to walk through. On Slide 26, I'll walk you through the updated capital -- sorry, I'll walk you through the updated capital cost estimate in the next couple of slides, starting with Sanction Case, which we reported in December 2018, starting with Slide 26. I want to provide a caveat upfront here as the updated estimate was developed before the COVID-19 situation, as such, the numbers that we present here provide a go-forward view before the impact of COVID-19. On the left-hand of the slide, you can see the project capital metrics that we announced at project sanction. On a 100% go-forward basis from January 1, 2019, the capital cost for the project is USD 5.2 billion, including escalation of $425 million, in line with the guidance at the time of sanction. You'll note that all numbers I speak to today include escalation through project completion. Note this number does not include working capital and interest during construction, and you can also see here that the sanction estimate assumed a Chilean peso to a U.S. dollar exchange rate of CLP 625. The photo you see here shows a drone shot of the concentrator area with the floatation area to the left and the grinding in the center. And you can see solid progress is being made in these areas by our major contractors. Moving on to Slide 27. On the right side of the slide, you can see the updated project capital metrics announced in our recent press release. On a comparative basis to the plan at time of sanction, the updated capital cost estimate of the project is USD 5.2 billion, including escalation. And the to-go capital from April 1, 2020, is estimated at USD 3.9 billion before considering any impacts of the current suspension as a result of the COVID-19 situation. Note, this number does not include working capital and interest during construction. And you should also note that the updated estimate assumes a Chilean peso to the U.S. dollar exchange rate of CLP 775. You can see here that the project continues to carry a significant contingency reserve at USD 400 million or approximately 11% of the to-go capital before contingency. In terms of schedule, we've seen a 4-month delay, and this is before considering any impacts of the current suspension as a result of COVID-19. Our engineering, procurement and construction manager, Bechtel, who has significant experience with the designing and building of major copper concentrate projects in Latin America, has developed the updated capital estimate, which included a detailed review of all aspects of the QB project along with Teck. And this includes a revised schedule, updated material quantities and productivities, together with actual contract and purchase order pricing, which is now in place. And I just want to reiterate here a key point that I mentioned earlier that provides substantially greater confidence in the estimate is that the fact that engineering contract formation and procurement activities are all approaching 100% and in close out. I'm now going to speak to some of the key drivers with respect to cost and schedule, some of which are listed here on Slide 28. Although construction has been proceeding material and in accordance with the construction program, several external factors have impacted the project schedule, extending it by approximately 4 months. These factors have contributed to about half of the relative increase in costs. These factors primarily include permitting delays in the recent social unrest. Although the major environmental permits are in hand, a number of construction permits requiring approval from local and national authorities have experienced delays, including some archeological clearances of some general construction permits. With respect to the recent social unrest in Chile, which started in October 2019, we have experienced both construction delays and disruptions. Although QB2 construction activities continued through the unrest, there have been impacts to the project and specifically, impacts from permitting delays and social unrest include the following: Delayed or restricted access to certain work fronts. Disruption of transportation of workers and supplies to the work sites. The inability to move oversized loads to the site through November and December as police escorts were suspended during that period. And we've seen lower worker productivity and higher absenteeism during certain periods. In addition to the external factors, costs have been impacted by a number of other factors, including road construction and maintenance, schedule extension, certain design modifications and contractor performance. On the other hand, the social unrest and other factors such as the copper price have also had a significant impact on the valuation of the Chilean peso. And as a significant portion of the project costs are related to local labor as well as local supplies and services, this has offset the upward cost pressures I've just described. Turning to the next slide, you can see the sensitivity of the to-go capital to the Chilean-U.S. exchange rate. Looking to the left-hand Slide 29, we can see the impact of the exchange rate on project capital, which is just under 70% exposed to the Chilean peso on a go-forward basis at the exchange -- at an exchange rate of CLP 775 to the U.S. dollar. The peso-U.S. dollar exchange rate has ranged from CLP 726 to CLP 879 since last October. And recent exchange rates have been around CLP 850. And if you look at the graph on the lower left, which shows the sensitivity of the to-go capital to the Chilean-U.S. exchange rate, you can see that this provides about a 240 -- USD 240 million positive impact compared to the estimate at USD 775 million, which could provide a significant benefit to the project or potentially a buffer from any unexpected events. On the right side of the slide, you can see the impact of the updated estimate on Teck's capital requirements going forward, considering partnering, funding and project finances in place. Teck had $135 million in required pre-closing funding in 2019. After which Sumitomo Metal Mining and Sumitomo Corp. funding covers the next USD 1.2 billion followed by funding from the USD 2.5 billion project financing. So Teck's required contribution of the remaining funding would be approximately USD 880 million, and its next contribution to capital is not required until the first quarter of 2021. So just a couple of comments on the impact of COVID-19 on Slide 30. As you know, we announced the suspension on March 18, impacting a total of approximately 15,000 workers. And while initially planned for 2 weeks, project construction activities remain on hold. This was a decision that was not taken lightly. Demobilization was essentially complete by March 23, and I can say the team did a tremendous job in achieving this in a safe and orderly fashion. Extensive planning continues in order to be able to -- in order to be ready to safely and efficiently remobilize as soon as possible once the decision to restart is made. And we continue to assess the status of the suspension in light of the rapidly evolving COVID-19 situation. Our engineering, procurement and project management teams are all continuing to work on a remote basis to advance key activities in permitting. We will also take this as an opportunity to continue to advance procurement, manufacturing and other activities, not directly related to site construction activities. And this includes the receipt of equipment and materials to the various ports of entry in Chile, which should have a positive impact in the project in the long run. At the same time, we're maintaining a limited workforce at site for security, care and maintenance and environmental monitoring. Our priorities continue to be the safety of our workforce in supporting Chilean efforts to limit transmission of COVID-19. The ultimate cost and schedule impact of this suspension will depend on the length of the suspension and the timing of restart of construction activities. As well, the speed at which the movement of people and materials returns to normal, and the government and businesses return to normal, will be key focus -- key factors. Our preliminary assessment indicates that if a suspension lasted a total of 4 weeks, the impact is estimated to be USD 75 million to USD 125 million, inclusive of the demobilization, suspension and restart impacts. In terms of schedule, we could see up to 6 to 8 weeks of schedule delay, including the suspension of remobilization periods. The incremental cost of any additional suspension is expected to have a day-to-day schedule impact, and an approximate USD 25 million to USD 50 million per month cost impact, given that we expect lower fixed care and maintenance costs on the project while idle. Although it's not currently possible to predict when the temporary suspension of the project will be lifted, if we assume full construction activities are started in the second quarter, the soonest we would expect first production is mid-2022. So now for a few slides to show the construction progress across various portions of the project. On Slide 31, you can see the primary crusher area where we're in the process of pouring concrete foundations and completing the platforms for ore transport conveyors, and this will take the crushed material to the coarse ore stockpiles providing feed for the mill. On Slide 22 -- sorry, on Slide 32, you can see the progress we've made in the grinding area of the concentrator, where we've been pouring concrete for the 2 SAG mills and 4 ball mills since May of 2019. Here, you can see the 2 SAG mill foundations on the right of the photo with the shell for SAG1 in place just to the right of the red crane. In the center of the photo, you can see the foundations for the 4 ball mills and some of the structural steel that's being erected. And on the left side of the photo, you can see some of the 14 650 cubic meter rougher flotation cells that are being erected. So we will continue with concrete, structural steel and mechanical and mill erection in this area through 2020. Here on Slide 33, you can see a view of the shell components that have been installed for the first SAG mill. And we'll start placing the shells for the 2 ball mills for the first grinding line once we remobilize. On Slide 34, you can see a panoramic view of the tailings management facility. We have completed the coffer dam here, which you can see in the left center of the photo. And we're in the process of installing a drainage system and hauling and placing materials for the starter dam just to the right of the photo. Platform for the tailings transport system is also near completion, and work is ongoing with respect to platform development for the tailings distribution system. On Slide 35, you can see some of the progress on the pipeline with the contractors working on multiple work fronts, developing the platform, trenching, stringing and bending pipe and welding. And the photo shows the pipe stringing and welding for the 36-inch water makeup system, and you can see the trench for the pipeline just on the left-hand side of the photo. Construction of the 8-inch concentrate transport system will follow a similar process. On Slide 39, you can see the port site, where we're progressing with both onshore and offshore activities. This photo shows progress of the desalination plant, with the foundations well advanced ahead of installation of the mechanical components and prefabricated modules. Overall, the project team continues to focus on advancing construction across all areas of the project as well as advancing activities in the operational readiness front. And with that, I'd like to thank you for your attention, and I'll turn it back over to Don for closing remarks.

Okay. Thank you, Alex, and we're on Slide 38 now. As I've said, these are unprecedented times that we are living in. And the COVID-19 pandemic has had a significant negative impact on the global economy and commodity markets and the outlook remains uncertain. But there have been some positives in what has otherwise been a difficult first quarter of this year. March was particularly strong. The positives include that while our COVID-19 responses temporarily reduced production at some of our operations, in fact, all of our operations are still running. I've seen lately, one of the banks has been keeping track of those that are closed and something like 144 different sites are now shutdown. Our steelmaking coal sales exceeded guidance, the revised guidance for the quarter, and by a reasonable amount. Our steelmaking coal adjusted site cost of sales are expected to be well below previous expectations in Q1. Our steelmaking coal logistics supply chain performed very well in March. The Elkview expansion project is progressing well with completion expected in just 2 weeks and that is a significant improvement structurally to our business for the long term, worth about $160 million of EBITDA at a coal price of $150 million. And then the Neptune facility upgrade project continues to advance. So looking forward on Slide 39, our focus remains on managing the risks around COVID-19 in order to safeguard the health of our employees and our local communities. And at the same time, we continue to progress our 4 key priorities to add significant value to Teck over the next 24 months. First, the QB2 project, which, as I said, is a key component of Teck's future growth, and it will help rebalance our portfolio. Then RACE21 innovation transformation taking place that will significantly improve our competitiveness. Then the Neptune upgrade project, again, long-term structural addition to value of the company. And finally, our company-wide CRP, cost reduction program to reduce spending with an increased target of total reductions of $1 billion of previously planned spending through the end of this year. We have a strong financial position, and we are well positioned to weather the challenges around COVID-19. And with that, we would be happy to answer your questions. I should say, as a reminder, we are all on phone lines from home, so please bear with us if there's a delay while we sort out who will answer your questions. So back to you, operator.

[Operator Instructions] First question is from Orest Wowkodaw from Scotiabank.

A question about the go-forward CapEx, if I may. The USD 3.9 billion of remaining CapEx, I think you said that 69% of that is exposed to the peso. So that's about $2.7 billion by my math. And I'm just curious, of that amount, are those rates for most of the contractors and labor and stuff, are those locked in with respect to what they're charging you in peso? Or are you seeing inflation on rates because of the weaker currency?

I'll turn that over to Alex to start and Dale may want to chip in.

Yes. So Orest, the majority of the contracts we have out there are unit rate contracts, so with locked in pricing. And with -- when you think about escalation, some of them have escalation built into the contracts. Others have it fixed. So they have baked into the number, while the other ones have a rate of escalation built into the contract. So we have not seen any hyperinflation to date. And currently, that -- we feel that the contracts we have in place tie ourselves to the current peso.

Okay. And then is there any thought to -- given the spot FX is much weaker, is there any spots or any thoughts to just lock that in via FX hedges here?

Yes, I'll take that one. So we have studied the potential of hedging the Chilean peso very intensely. We even have a special committee of the board that I work closely with as we look at the question. And of course, there's always a significant risk if you do lock it in, that if something were to happen to the project. For example, if social unrest were to rise again and somehow the project was cut off or halted, and that would probably be a situation where the peso would decline even further, then you would have locked in the pesos without the need to use them and you would have quite a significant currency loss. So on balance, we decided that, that was adding risk. And right now, we're benefiting every single day with the currency where it is. And so we're taking the benefit as it comes. And each week, we get closer to completion at these attractive exchange rates. So that's our current position, but we will continue to monitor it quite closely. But so far, we're benefiting now.

Okay. And just a final question for me, if I could. Don, if I think I understood you that you're increasing your reduction, your capital reduction target to $1 billion or by $400 million from what you issued with the guidance. Is that all related to CapEx? Or is that a mix of OpEx and CapEx? And can you give us any details?

Yes. It's a combination of operating and CapEx. We've already identified over 900 of areas where we can go after. And I'll turn this over to Ron Millos, who's in charge of CRP. Ron?

Sure. Yes, Orest, the biggest part of the increase is likely to come from the capital side. But our sort of current estimate right now is looking at about 2/3 is going to be on the capital side and about 1/3 on the operating side. But once we move that target up to $1 billion, we see what's underneath all of those numbers, we'll have a better sense. And it's spread amongst all the business units, and it's going to be hitting a number of the different line items on the financial statements, primarily, those items that are expense in nature.

Okay. I assume we'll get more clarity on that then with updated guidance in a couple of weeks?

Yes. And it will be a moving target as we go forward throughout the year as well as we fine-tune things.

Next question is from Chris Terry from Deutsche Bank.

A couple of questions for me to run through. Just want to start in the coal division. The $65 recorded in 1Q, is that just really a result of the better volume, so it's more a unit basis? Or was there something else that enabled you to lower the costs to be so far underneath the guidance?

So it also includes benefit from the cost reduction program, CRP, but I'll turn that over to Robin Sheremeta, please.

Yes. That's -- the majority of that is cost reduction program related. So that would be repair and maintenance and a pretty big reduction in contractors. So we saw kind of extending out of Q4, a continued really, really strong results at the sites as far as cutting the spending and cutting costs down. And the other benefit we saw through the first quarter, for sure, was a lower diesel price, and that also helped to keep our costs down.

Okay. And does that $65 really back out anything related to COVID-19? Or is there no impact from that? I'm just trying to make sure I've got a like-for-like number.

No. That would have no adjustments for COVID-19. And I think any adjustments that would occur would be disclosed in the quarter release when we get to it.

Okay. Sounds good. And then just sticking with coal, I was wondering if you could comment a little bit, obviously, a lot of focus on steel markets at the moment in the U.S., but also Europe where you have some exposure on your coal volumes. I'm just wondering if you could comment on the state of the seaborne coal market, and in particular, the ex-China steel market and what you're seeing there for net coal?

Okay, Réal Foley, over to you.

Thanks, Don. So Chris, yes, there is absolutely no doubt that COVID-19 is having an impact. We've seen a number of steel producers announcing reduction or suspending production. And that's particularly been in Europe, the States and India. The current cuts to hot metal production amount to about 8% or so of capacity, and that is capacity ex-China and Russia. Now when we look at what is happening also on the supply side, and there is also risk, of course, with COVID-19, and we have seen a number of impacts. There was a closure of the Mongolia border. They've just started ramping up exports, again, to China last week, but that's a loss of around 5 million tonnes or so of coking coal. Lower Chinese production also, February year-to-date, so that's their domestic coking coal production. That's removed another 5 million tonnes from the market. Lower seaborne prices also compared to the domestic coking coal in China. So we're continuing to see buying from China. And of course, with China implementing stimulus measures, we're seeing the economy in China ramp up quicker now. And we've seen a number of supply disruptions also prior to COVID-19 and with COVID-19. There was a roof collapse at Anglo's Moranbah North mine in January. We talked about our own issues with weather-related disruptions and rail blockades in January and February. Wet weather in Australia in February and March. And COVID-19 disruption specifically, we've seen temporary mine closures announced in the States, in New Zealand, in South Africa, and those total somewhere around 18 million tonnes or so on an annualized basis. So the other point to keep in mind as well is the fact that steel exports out of China, year-to-date February, they're also down substantially. They're running at around 48 million tonnes annualized versus 2019, that was at 64 million tonnes. So overall, yes, we are closely monitoring the market for any potential impact with COVID-19. But so far, we have seen no impacts on our shipments and on our sales.

The next question is from Jackie Przybylowski. She's from BMO Capital Markets.

I guess, my first question I'll ask -- I've got that question about Fort Hills. I mean, obviously, we've seen oil prices weak, and particularly, Western Canadian Select. I'm hearing from a lot of people, the question about whether you're going to take another write-down at Fort Hills. I realize you just did one in Q4. So can I ask maybe just what the thought process would be? How frequently you assess write-downs and what you'd need to see in order to make a decision to take a subsequent write-down on Fort Hills?

Yes. It's fairly straightforward, and we'll give the answer with our financial results about 3 weeks from now. But under IFRS accounting, every quarter, we have to look at the assets and make an assessment as to whether an impairment event has occurred. Clearly, there has been a significant change in the outlook for the oil market, at least for the 6- to 24-month period or for some time period. So we'll have to make that judgment. We'll look at the parameters that Suncor is using as well, and we'll make that decision then. Ron, is there anything you want to add to that?

No. I think that covers it. That's -- technically every quarter when -- after you've taken an impairment, you're on the cusp. So if things get worse, you'd probably have a further impairment. If things get better, you'll reverse it. So that's just generally how the rules work.

Okay. On QB, with the delays to QB2 and understanding that it's up in the air right now. Is there any changes to the way you're looking at subsequent approvals? So I know QB3, you had said you still wanted to see QB2 in production first before you'd move on QB3. Now that your engineering work is so far advanced, is there any way that you could maybe accelerate QB3? Or work to move that forward a little more concurrently?

Short answer is no. QB3 is on hold. We are totally focused on executing QB2 as well as we possibly can. That's our priority. QB3, of course, will be very exciting at a point in time, but we don't want to be distracted in any way from QB2 and getting that done.

The next question is from Carlos De Alba from Morgan Stanley.

Don, just a follow-up on the prior question -- previous question on this -- on the Chilean peso exposure in QB2. So did I understand correctly, and their cost contracted or -- yes, the cost that you have contracted in the local currency, are those fixed? Or are you facing any inflation that you have already incorporated into the new CapEx guidance that you provided? And I guess maybe in addition to that, how much of the equipment services that you're contracting are actually made in or produced in Chile versus how much are you importing into the country? That will be my first question. And if I may ask a couple more, would be any update on the satellite asset portfolio. We -- there were news that Zafranal was potentially being in discussions to be partially sold. I wonder if you have any update that you can comment upon. And then finally, is there any potential cost benefits that you can guide to regarding the very sharp depreciation that we have seen in Latin America and Canada? How much -- if you have any rough -- rule of thumb as to how much can the operations benefit in terms of that weakening of the currencies?

Okay. I'll take the second question and part of the third, and then Alex will be back to you for the first question. So on Project Satellite, as you might imagine, this is not the environment to discuss potential transaction. So any activity on that front is on hold. And in fact, we've cut any capital spending on all 5 projects to the bare minimum in this environment, and we'll just have to wait till we'll get through COVID-19, which it will. On the third question, the -- we'll give you more detailed numbers on that with our quarterly results 3 weeks from now. But just as an example, in our guidance for coal, where we say it's a range for the year of $63 to $67. And that had previously included a much higher number in Q1 than we achieved. So we should be able to do better. But at the midpoint of that range, in U.S. dollars is about $46 for site cost, which obviously, is quite an attractive number relative even to the recently declined price. So it does have quite an effect when you move from $130, $132 or so to $140 or $142, very beneficial, and we'll see something similar [indiscernible]. Alex, back to you on the first one related to fixed pricing.

Yes. Okay. So basically, our contracts -- so the majority of our contract, as I said earlier, are unit rate contracts. So we have fixed pricing for installation of the specific units. A portion of those contracts have the escalation built right into the fixed unit pricing. Another portion of those contracts have exposure to escalation. We do have escalation built into the capital estimates to cover for that. And we've seen an escalation rate of approximately 3% to date. With respect to the equipment they were referring to, I'm trying to determine whether you're referring to our contractors' equipment or if you're referring to the mining equipment and the -- and all of the mechanical equipment for the mills, et cetera. So maybe I'll touch on -- so the majority of our major mechanical components for the mills equipment, like the mills, et cetera, the majority of those have been purchased from offshore suppliers who manufacture that type of equipment, which is quite special equipment or specialty equipment that there aren't a lot of manufacturers around the world. Our mobile equipment fleet will come from one of the big providers. And then our local contractors, depending on what equipment they're using, they either source it in Chile or they will be sourcing offshore, again, some specialty equipment that you saw in those pictures, like the 600-tonne crane, et cetera, are not from local manufacturer.

Our next question is from Greg Barnes from TD Securities.

I think you mentioned during the presentation that you have $400 million contingency built into the CapEx estimate. I assume you haven't moved into the contingency in any way at this point?

So this is a new bottoms-up estimate, Greg. So essentially, that the remaining contingency in this new bottoms-up estimate is $400 million or approximately USD 400 million. So once we start going forward, should there be items that come up that increase costs or other things that come in that were not included in the estimate, those would start to draw in contingency. But right now, if you want to think about it, our contingency bucket is full at USD 400 million. And where the exchange rate is right now, we will be seeing additional, let's call it, credits from the Chilean exposure, should it remain at CLP 850.

Okay. And Alex, just this capital cost estimate that's been recalculated, was that done largely by Bechtel or how involved was Teck in coming up with that new estimate?

So I mean, I think Teck's involved in the process every step of the way. Although Bechtel is our engineering procurement and construction managers, so they are the ones who actually manage things on a, let's say, a detailed level. So we've been involved in every step. The estimate is build up right from the bottom-up for every individual contract. The pricing of those contracts, the units, the schedules, we go back and forth with the various contractors on the schedule to ensure that there's alignment in terms of that against the productivities that we're estimating. So Teck is very involved in it. It has a substantially good working relationship with Bechtel. And it is a Bechtel machine driving that, but Teck is certainly involved right across the whole process.

Okay. And just finally, Alex, once you get to the other side of this COVID-19 situation and the travel restrictions come off and things like that. How long will it take to remobilize the workforce back to site and to ramp things back up to full construction progress?

Yes. So I guess there's 2 things that that's a function of, one is a function of the length of the suspension. And the other one is really a function of how well the, let's call it, their services and service providers are operating in terms of planes and buses, et cetera. So we have a view that we can get the workforce back on-site inside that 4-week period and starting to -- starting to produce points on the curve. But to get to full -- back to where we are, we probably expect that's going to be a little bit longer than 4 weeks, so maybe we're more in the 6-week program to get back up to full production.

The next question is from Oscar Cabrera from CIBC.

If we just stay on QB2 for a second, please. Could you provide the total gross of CapEx overrun before the depreciation sales that you saw in the revision of a new number?

So Oscar, as a significant portion of the increases are related to the Chilean social unrest and also -- and other factors here, which have also contributed to the devaluation of the peso, we actually don't think it's meaningful to look at this issue independent of each other. So again, we've seen realized rates to date of about CLP 730 and the updated estimates at CLP 775. And again, indicated that there is quite a delta between current spot and the estimate at today's rate.

Okay, Alex, let me ask it this way. You mentioned in your opening remarks that about half of the CapEx overrun had to do with the social disturbance that you faced. What I'm trying to establish here is like I know that the Chilean peso can provide another tailwind here. But at what point the project start-up continues to drop back if you cannot get permits? So in other words, have you factored in the plebiscite in October now -- in your estimates now?

So in terms of the estimate, I think there's a couple of things. We progressed significantly with respect to permits, and we're working well with the authorities and the regulators. So we hope to see minimal further delays with respect to permitting when we restart. In terms of further social unrest, we've certainly looked at that from a risk perspective, but we have not built additional dollars or time in for further unrest, although we understand what the impact to that can be and we are doing work to ensure that we have materials, more materials than we need in place, et cetera, to mitigate should something else arise.

Okay. That's helpful. And then if I may, just the cost savings part of the presentation, how do we put into context the approximately $300 million in savings that you're adding with RACE21 and the $500 million cumulative number to the end of 2020? Are they related somehow? Or should we -- how should we think about 2020-specific?

So if I could rephrase the question and make sure I understood it, how much does RACE21 activity contribute to our overall cost reduction? Is that what you're asking?

Yes, sir. That would be the question.

Okay. The RACE21 project is managed entirely separately from the CRP, the cost reduction program. And RACE21, the benefits of it can be cost reduction or it can be increased production and tonnage available for sale and those create benefits as well. So they're kind of -- they really are quite separate buckets as we go forward. The CRP is directed right at the current state of operations that we have and similar to what we did during the long downturn in 2012 to 2016. So they're 2 different buckets.

But -- so if you're not spending any more CapEx in some of these RACE21 programs, then better just to look at the $1 billion dollar cost savings or capital savings in 2020?

We've slowed down RACE21 for 2 key reasons. One is COVID-19 flexibility to execute some of these projects. But also because we're going to be guarding our capital very carefully during this phase of COVID-19.

Orest (sic) [ Oscar ], the $1 billion is for the period from when we started the program in the fourth quarter of 2019. So it's not -- that whole $1 billion is not in 2020.

Operator, we've gone over time now. I think we'll call it there and hand this back over to Don for his closing remarks.

Okay. Well, thank you, Fraser, and thank you all for attending today and for your questions. I want to say, again, that we were very pleased with the performance of the company in March, even though March was a pretty tough month worldwide for everybody, but our operations performed very well and really showed what they can do. We are being very, very careful around COVID-19 and we'll continue to do so. But the 4 key initiatives are continuing to progress and each of them adds significant value to the company. And one by one, they're getting completed. And we're very pleased to see we're so close to the Elkview plant being completed just a couple of weeks from now. And what that can add in value is quite significant for the long term. And before you know it, Neptune will be finished too. The world is in a pretty tough situation but the world will fix itself. It always does. I don't know when it will be. Nobody knows when it will be, but it always does fix itself. And when we get through to that time, Teck will be in very strong position with these key initiatives being completed and very, very strong free cash flow coming. I look forward to the day when we can return significant amounts of capital to shareholder, possibly through a significant buyback or even a significant special dividend, and it will come when you least expect it. The future will be right once we get through COVID-19, the world always fixes itself. I end every meeting with my own people, and I say, stay healthy, keep the faith, this too shall pass and all will be well. Thank you very much for joining today. Meeting adjourned.

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