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Teck Resources Ltd (NYSE:TECK)
Q4 2019 Earnings Call
Feb 21, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teck Resources' Q4 2019 Earnings Call. [Operator Instructions] Later, we will conduct a question-and-answer session. This conference call is being recorded on Friday, February 21, 2020.

I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations & Strategic Analysis. Please go ahead, sir.

Fraser Phillips -- Senior Vice President, Investor Relations and Strategic Analysis

Thanks very much, Mott and good morning, everyone. And thank you for joining us for Teck's fourth quarter 2019 results conference call. Before we begin, I would like to draw your attention to the caution regarding forward-looking statements 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, Teck does not assume the 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.

Donald R. Lindsay -- President and Chief Executive Officer

Thank you, Fraser and good morning, everyone. I will begin on Slide 3 with highlights from our fourth quarter and our year end results, followed by Ron Millos, our CFO, who will provide additional color on our financial results, and we will conclude with a Q&A session. Ron and I and additional members of our senior management team would be happy to answer any questions. So commodity prices were negatively impacted by global economic uncertainty in 2019. This has continued into 2020. There were some signs of improvement in December and early January within an agreement on a US-China Phase 1 trade deal, but then the coronavirus emerged, and the full impact of the virus is still unknown. We are monitoring developments in order to be in a position to take appropriate action.

It has been a difficult start to the year. In addition to the coronavirus, our steelmaking coal operations in British Colombia, have also been impacted by logistics constraints caused by severe winter weather in January and early February. And then, more recently by railway interruptions across the country and as many of you know we are Canada's largest railway customer. Given this backdrop, our focus remains on those aspects of our business that are within our control.

So with that, I'll turn to highlights from our fourth quarter of 2019. In that respect, we made significant progress on our four key priorities. First, construction continues at QB2 with over 7,500 people actively working on site across the six major construction areas. We closed the $2.5 billion project financing in the fourth quarter, and on February 3, we announced an agreement with AES Corporation to source approximately half of QB2's total operating power needs from renewable sources. QB2 is a world-class copper project and a key component of Teck's future growth.

Second, our innovation-driven business transformation program known as RACE21 continues to advance. We exceeded our initial target in 2019 having implemented projects aimed at achieving $160 million in annualized EBITDA improvements, as of December 31, and commodity prices, that were in prices [Phonetic] on December 31, and those prices were substantially lower than the prices that were in effect when we set the initial target back in May of 2019.

RACE21 is transforming our business through implementation of existing proven technology across the mining value chain to improve productivity and lower costs. We have set a target for a cumulative total of a CAD1 billion in ongoing annualized EBITDA improvements by the end of 2021. To put it in perspective, RACE21 has the potential to have as big an impact on our financial results as QB2 yet with less than 25% of the capital and in just two years instead of 10. And I'll come back to RACE21 in a few minutes.

Third, the execution of our priority project at Neptune terminals continues to advance. In order to match port capacity with the reduced production and improve productivity and safety as we advance construction, we intend to suspend terminal operations for five months, from May to September. The upgrade project will significantly increase terminal loading capacity and improve our capability to meet our delivery commitments to our customers, while lowering our overall logistics costs. Project completion is expected in Q1 of 2021, and we are evaluating opportunities to gradually increase port capacity earlier than that.

And fourth, we are starting to see the benefits of the companywide cost reduction program that we announced in Q3 of 2019. We have achieved CAD210 million of capital and operating cost reductions in the fourth quarter, exceeding our target of CAD170 million. And Ron Millos will speak to our cost reduction programs in further detail a little later. We are pleased with the progress that we've made on our four key priorities, and at the same time, we reduced total shares outstanding CAD547 million.

Our financial position remains strong with current liquidity of around CAD5.8 billion and we continue to focus on health and safety and sustainability leadership. We are pleased to recently receive further recognition of our sustainability leadership by being named as one of Canada's top 100 employers. We were named to the 2020 Bloomberg Gender Equality Index and as one of the Global 100 Most Sustainable Corporations. We have been working on an updated sustainability strategy and goals, which will be released with our sustainability report in March as a preview of what is to come. We have announced an objective to be carbon-neutral across all operations and activities by 2050.

Turning to our financial results on Slide 4. In the fourth quarter, revenues were $2.7 billion and gross profit before depreciation and amortization was CAD875 million. The decline in steelmaking coal prices had a significant negative impact on fourth quarter profitability. Benchmark steelmaking coal prices declined from $210 per tonne in the first quarter 2019 to $142 per tonne in the fourth quarter. Current spot market prices are actually back up to $159. In addition, we recorded total non-cash after-tax impairment charges of CAD999 million and CAD910 million was for our interest in Fort Hills, CAD75 million for our Cardinal River steelmaking coal operation and CAD14 million for the remaining assets of our cathode operations at QB.

Bottom line adjusted profit attributable to shareholders was CAD122 million or CAD0.22 per share on both a basic and a fully diluted basis, which was below consensus EPS of CAD0.39 per share. There were three items that were not known or estimated by the market that reduced our adjusted EPS. First a decommissioning and reclamation provision. Second, inventory write downs, and third, other environmental expenses. These totaled CAD0.17 per share, which accounts for the whole difference between the consensus EPS of CAD0.39 per share and our reported adjusted EPS of CAD0.22. For the full year, we generated CAD11.9 billion in revenue and CAD5 billion in gross profit before depreciation and amortization. Bottom line adjusted profit attributable to shareholders was CAD1.6 billion, which is CAD2.77 per share or CAD2.75 per share on a diluted basis.

Details of the quarter and the year's earnings adjustments are on Slide 5. The CAD999 million in total non-cash after-tax impairment charges, was the only significant adjustment in the fourth quarter. All of the additional charges in the fourth quarter that we do not adjust for are detailed on the slide and they totaled CAD105 million on an after-tax basis or CAD0.19 per share on a diluted basis.

I will now run through the highlights by business unit, starting with steelmaking coal on Slide 6. In the fourth quarter, sales of CAD6.3 million tons were at the mid-point of our guidance range, despite some logistics challenges. 2019 production was in line with the revised guidance. Fourth quarter production was impacted by mining challenges reporting River operations, which were partially offset by record production at Elkview Operations and strong processing throughput at other operations. Our mine site clean coal inventory storage areas were at full capacity at times in the fourth quarter due to logistical constraints which reduces our operational flexibility into 2020. 2019 site cost of sales and transportation costs were in line with guidance and at the upper end of the range.

In December 2019, we entered into a long-term agreement with CN for shipping steelmaking coal between Kamloops and Neptune, and between Kamloops and Ridley from April 2021 to December 2026, which will enable us to significantly increase shipment volumes through Neptune. We also announced an expanded commercial agreement with Ridley Terminals in January 2020, increasing our contracted capacity from 3 million tons per annum to 6 million tons with an option to extend up to 9 million tons commencing January 1, 2020.

Looking forward, we expect sales of approximately 4.8 million tons to 5.2 million tons in the first quarter of 2020, down from our previous estimate of 5.1 million tons to 5.4 million tons. As I mentioned earlier, our steelmaking coal operations in British Columbia have been impacted by severe winter weather in January and early February, and more recently by railway interruptions across the country. This caused rail and port terminal performance issues with an estimated impact of over 1 million tons on our Q1 sales.

Given the potential for weaker short-term due to the effects of coronavirus, and the high inventory levels due to rail and port constraints, we are choosing to temporarily reduce production and implement a shutdown of Neptune Bulk Terminals in order to progress the facility upgrade. This reduction, combined with extreme winter weather in January and early February, which was then followed by rail blockades means that we are now expecting our steelmaking coal production in 2020 to be between 23 million tonnes and 25 million tonnes.

As we had previously disclosed in Q3, we plan to complete some of our major plant outages earlier in 2020, reducing our steelmaking coal production in the first half of the year, and increasing production in the second half of the year. The extended construction outage from May to September at Neptune will also affect our quarterly cost of sales. As a result, we expect our cost of sales to be higher in Q1 2020 than in Q4 2019, and then to decrease in the fourth quarter 2020 when we are back to near full production levels. Finally, as part of our strategy to maintain production capacity of approximately 27 million tons in the Elk Valley, our Elkview operation is scheduled to complete its plant expansion project in the first quarter of 2020.

Turning to our copper business units. Our Q4 results are summarized on Slide 7. Copper production declined by 2,000 tons from a year ago, primarily due to the Labour Action at Carmen de Andacollo, which resulted in around 9,000 tons of loss production. This was offset by increased production from Highland Valley as a result of higher copper grades and recoveries. Overall, 2019 copper production was in line with guidance. Our cash unit cost before byproducts decreased by about $0.18 per pound in the fourth quarter. However, lower moly and zinc prices and sales volumes, resulted in a substantially lower byproduct credits. And as a result, our net cash unit costs were up $0.06 per pound. For the year, cash production cost came in just below the lower end of our annual guidance range. Looking forward to 2020, we expect our copper production to be similar to last year and our net cash unit costs to decline.

Moving on to Slide 8. I would like to provide a quick snapshot of our progress on QB2 which is one of the world's largest undeveloped copper sources. QB2 is expected to have low operating costs, initial mine life of 28 years and significant potential for further growth, which we are evaluating as part of the QB3 expansion study. Overall progress stands at about 25%. Engineering, contracting and procurement activities are each over 95% complete. With earthworks and concrete installation well advanced, the project has commenced steel erection and the placement of mechanical -- mechanical equipment, including the first components for the grinding mills in the concentrator. The photo on the right shows the first mill shell being lifted into place.

Construction of the tailings facilities, the pipelines, the roads and power lines is also progressing. Project continues to target first production in the fourth quarter of 2021, with ramp up to full production expected during 2022. However, there have been delays in the schedule, primarily due to permitting and social unrest. And those delays will also affect cost. I should note here that the recent weakness in the Chilean Peso is having a significant beneficial effect on project capital expenditures. As we have said before, an updated capital estimate and baseline schedule is currently under development with completion expected by the end of March 2020, and we'll be going through that at our Investor Day on April 1.

On Slide 9, you can see the primary crusher area where we are in the process of pouring concrete foundations and completing the platforms for the ore transport conveyors, that will take the crushed material to the coarse ore stockpiles providing feed for the mills. Overall, the project has moved over 12 million cubic meters of earthworks representing approximately 47% of the overall plan. The majority of the remaining earthworks are associated with the tailings management facility, the pump station platforms and the pipeline right away.

On the next slide, you'll see concrete installation is progressing well in both the concentrator and port areas with approximately 50,000 cubic meters or 29% place to-date. This slide shows the progress we've made in the grinding area of the concentrator where we've been pouring concrete for the two SAG and the four ball mills, since May. We will continue with concrete, structural steel and mill erection in this area throughout 2020.

Moving to the flotation area of the concentrate on Slide 11. You can see the first of 14, 650 cubic meter flotation cells in place on its foundation. In addition to the erection of mechanical equipment, we continue to advance the concrete foundations for the molybdenum plant and concentrate and the tailings thickeners. The platform for the tailings transport thickener is near completion and the copper dam with the tailings management facility has reached its crest and work is ongoing with respect to the starter dam.

On Slide 12, you can see some of the progress on the pipeline where the contractors are working on multiple fronts, developing the platform and the trench [Technical Issues] Pipe stringing and welding is now also under way. The photo shows the pipe stringing and welding for the 36-inch water system with the trench for the pipeline to the left of the photo and construction of the 8-inch concentrate transport system will follow a similar process.

Finally, on Slide 13, you can see the port site. So we are progressing both onshore and offshore activities. This photo shows progress of the desalination plant with foundations, well advanced ahead of installation of mechanical components. Overall, the project team continues to focus on investing construction across all areas of the project.

Our Zinc business unit results are summarized on Slide 14. And as a reminder Antamina zinc related financial results are reported in our copper business unit. Red Dog sales of zinc and concentrate were above our guidance range at 174,000 tons. Red Dog zinc production declined by 29,000 tons compared to a year ago, primarily due to reduced mill throughput as a result of planned mill shutdowns related to the VIP2 mill enhancement project. At trail operations, the electrical equipment failure in August contributed to a 10% reduction in refined zinc production and negatively affected trails profitability in the fourth quarter. However, the repairs were completed by the end of November, ahead of schedule.

Looking forward, we expect Red Dog's contained zinc sales to be 135,000 tons to 140,000 tons in Q1, reflecting the normal seasonal pattern. Red dog's production is expected to be lower in the first quarter due to both lower grades and VIP2 commissioning activities. For the full year, we expect our zinc and concentrate production to be 600,000 tons to 640,000 tons, including co-products and zinc production from our copper business unit. Net cash unit costs at Red Dog are expected to increase in 2020, primarily due to lower production, and increased treatment charges for both zinc and lead and are expected to follow the normal seasonal pattern.

Our energy business unit results are summarized on Slide 15. Gross profit before depreciation and amortization from our energy business increased by CAD129 million, primarily due to higher realized prices. As I noted earlier, during the fourth quarter, we recorded a non-cash, pre-tax assess -- asset impairment for interest in the Fort Hills of CAD1.24 billion or CAD910 million [Phonetic] after tax, as a result of lower market expectations for future Western Canada Select heavy oil prices.

Adjusted operating costs were higher in Q4 compared with the same period last year, reflecting the impact of lower volumes in the current period. Operations also advanced overburden stripping to take advantage of winter conditions resulting in higher costs. Despite the government of Alberta's mandatory production curtailments being in place throughout 2019, both production and unit operating costs remained within our annual guidance for the year. Overall gross profit before depreciation and amortization was CAD144 million for the full year.

Turning to Slide 16 and RACE21. Our innovation-driven business transformation program with a focus on transforming our business, and generating significant value through 2021. We launched the program at our Investor and Analyst Day last year and set an initial target in May 2019 to implement projects that would generate CAD150 million in annualized EBITDA improvements by the end of 2019. As I said earlier, we have exceeded the initial target and implemented initiatives aimed at achieving CAD160 million in annualized EBITDA improvements as of December 31, and that is based on commodity prices on that date, December 31, and those prices were substantially lower than when we set the initial target back in May.

Approximately 65% of the EBITDA improvement comes from application of data analytics at our processing facilities. 25% comes from analytics of our mining processes, and 10% from improvements in maintenance through the application of machine learning. Overall, 30 different projects are now currently operating. Going forward, we plan to expand these projects, implemented to-date more broadly across all our operations, as well as to identify and implement some new projects to create additional value.

For 2020, we are targeting implementing projects that are aimed at generating an additional CAD350 million in annualized EBITDA improvements for a cumulative total of around CAD500 million. And looking forward to 2021, we are targeting implementing projects that are aimed to generating a further CAD500 million in annualized EBITDA improvements by the end of that year. So as I mentioned earlier, that would be a cumulative total of CAD1 billion for the RACE21 program. Those are ongoing annualized EBITDA improvements, which are recurring year after year, which represent significant value.

And with that, I will pass it over to Ron Millos for some comments on our financial results.

Ronald A. Millos -- Senior Vice President, Finance and Chief Financial Officer

Thanks, Don. I'll start with a summary of changes in our cash position during the quarter on Slide 17. We generated CAD782 million in cash from operations and we received CAD25 million in equity contributions from Sumitomo Metal Mining and Sumitomo Corporation for the QB2 project, and CAD14 million came from investments in asset sales in the quarter. We spent CAD883 million on capital projects, and capitalized stripping costs were CAD152 million. We purchased CAD148 million in Class B shares, paid CAD71 million in interest and finance charges, spent CAD55 million on investments and other assets and we made lease payments of CAD43 million. Our quarterly dividend used CAD27 million in cash and after these and other major items, minor items, sorry. We ended the quarter with cash and short-term investments of approximately CAD1 billion.

Slide 18 provides an update on our companywide cost reduction program, which is implemented in Q3 2019 in response to the global economic uncertainty. In Q4, we achieved approximately CAD210 million of capital and operating reductions and that exceeded our target of CAD170 million. And looking at 2020, we now expect around CAD400 million of capital and operating reductions, which are included in our guidance which therefore increased our target for total reductions to approximately CAD610 million from previously planned spending through the end of 2020, and that compares with our original target of CAD500 million.

And to achieve our targeted cost reductions, we expect to eliminate approximately 500 full time equivalent positions by the end of 2020. Some of which we expect to come from attrition, the expiration of temporary contract positions and current job vacancies. And our target cash cost reductions, do not include initiatives that would result in a reduction of production volumes of our commodities or that could adversely affect the health and safety of our people.

Turning to Slide 19. Our financial position remains strong. We currently have approximately CAD580 million [Phonetic] and that includes CAD532 million of cash. We have no significant debt maturities prior to 2035, and we have investment grade credit ratings from all four credit rating agencies. We, as Don mentioned, we closed the $2.5 billion limited recourse project financing facility to be used to develop QB2. That was done in the fourth quarter and we expect to start drawing on that facility shortly.

And as we previously mentioned, the QB2 partnering transaction and the financing plan dramatically reduced tax funding requirements for the project and no contributions to the project are expected from Teck until early 2021. And as Don mentioned earlier, we reduced our total shares outstanding to 547 million shares through purchases under our normal course issuer.

So with that, I'll turn the call back to Don for his closing comments.

Donald R. Lindsay -- President and Chief Executive Officer

Thanks, Ron. As I said at the outset, our focus remains on those aspects of our business within our control. And we are focused on our four key priorities. First, the development of the QB2 project, which is a key component of our future growth. Second, executing our RACE21 program to improve efficiency and productivity across our business. Third, the execution of our priority project at Neptune terminals. And fourth, our companywide cost reduction program [Technical Issues] expense, increased target at now of approximately CAD610 million of reductions up from the CAD500 million target previously, and that's from previously planned spending through to the end of 2020.

These priorities are consistent with executing our straightforward strategy of running our operations safely, efficiently and sustainably to generate cash, successfully execute our QB2 project and return additional cash to shareholders. And with that, we'd be happy to answer any questions. And I should say that some of our management team members are calling in from different locations. So there may be a brief pause after you ask your question, while we sort out who's going to answer it.

With that, back to you, operator.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Orest Wowkodaw from Scotiabank. Please go ahead.

Orest Wowkodaw -- Scotiabank -- Analyst

Hi. Good morning. I was hoping we could get some more color on the guidance for the coal segment for 2020. I find it very confusing, why the cost guidance is so high given last year you were pushing volume in order to maximize margin, obviously, with the lower coal price, we've been hearing that contractors have been reduced, over time reduce, strip ratio coming down and then all of these efficiency programs RACE21 and others. How come we're not seeing that at all flow through the cost guidance in 2020?

Donald R. Lindsay -- President and Chief Executive Officer

Over to Robin Sheremeta.

Robin B. Sheremeta -- Senior Vice President, Coal

Yeah. You've got, I guess, the biggest influence that you're going to see on cost guidance through 2020 really comes down to the production rate that we're able to operate at. So, and we walked through the constraints that are on the system, particularly in Q1, where we're going to be close to 5 million production, and then Q2 and Q3, where we have a five month plant shutdown at Neptune. So when you take that production off, we're going to have to reduce our production at the mine sites, but I want to come back to, there are number of factors that are changing and it's consistent with what you were -- what you're thinking as far as a declining cost base.

So I'll just walk you through those because this is happening through the year. And you'll see it really translate in Q4 and into 2021 when we're back to full production levels. So we've got it. We do have a declining strip ratio. Our strip ratio was 11.4 in 2019. It should be around 10.6 this year. But by 2021, it's going to be below 10 and it will be sustained below 10 going forward. We are moving Cardinal into closure this year and that's going to happen about midyear, that's going to reduce the overall cost of the business, $3 a ton. We won't see that through 2020, but we will see that into 2021.

And Elkview which is our -- one of our lowest cost operations is moving from CAD7 million to CAD9 million, so that's part of part of the production constraints in the first quarter as we need to take a shutdown to get that expansion in. But that's also not only is going to reduce or replace the tonnage that we shutdown at Cardinal. It's at a much lower cost base than what Cardinal was. The work we're doing on Neptune that investment is going to significantly reduce our logistics cost.

And then, as Don mentioned, with RACE21, there is a huge amount of potential past -- certainly past '20 as we develop the program through 2020 into 2021. So all those things combined, when you put them altogether, by Q4 of 2020 and going into 2021, we'll be at a cost base less than CAD60 per ton. So our costs are coming down, it just, we have to get through this production constrain period.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. So when we look ahead to 2021, assuming you're back at your 26 million ton to 27 million ton run rate for volumes. Adding all these pieces together, are we looking at a potential CAD10 in savings. Is that kind of the ballpark?

Robin B. Sheremeta -- Senior Vice President, Coal

Yeah, I'll stick to the CAD60 a ton marker. So we'll be below CAD60 a ton and we'll achieve that rate by Q4 of 2020.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. Thank you very much.

Robin B. Sheremeta -- Senior Vice President, Coal

But the tonnage will be around 26 million to 27 million.

Orest Wowkodaw -- Scotiabank -- Analyst

Thank you.

Operator

Thank you. Our following question is from Matt Korn from Goldman Sachs. Please go ahead.

Matt Korn -- Goldman Sachs -- Analyst

Hi. Good morning. A follow-up on coal, when you're looking at the co-ops holistically, or where you've seen this persistent challenges, are you confident you're looking at the business today that the Neptune -- Neptune build out, the Elkview investments. This is going to be really enough to provide long-term stability to the segment or is there more that you may need to do to invest to get there, like, is there any practical way to add redundancy bypass and is there bottlenecks in the chain say between your stores and your port that you may have to do. Just looking for ideas there.

Robin B. Sheremeta -- Senior Vice President, Coal

Yeah, I mean a lot of the work we've done over the last three years in terms of expanding some of the mining areas at Elkview, at Fording River, at Greenhills, at Line Creek, these are the assets that we've consolidated down to have a stable base of strip ratio, getting the strip ratio down below 10 to 1 that's critical to the business. Moving away from the higher cost operations like Cardinal, that's going to be good for the business. The work we're doing at Neptune, this is going to strengthen our entire logistics chain. So that's a stability that we require, and we've -- we've suffered for the last few quarters. So, I think that's incredibly positive.

And then, just again, the potential that RACE21 has to the coal business and all the business in entirely is tremendous. And we saw good evidence that many of the programs we've initiated in coal are starting to yield that kind of benefit. So we're much stronger going into this Q4 of this year. Unfortunately, again, we have to get through a couple of quarters of transition, but as we get into Q4 and into 2021, we're pretty well set up here with a very strong cost base.

Matt Korn -- Goldman Sachs -- Analyst

All right. Let me then rotate bit to copper. On QB2 development, could you tell us a bit more. What's been the [Indecipherable] with the permitting delays. How much of a delay has there been with those permits versus the initial expectations and has the social unrest remained on ongoing pressure there as you -- as you try to move materials, people around to the site?

Donald R. Lindsay -- President and Chief Executive Officer

Hey, we're going to start with Dale Andres on that and Alex Christopher might touch it as well.

Dale E. Andres -- Senior Vice President, Base Metals

And well, thanks. To start with, I'll talk about permitting primarily the delays that have been in the sectoral and -- sectoral permits, so the small number -- huge number of permits, but small permits, facilitate construction. Overall, we have over 2,000 of these permits and there is multiple levels of government that we need to work through to get those. So that has slowed things down. On the archeological clearances, and part of that is also due to the social unrest. But the regulatory agencies that process these applications and permits have been -- have been slower than we anticipated but partly due to the social unrest. And one of the agencies was even on strike for part of that period as well. So that has had an impact.

Just back to the social unrest. I think QB2 is made out much better than other projects and other operations in Chile. But there's no question, we have been impacted. It does affect movement of equipment, movement of people through the period, in particular after October 18, our workers were concerned about their families and homes, and so the logistics of getting the workforce up to site has had an impact on the project. And I think as we put in our release, we are in the middle of completing updated cost estimate and schedule for the project and that will be released before the end of the quarter.

Matt Korn -- Goldman Sachs -- Analyst

Got it. Thank you very much.

Operator

Thank you. Our following question is from Greg Barnes from TD Securities. Please go ahead.

Greg Barnes -- TD Securities -- Analyst

Hi. Thank you. I just wanted to take the cost guidance on the coal business a step further, if I can. The transportation cost this year, over CAD40 a ton, given all the moves you've taken, how do you expect that to evolve over the next several years?

Donald R. Lindsay -- President and Chief Executive Officer

Well, what we will say is it's certainly going to go down, but how much it goes down will depend on the tonnages that go through each of the ports and that won't be determined, Greg, until sometime probably toward the end of the year. So we can't give you an exact answer, but we're highly confident that it'll be going down, and it should be a very, very beneficial thing. And then the reliability will be going up, which is incredibly important and contamination won't happen. So that's also important.

Greg Barnes -- TD Securities -- Analyst

Sure. Don, I'm a little curious about the decision to delay the pre-fees on QB3, that can't be a big expense item.

Donald R. Lindsay -- President and Chief Executive Officer

No, it wouldn't be a big expense item. It's more about keeping the focus on QB2 and making sure everything is going smoothly there, and it's also probably just part of overall of CRP in the company cost reduction program, so we slowed down on all the projects, Satellite as well, and use reduced in Galore Creek and others so it's just part of the whole thing. It's not really specific to QB3.

Greg Barnes -- TD Securities -- Analyst

Okay. Thank you.

Operator

Thank you. Our following question is from Chris Terry from Deutsche Bank. Please go ahead.

Chris Terry -- Deutsche Bank -- Analyst

Hi, Don. Couple of questions from me. Maybe just starting with overall capital management and then thinking about any asset sales. I'm just wondering, if you could comment on any of the projects Satellite areas, whether there could be asset sales there over the course of this year and whether that would then be tied back to capital returns in the next 12 months to 24 months. Thank you.

Donald R. Lindsay -- President and Chief Executive Officer

Yeah. No, as I said before, we think Zafranal in the not too distant future is San Nicolas, are projects that there is a lot of interest in out there. And pre-coronavirus, I would have said that this year, there would be at least one asset sale and that the board would probably look at that capital, however much it was, in terms of additional buybacks, so that sort of thing. With coronavirus still prevailing, I think most people are going to -- going to wait and see how that shakes out. It's still unknown what the long-term effect is, not just the disease itself. But the effect on inventories at different nodes in the supply chain. I think we have to get a better view and see how long that takes to clear whether it's two months or three months, or 10 months or 12 months, and so someone making investments like that would probably want to see that too. So we will go pretty slow on that for now. But if the market starts to clear and we think buyers have confidence, then we'd be back at that pretty quickly.

Chris Terry -- Deutsche Bank -- Analyst

Okay. Thanks, Don. And then, just to circle back to couple of the other questions that were asked already, but just in a slightly different way. I just want to be clear, so on the cost-out target, the CAD610 million, and you're expecting to get coal costs into 2021 below CAD60 a ton. Is that where the majority of the savings will actually be shown in the numbers, it will be in the opex. I know there's a portion that's capex as well, or is it outside of coal as well. Just trying to get a feel for where we'll actually see those savings come through the financials. Thanks.

Donald R. Lindsay -- President and Chief Executive Officer

Over to Ron.

Ronald A. Millos -- Senior Vice President, Finance and Chief Financial Officer

So that was the cost reduction program?

Donald R. Lindsay -- President and Chief Executive Officer

Yes.

Ronald A. Millos -- Senior Vice President, Finance and Chief Financial Officer

Yeah. They're all over the place. There is obviously various buckets of capital spending, and they're within the -- each of the various business units, there is savings in the Satellite projects, as Don mentioned earlier, there is administrative cost savings, some of them will be included in the sort of the G&A number that you see, others will be in the admin costs at the sites.

There is other income expense items in there, where we -- as an example, we've monetized some hedging contracts that we had in place for small dollar amounts so split all over the place. The basic -- the split for the CAD210 million for 2019 was about CAD60 million in capital, sorry CAD150 million in capital, CAD60 million opex and about 75% of that came from the operating business units and then the other 25% came from the Satellite, the corporate initiatives.

And then go forward on the $400 million, about 65% of that is at the operating business units. The big swing there is that one of the big initiatives as we were planning on refreshing a lot of our IT system and that's been put on hold. So that's the reason for the drop in the percentage allocated to the producing business units and more to the other business units, and then the target for -- the CAD400 million target. That's CAD220 million of opex and CAD180 million of capex.

Donald R. Lindsay -- President and Chief Executive Officer

Maybe just related to the core part of your question and I'm sure people are grasping this but -- but for further clarity. In closing Cardinal River, which was 1.4 million tons and replacing it with 2 million tons at Elkview is quite significant. So the Cardinal River tons were lower revenue per ton than the new tons at Elkview and the Cardinal tons in terms of costs were close to double the costs that we'll have at Elkview. So it is a really big improvement in the business and that's why we've moved it up to get it done as fast as we can. So a couple of quarters from now, the business will be much stronger for having done this.

Chris Terry -- Deutsche Bank -- Analyst

Okay. Thanks for the color. Just the last couple from me. The RACE21 program, just to be clear, does that have any capex associated with it?

Donald R. Lindsay -- President and Chief Executive Officer

Yes, it does. Who, Ron or...?

Ronald A. Millos -- Senior Vice President, Finance and Chief Financial Officer

Yeah. In our guidance there's about CAD85 million for capex, the total spend when you read the news is about CAD140 million. The RACE21 is another sort of awkward one from an accounting perspective in that there is physical equipment. There is a software, an algorithm writing and then there is assessment costs. So the cost will get split in three buckets. They'll be included in our research and innovation line item on the face of the P&L. And in the cash flow, they'll be in investments and in property, plant and equipment, and effectively, the piece that goes into investments it's intangible assets.

And it's basically the software and the algorithm, so things that you can touch and kick and feel going to fixed assets. Other things that can get capitalized go into the intangible asset bucket and investments and then sort of assessment costs as you're looking at the various initiatives before you come to a conclusion whether they're going to look or work or not, those would be expensed as incurred.

Chris Terry -- Deutsche Bank -- Analyst

Okay. Thanks for that. So I mean it sounds like, on a net basis, the savings are not nearly as high as the headline numbers when you put in the costs to actually implement the program.

Ronald A. Millos -- Senior Vice President, Finance and Chief Financial Officer

While the -- the savings go every year, right, whereas the costs are -- they're one-offs.

Chris Terry -- Deutsche Bank -- Analyst

Okay. And just the last one from me, just in terms of just to get full clarity on the port situation to understand that in coal. Can you step through maybe 2020, '21 and 2022, the percentage from each port that you're expecting over that time. Just trying to understand how you manage the Neptune situation as you take that offline. I'm just making sure we've got the tons understood. Thanks.

Donald R. Lindsay -- President and Chief Executive Officer

Yeah. No, as I said earlier, we won't be able to do that till probably toward the end of the year that -- it hasn't yet been decided, how many tonnes will go through each of the three ports.

Chris Terry -- Deutsche Bank -- Analyst

Okay. That's it from me. Thank you.

Operator

Thank you. Our following question is from Gordon Lawson from Paradigm Capital. Please go ahead.

Gordon Lawson -- Paradigm Capital -- Analyst

Thanks for taking my question. In terms of railway delays, if they were to end in the near term, do you believe you can make up for the losses by the end of Q2 or could this be more drawn out. And also given current share prices, do you anticipate being more active in the NCIB program in the near term?

Donald R. Lindsay -- President and Chief Executive Officer

I'll take the first one, and then turn it over to Ian Anderson on the -- are on the -- I'll take second one. On the NCIB, we've done about CAD800 million of the CAD1 billion that we announced, so that will resume when the blackout is finished. So short answer is yes, and on rail, hard to know, but give your best view.

Ian K. Anderson -- Vice President, Logistics

So the weather conditions, we anticipate what we encountered in Q1, those appear to be largely resolved. Of the blockade situation and the inventory situation that we're in now is very fluid, and so we do not anticipate at this point that we'd be able to make up those volumes over the first-two quarters, and we'll look forward to doing that as the course of the year progresses, and the things to come.

Gordon Lawson -- Paradigm Capital -- Analyst

Okay. Thank you very much.

Operator

Thank you. Our following question is from Carlos de Alba from Morgan Stanley. Please go ahead.

Carlos de Alba -- Morgan Stanley -- Analyst

Great day. Thank you very much. Don, maybe just a follow-up on RACE21, is there any split, even if it is just ballpark figure on how the savings will be distributed or broken down by segment?

Donald R. Lindsay -- President and Chief Executive Officer

Yeah. I'm going to turn that over to Andrew Milner, our Senior VP Transformation.

Andrew Milner -- Senior Vice President and Chief Transformation Officer

So, if we look at the 2019 year, the majority of the benefits came through the processing environment. So, throughput improvements. They are largely in the base metals business. So we take all the projects that we saw there are offering the greatest value, that will continue into 2020. What we're now shifting as part of RACE21 to the broader aspects of the program is integrating the autonomous work, the full data integration work. So, we'll see a ramp up in the analytic space in mining, predictive maintenance, etc. So, in the initial phases, it's largely been throughput increases with cost savings being seen also, but to a lesser extent, but that will certainly ramp up as we head into 2020.

The other one I'd just like to say on early -- on an earlier point just on the value capture, or value uplift here. The value proposition is substantial, if you just look at the example of 2018 [Phonetic], we invested CAD45 billion one-off to capture CAD150 million or CAD160 million was -- what was achieved in recurring benefits. So, it's actually quite a compelling investment. And going forward, our approach will be very much one of aligning investment to value uplift, so we have a program in place now where we've got stage gates and criteria for assessing projects. We'll invest in those projects, we will look at the value uplift and then we'll make future decisions on future investment as we go forward. But we're very confident that we will achieve the CAD500 million a year, and CAD1 billion by the end of '21.

Carlos de Alba -- Morgan Stanley -- Analyst

All right, thank you. And then, another follow-up on the share buybacks, as it was mentioned before, 80% has been completed from the previously authorized program. Don, how do you see the timing for a potential expansion or a new authorization on buybacks in light of the potential review in the capex of QB2, would that happen or would management propose to the Board a new program just after the new QB2 capex is announced. And then, depending on how that -- how the higher capex -- what is the higher capex, then you would propose to the Board a new program or it doesn't really matter, and is not linked to QB2 capex?

Donald R. Lindsay -- President and Chief Executive Officer

Well, we got to finish the first program, the current program and we're not sure how long that will take. But once that's done and that would likely be passed when the QB2 information on capex and schedule comes out. So, it's a Board decision, there's nothing planned at the moment. And the board would assess how the overall market looks, coronavirus, coal price all the normal things that you'd think about, and look at our capital needs and decide if there is surplus to add or asset sales. Nothing planned at the moment, but the board will always be monitoring these in each meeting that we have.

Carlos de Alba -- Morgan Stanley -- Analyst

Great. Thank you very much.

Operator

Thank you. Our following question is from Lucas Pipes from B Riley FBR. Please go ahead.

Lucas Pipes -- B Riley FBR -- Analyst

Hey. Good morning everyone. Just another one on the coal side. And things do seem out of sync there at this time. I just wanted to get a little bit more color. Is this related to Neptune at the end of the day, or is this a perfect storm with weather, rail and your Neptune development coming together, or are there may be more specific processes that you can improve on your side that could avoid similar outcomes in the future? Thank you very much.

Donald R. Lindsay -- President and Chief Executive Officer

Thanks, Lucas. So, as usual, it's a combination of things, but it's probably closer to the perfect storm, if you had to pick one. So if you start a big picture and say look the coronavirus has hit commodity markets. We don't know how it's going to shake out. But generally, they'd be weaker for a period of time until this whole thing sorts itself out through at the supply chain. So we're saying, we'll do our part and cut back production a bit.

I noticed that that's helping to strengthen the coal price has been very effective so far, that then which reduced production gives us opportunity to take the five-month shutdown at Neptune which assists with the construction and helps manage things there. So it's kind of seeing an opportunity and taking it in terms of making those decisions. But we got to get through these two quarters, but the point, it sets the business up in a really good position as we get to the end of the year, like this transfer from Cardinal River to Elkview is very significant. It's a much higher quality business once we've completed that. So a lot of it's happening, these two quarters. No question, but it certainly comes to NIM and business in good shape after that.

Lucas Pipes -- B Riley FBR -- Analyst

That's a helpful perspective. I appreciate that. And then my second question on QB2, and I appreciate it. We'll have an update here before the end of the quarter, but I'm sure you can appreciate that this has been an overhang for the stock and investors are eager to kind of find out what the number is. And I understand it's early and there is still some -- I'm sure some work to be done. But, can you maybe ballpark the potential cost inflation could it be 10%, 20% below that, any color that you could share at this point, I think it would be really appreciated by the market. Thank you.

Donald R. Lindsay -- President and Chief Executive Officer

Firstly, I certainly understand why you're asking the question but I'm sorry, I am not going to be able to do that. We will give you the answer. It's only maybe six weeks away not even that and then you'll get lots of detail and then will be available on April 1 in the Investor Day to go through all the detail, I think it's best to get the true story rather than making the estimates at this time.

But, I might just add back on the coal business, like, when I say we got to get through these two quarters, but once you get into really even into Q3 and Q4, we go into a period of time where coal costs continue to go down firstly, the Elkview expansion that we talked about, but then as Robin said, this strip ratio is coming down this year and again next year, then we get Neptune in place and that lowers our costs in the logistic side. So we're quite excited about the coal business. It's going to be so much stronger six months from now, but yes, we got to go through these quarters. I know the markets, short-term always, always is short-term, but even medium-term or not even quite. It's not that long until this business looks awfully good.

Lucas Pipes -- B Riley FBR -- Analyst

That's very helpful. Really appreciate it and best of luck to you and the team.

Donald R. Lindsay -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our following question is from Brian MacArthur from Raymond James. Please go ahead.

Brian MacArthur -- Raymond James -- Analyst

Good morning. I'm sorry to go back to the call again and I hear everything you're saying about getting to the next two quarters, but there's also a statement in here, about the risk if you don't complete Neptune on time and your Westshore Terminal contract expires, you may have to pull back production and sales. So can you just go through, it looks like you have some mitigation in there with your deal on Ridley. But can you just answer that Ridley deal that goes from 3 million tons to 6 million tons, and then you have an option to 9 million tons. If, for some reason, Neptune's delayed, West shore expires. Can you get 9 million tons through Ridley next year in that short period of time, while you're buffering everything because that will impact the cost too. Can you just go through that scenario. Please?

Donald R. Lindsay -- President and Chief Executive Officer

I'll make a few good points and then turn it over to Real and Ian. So the language in our disclosure is what you would expect that we do is our job to highlight the risk. So we've done, so it's nothing more than that. In terms of -- let's go to the Ridley contract now. Then so, who wants to start? Real, you want to go back in -- OK.

Real Foley -- Senior Vice President, Marketing and Logistics

So, when you look at what we've announced on contracts in -- there is additional capacity on CN, there is additional capacity at Ridley, like you described. What we're actually doing is continuing to progress commercial and operational options to complement our capacity at Neptune. And keep in mind also that the five-month outage that we're doing at Neptune will bring benefit to the schedule. And there is a possibility that we'll get benefit from tonnage going through Neptune. It's difficult to estimate at this point.

And then, with respect to other alternatives, we're not going into -- we're not going to go into further details at this point, because it's actually commercially sensitive.

Brian MacArthur -- Raymond James -- Analyst

Great. Thanks very much.

Operator

Thank you. Following question is from Alex Hacking from Citi. Please go ahead.

Alex Hacking -- Citi -- Analyst

Yeah. Good morning. Just one question from me, on the energy business. Right now, I guess, it's generating negative cash flows, negative headlines. Where does this business fit in your portfolio on the long-term, especially, given your targets around carbon neutrality and stuff like that. Thank you.

Donald R. Lindsay -- President and Chief Executive Officer

Okay. Sort of a big picture question and answer in two parts. First, what we've said is that again, this is really focused on Fort Hills. So Fort Hills has been very successful from an engineering and operating point of view, and in the only month -- the last month it was allowed to run full out, it averaged 104% of capacity, and accounts for CAD23. So, it's a pretty good asset. Since that time we've had the capacity shut in Alberta, and it doesn't look like it's going to change anytime soon. And that, of course, is due to the pipeline issue. And, so really, for Fort Hills to achieve the kind of results that it was built for, we have to wait for the pipelines to be completed, and during that time, Suncor believes there is really good bottlenecking -- debottlenecking opportunities that can increase the capacity as much as 20%.

So, allowing those two things to happen certainly increases the value of Fort Hills. We've said that at that time, which is a couple of years off, that if we're not getting paid in the Teck Resources share price for that asset, which might be one of our top three assets in the time, then we would look at doing something to our release that value, whether it's a spin out or sale or some sort of transaction, we looked to make sure that the shareholders got, too, some value. So that's how we think, and I think we did that then probably Frontier and Lease 421 would go with it. The specifics on Frontier, of course, straight before Federal Cabinet. Now, we don't know what the decision is going to be and I think we've come this far, we're just going to wait to see what the answer is at this stage. As I've said before, it's anyone's guess.

Operator

Thank you. Our following question is from Orest Wowkodaw from Scotiabank. Please go ahead.

Orest Wowkodaw -- Scotiabank -- Analyst

Well, thanks for taking the follow-up. Just in your three-year guidance for Highland Valley Copper at 155,000 tons to 165,000 tons, does that assume an expansion kicks in somewhere in that timeframe?

Dale E. Andres -- Senior Vice President, Base Metals

No. In fact, specifically, it doesn't assume that, and an expansion, if anything, could probably even potentially drop that for a while, but that's the existing plan. It's better grades as we go deeper in the pit, and we're getting tremendous benefit from RACE21 throughput initiatives as well as the recent D3 mill that was installed and commissioned in 2019.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. Thank you. And then, just on QB2, I realize the study is under way. But can you give us a sense of how much of the original capex was exposed to the peso versus the dollar?

Dale E. Andres -- Senior Vice President, Base Metals

Yeah, it's close to 70% and the other part of that question, and answer is that the US dollar component is generally more upfront, in terms of the things you're purchasing, whereas now, between now and finish the project, a high percentage of labor, which of course is in Chilean peso. So, pesos around 800 today. So, it's pretty -- pretty big benefit.

Orest Wowkodaw -- Scotiabank -- Analyst

Thanks very much.

Dale E. Andres -- Senior Vice President, Base Metals

Just to remind people when we sanctioned the project CLP625 to the US dollar.

Fraser Phillips -- Senior Vice President, Investor Relations and Strategic Analysis

Mont, I think we've got time for one more question. Thanks.

Operator

Certainly. Our last question is from Greg Barnes from TD Securities. Please go ahead.

Greg Barnes -- TD Securities -- Analyst

I just want to squeeze in around the trout issues in the Elk Valley. How serious is that and what mitigation measures do you think you need to make?

Donald R. Lindsay -- President and Chief Executive Officer

We're turning to -- Robin Sheremeta go with that.

Robin B. Sheremeta -- Senior Vice President, Coal

Yeah. I mean we're still evaluating it. We had the one population measure last through the summer season. So, and that sort of decline in the population, and right now we're into a technical review that's going to take some time. There is multiple different possible causes from -- any from water quality issues to flow conditions, habitat availability, predation, lots of different scenarios around natural causes. So we have to get through that process of understanding what the potential root cause is. We are confident that whatever we find as a root cause, we'll be able to mitigate and move forward. But that that's about where we sit right now. There's not much more we can say until we get through this study.

Greg Barnes -- TD Securities -- Analyst

[Speech Overlap] How long?

Robin B. Sheremeta -- Senior Vice President, Coal

Possibly, three months to four months is what I think we're looking at. And that's the last update I had. A really strong team that's on it, external people have come in to help us understand that -- what's happened so.

Greg Barnes -- TD Securities -- Analyst

Okay.

Robin B. Sheremeta -- Senior Vice President, Coal

Well, three months to four months.

Greg Barnes -- TD Securities -- Analyst

Thank you.

Operator

Thank you. That concludes the Q&A session. Please go ahead, Mr. Lindsay.

Donald R. Lindsay -- President and Chief Executive Officer

Okay. I just want to say thank you to all for joining us today. And maybe just to remind you that particularly when talking about QB2, none of that information that we just -- is new. It's all sort of been things we've disclosed for several months now. And we look forward to being able to more fully answer the question on capex in schedule at Investor Day on April 1, and we hope to see all there. Thanks very much.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Fraser Phillips -- Senior Vice President, Investor Relations and Strategic Analysis

Donald R. Lindsay -- President and Chief Executive Officer

Ronald A. Millos -- Senior Vice President, Finance and Chief Financial Officer

Robin B. Sheremeta -- Senior Vice President, Coal

Dale E. Andres -- Senior Vice President, Base Metals

Ian K. Anderson -- Vice President, Logistics

Andrew Milner -- Senior Vice President and Chief Transformation Officer

Real Foley -- Senior Vice President, Marketing and Logistics

Orest Wowkodaw -- Scotiabank -- Analyst

Matt Korn -- Goldman Sachs -- Analyst

Greg Barnes -- TD Securities -- Analyst

Chris Terry -- Deutsche Bank -- Analyst

Gordon Lawson -- Paradigm Capital -- Analyst

Carlos de Alba -- Morgan Stanley -- Analyst

Lucas Pipes -- B Riley FBR -- Analyst

Brian MacArthur -- Raymond James -- Analyst

Alex Hacking -- Citi -- Analyst

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