Teck Resources Ltd (NYSE:TECK) Third Quarter 2022 Results Conference Call October 27, 2022 11:00 a. m. to 5:00 p. m. m. ET
Participating companies
Fraser Phillips – SVP, RI and Strategic Analysis
Jonathan Price – Executive Director and Director
Harry Conger: Executive Vice President, Chief Operating Officer, President and Chief Executive Officer
Crystal Prystai – Vice President, Corporate Controller and Interim Chief Financial Officer
Real Foley: Senior Vice President of Marketing and Logistics
Robin Sheremeta – Senior Vice President, Coal
Conference Call Participants
Greg Barnes – TD Values
Orest Wowkodaw – Scotiabank
Lawson Winder – Bank of America Merrill Lynch
Jackie Przybylowski – BMO Capital Markets
Brian MacArthur-Raymond James
Operator
Ladies and gentlemen, thank you for being here. Welcome to Teck’s third quarter 2022 earnings call. [Operator Instructions]. This convention call is being recorded today, Thursday, October 27, 2022. Now I’d like to speak with Fraser Phillips, Senior Vice President of Investor Relations and Strategic Analysis. Continue.
Fraser Phillips
Thank you Ariel. Hello everyone. Thank you for joining us on Teck’s third quarter 2022 earnings convention call. Please note that forward-looking statements are from today’s call. Various hazards and uncertainties could cause the actual effects to vary. Teck assumes no legal responsibility for updating any forward-looking statements.
Please refer to slide 2 for the assumptions underlying our forward-looking statements. In addition, in this call we will refer to various non-GAAP measures. Explanations and reconciliations related to those measures can be found in our MD
Jonathan Award
Thank you, Fraser, and good morning everyone. It is an enthusiasm to deal with you today as CEO of Teck. I am excited about Tech’s opportunity to build on our existing strong foundation and position the company for long-term success. In recent meetings with investors, I was asked if I deserve to expect adjustments in generation strategy as I take on the CEO role. Having been involved in the progression and articulation of Teck’s strategy over the past 2 years, I can hopefully say that our existing strategy is the right one to generate a sustainable long-term shareholder price.
Now let’s move on to slide 4. The core of our strategy is copper expansion. We remain focused on creating prices from our industry-leading copper expansion profile. QB2 will double our consolidated copper production when it reaches full production next year. The rest of our portfolio of hot expansion options has prospects of increasing five times the amount of our existing copper production.
Second, we are rebalancing our portfolio of high-quality assets towards low-carbon metals, namely copper, whose demand is expected to double by 2050, driven largely through electrification and the low-carbon transition. We intend to capitalize on this market opportunity while reducing the share of carbon in our overall portfolio.
Third, as we demonstrated this year, we will balance our expansion investment with returning capital to our shareholders while maintaining a strong balance sheet. To this end, I remain fully committed to our capital allocation framework. We can strike the right balance between expansion and returning money for shareholders while ensuring we are well placed to weather periods of market uncertainty and volatility. Finally, we will continue to build on our strong sustainability trajectory.
Sustainability is at the core of our goal and values, and we see it as a competitive advantage. Sustainability will continue to be fully embedded in our operations and processes at all levels of our organization. Together with the entire Teck team, our goal is to execute this strategy while navigating global economic uncertainty.
Recently, investors have also asked me about my priorities as CEO. As indicated on slide 5, my most sensible priority is to continue advancing our long-term copper expansion strategy. Our immediate priority is the final touch and acceleration of the QB2. Assignment as organizational functions progress across our suite of high-quality copper allocations. In doing so, we will rebalance our portfolio towards low-carbon metals and decrease the overall proportion of carbon in our portfolio. Second, we remain focused on operational excellence, adding the deployment of autonomy and virtual technologies.
And finally, we are committed to keeping our sustainability functionality at the forefront of the industry as we seek to achieve our short- and long-term goals. And, taken together, those priorities will position us to meet the growing demand for copper driven through the net-zero global transition while returning significant capital to our shareholders.
To this end, we executed a number of significant transactions during the quarter. On July 20, we announced an agreement with PolyMet in which Glencore holds a majority stake to advance its allocation of North Met and Masaba’s mineral deposit in Minnesota. And on September 16, it announced an agreement with Agnico Eagle to advance our San Nicolas copper and zinc allocation in Zacatecas, Mexico. Agnico Eagle will subscribe for the first $580 million in shares of San Domain Nicolás, a subsidiary of Teck, giving Agnico Eagle a 50% effective interest in San Nicolas.
Together, those transactions that threaten our positions pave the way for progression and crystallize a significant price of our copper expansion pipeline. Closing is subject to standard final conditions, adding receipt of regulatory approvals.
In addition, we just announced an agreement to sell our 21. 3% stake in Fort Hills to Suncor for approximately $1 billion in gross proceeds. High quality assets towards low-carbon metals. It is the culmination of a thorough procedure we have undertaken to compare all features in order to achieve the highest price for our shareholders. The transaction price is consistent with the Fort Hills-based company’s existing price outlook as reflected in Suncor’s most recent comprehensive review and resulting long-term plan for allocation and is consistent with comparable transactions.
Following the sale agreement, we recorded a non-cash after-tax impairment rate of approximately $950 million in the third quarter. We will review the use of income in accordance with our capital allocation framework in February 2023. The sale agreement will take effect on November 1. Closing is subject to standard conditions, adding receipt of regulatory approvals.
Let me now turn to our third trimester birth, with the highlights of slide 6. Overall, our third-quarter monetary effects remained strong, primarily due to continued strength in commodity costs despite the overall economic slowdown. Gross source of income before depreciation and amortization of $2400 million, a significant accumulation of $2100 million in the third quarter of 2021. Adjusted EBITDA of $1900 million and adjusted earnings attributable to consistent shareholders were $923 million or $1. 74 consistent with percentage on a diluted basis. Since the beginning of the year, we have returned $1. 4 billion to shareholders through repurchases and $468 million through dividends, while paying $1. 2 billion of our remarkable debt.
During the quarter, we achieved a number of significant milestones in QB2, adding the commissioning of our transmission system, significant progress of the commissioning of the desalination plant and the start of pre-operational testing of the Line 1 mills, all of which are in operation. The critical trail of the first copper. After the quarter, we announced our goal to deploy 2 electric tugs at our Neptune terminals. Working with transport providers to expand green transport corridors is a component of our climate action strategy and supports our goal of zero emissions network until 2050. Crystal will provide a detailed review of our trading functionality and updates to our recommendation in minutes.
However, I should highlight 3 key adjustments on slide 8. First, for QB2, we have revised our structural capital charge management position from USD 7400 million to USD 7750 million. Based on our existing currency assumptions, charge pressures similar to climatic, underground and other factors. This is an accumulation of our previous forecast of $6. 9 billion to $7 billion. We continue to target the first Line 1 copper later this year. However, if the effects on productivity persist, this will be postponed until January 2023.
The first coupling with production is part of the ongoing commissioning plan for the mechanical finishing touch of Line 1, which will continue until the mechanical finishing touch of Line 2 and increase until 2023. It is expected to increase in 2023 after the launch of QB2. We now expect QB to match production between 170,000 and 300,000 tonnes between 2023 and 2025, and with a previous diversity of 245,000 to 300,000 tonnes between 2023 and 2023. at the end of the decrease in prognostic diversity.
Secondly, for metallic coal, we have updated our 3-year production forecast. Our metallic coal production capacity at our four operating mines in Elk Valley is approximately 26-27 million tons, and we have been operating at those grades for the maximum. However, over the past 3 years, external demanding situations largely beyond ours and, more recently, skills issues on our top floor have affected our ability to function at those levels. These demanding situations come with extreme weather events, adding rainfall, flooding, extreme events like coal and wildfires in 2021, as well as the COVID pandemic and relevant ongoing disruption of supply chains and workforce availability.
Therefore, to better reflect the increasing frequency of such adverse events and the related threat of effects on our operations, we have reduced our 3-year production guidance from 2023 to 25 million to 26 million tonnes, from 26 million to 27 million tonnes. previously. .
Third and finally, our outlook for CapEx 2023. Si while we continue to expect our capital spending for 2023 to be lower than in 2022, with accumulation in capital direction QB2 and inflationary pressures continuing, we no longer expect $2 billion of relief from planned spending grades for 2022. We will make our capital spending forecast for 2023 in February, as usual.
Overall, thanks to our resilience and monetary strength, we remain well placed to deal with any near-term pressures while remaining focused on our copper expansion strategy. With that, I’ll now pass the word to Red to provide some operational highlights. for the 3rd trimester.
Harry Conger
thanks jonathan It’s a pleasure speaking with you today as president and chief operating officer of Teck. I need to give you an update today on the unplanned closure of the Elk View plant, the inflationary pressures we’re seeing and what we’re doing about it, building organizational capacity to put our copper expansion strategy into effect; and our progress on QB2, adding a [indistinguishable] move to slide 10. We announced a factory conveyor structural failure on September 20th. Although this interrupted the processing of steelmaking coal at the site, mining activities continued. More importantly, there were no injuries as a result of this incident. A cross-functional team has been assembled across the organization, and we have some of our most productive people working 24/7; we are on our way to get the factory back up and running. The emulation of the feed tube and supports has been completed and restored in all the spaces of the plant. We have almost completed sourcing the fabrics and working hard to complete a replacement.
The team was able to acquire remade conveyor tube sections and all pipe sections have now been transported to a manufacturing plant in Montana and are undergoing the mandatory modifications. weeks, we are on time and expect to complete commissioning and restart production at the plant by the end of November.
We continue to estimate the effect of coal production at relief of around 1. 5 million tonnes in 2022. Let’s move on to slide 11. We are, like others in the industry, still operating in a time of uncertainty. The company’s inflationary pressures increased our operating charges by 14% compared to the same time last year with similar and persistent pressures on our capital charges. While inflation appears to be slowing, we continue to enjoy significant value inflation for many of our major materials compared to the same era last year. Increases in the cost of raw materials, adding mining equipment, explosives and grinding agents, are basically due to the higher values of underlying commodities, such as the census metal, crude oil and natural gas, as well as higher labor and transportation rates. While our underlying mining engines remain relatively stable, inflationary pressures on diesel values and other input charges have increased our unit costs.
As we adapt to higher input prices, we continue to manage our controllable pricing. We have achieved tangible effects to date through our ongoing improvement and career programs, cutting unit prices and expanding productivity at mines and our processing plants across our business.
At our mines, we have been able to power through energy loading projects, predictive maintenance projects that employ appliance sensors to reduce appliance downtime and operational downtime, and a load relief initiative similar to our drilling and blasting operations. From a logistics perspective, virtual manufacturing Plan programs for interconnection operations with logistics groups have reduced prices and maximized transit between all technological steel operations and our Neptune terminal.
In addition, the automated exercise load at Forty River floats highest consistent with the car up to 2% and the charging speed up to 40%. Going forward, we will continue to make additional improvements, enabling us to meet our production targets to lessen the effect of inflationary pressures on prices and keep prices structurally sound over the long term.
Let’s move on to slide 12. As we actively move forward to leverage our suite of copper expansion processes, we are structuring organizational capacity ahead of the next wave of assignment delivery. To that end, we have appointed Tyler Mitchelson as Senior Vice President, Copper Growth, effective July 4. Tyler reports to me with a dotted line to Nick Hooper, our senior vice president of corporate development and exploration. Commissioning of our copper and gold assets, as well as expanding or extending the mine life of existing operations.
This new role and the delight Tyler brings will be a key catalyst to advance our copper expansion strategy. Let’s move on to an update on QB2 from slide 13. We are very proud of the steady progress we have made in the quarter and focus on completing the formula and beyond. In terms of key milestones achieved, we have completed the commissioning of the 220 kV transmission formula and the final testing of the switching equipment from the main substations to the center. As far as water is concerned, we are very complex in commissioning the pre-treatment and pre-operational testing of the opposite osmosis equipment of the desalination plant, and we have finished the hydraulic testing of the water source line and water pumping stations, which is no small feat. 156 kilometers of pipe have already been fully tested on fiber.
In the mine area, all subsystems of the ball mill No. 1 and SAG No. 1 mill are in 3 operational tests, and we have completed the installation of the ore garage dome of all location conveyor belts and the 12 kilometer long plant. tailings gutter. Given the delay in completion of the jetty and shipper seen here on the right, other concentrate shipping arrangements are very complex as a transitional measure until the carrier is commissioned. for the project, and we continue to target the first copper of Line 1 in the last component of this year, followed until the final touch of Line 2 and acceleration until 2023.
On slide 14, you can see the pre-treatment tanks at the desalination plant where we continue the commissioning process. Slide 2 shows the onshore conveyor that will send ore from pressures number one in the concentrator garage pile. Installations and billing connections were completed. in the last quarter.
Slide 16 shows that of the concentrator where the ore stacker is in the foreground with the garage stack down than with the mill construction and grinding lines there in the lab. Slide 17, for the generators themselves, as discussed above, all subsystems Ball mill 1 and SAG mill No. 1 are in pre-operational testing.
Slide 18 shows the flotation zone of the concentrator where we concentrate on completing the pipes and electrical systems. On slide 19, you can see concentrate tears, which are hydraulically tested as a component of the 3 operational jobs. At the tailings deposit facility, 12 kilometers of tailings gutter are now complete and in usable condition.
On slide 19, you can see the concentrate. So, in summary, we remain very pleased with the progress we are making and are excited to build on our structure and kick-start good fortune to date, with a key milestone achievement of the assignment. I urge you to stop by the Investors segment of our online page to watch the latest progress video and view the latest photo gallery. I will now pass the word to Crystal to learn more important points about the financial and operational aspects highlighted.
Prysai Crystal
We describe the key drivers of our third-quarter profitability on slide 22, adding our adjusted EBITDA of $1. 9 billion in the quarter. compared to last year, with a share of the accumulation similar to diesel prices in our operations and transportation prices. The increases in number one prices are not similar to key mining points, such as mine productivity and policy index, which have remained stable.
In fact, by looking for the parts that were under our control during the quarter, adding production and operating costs, we generated a net positive effect on adjusted EBITDA compared to the third quarter of 2021. We expect inflationary pressures on diesel charges and other key input charges, such as profit- and royalty-based reimbursement, to continue to push up our full-year and next unit charge guidance and our capital charges through next year.
Now let’s move on to our consistent operations and start with our business unit consistent with slide 23. Gross profit in the third quarter declined 50% year-over-year, primarily due to an 18% reduction in learned costs consistent with costs and a 9,000-tonne relief in sales volumes as a result of the shipment schedule. Costs matching those realized fell to $3. 49 per pound from $4. 28 per pound last year, but remain above old averages.
Production decreased by 6% to 66,000 tonnes compared to last year, basically due to a heavy rain in July that reduced production in Carmen de Andacollo. This was partially offset by increased Antamine production due to higher grinding yield.
Total unit money prices increased from $0. 28 to $1. 96 per pound. This is basically due to emerging prices for consumables, namely diesel, fixed and maintenance prices, and contractor expenses. our 3-year Highland Valley coincides with the diversity of production management from 110,000 to 170,000 tonnes according to the year due to the delay in the previous clearing at the Lornex pit, reflecting maintenance problems and high absenteeism rates, mainly in the professional trades.
Our net currency unit charge forecast for 2022 remains unchanged. Turning now to our zinc business unit on slide 24. Gross profit generation was up 9% year over year to $311 million. The build-up was primarily due to unit-consistent charges and a 45% build-up in zinc and concentrate sales volumes, which was partially offset through unit-consistent charges at our Red Dog with consistent sales. During the quarter, zinc concentrate production increased 34% at Red Dog due to increased mill output and steadily increasing zinc grades. Refined zinc production of 13% in Q3 from our Trail or Consistent conditions reflects ongoing primary paints to upgrade the KSAT furnace core and zinc roast dome. We anticipate that maintenance painting, which began in September, will be completed in November. Finally, general unit monetary charges for the construction of our zinc business unit increased from $0. 08 to $0. 64 consistent with the pound. This accumulation reflects the accumulation in metal; sorry, it is consistent with diesel and consumable charges, transportation charges, and smelter processing fees.
Looking ahead, we have reduced our subtle zinc production margin from 257,000 tonnes to 276,000 tonnes due to prolonged plant maintenance and lower than expected production for the year. We expect Red Dog zinc concentrate sales of 130,000 to 150,000 tonnes in the fourth quarter Our net unit monetary charge forecast for zinc in 2022 remains unchanged.
Now let’s move on to slide 25. Our metallic coal business unit had a solid quarter with gross margin up 37% to $1200 million from $901 million last year. and higher unit operating costs due to inflationary pressures.
Despite a 33% decline in the last quarter of this year, the value of metallurgical coal rose 28% to $304 per tonne through last year. The estimated FOB Australia value for metallic coal averaged $287 per tonne in the record third quarter of $527 per tonne in the current quarter this year. Sales to our consumers in China are based on the China CFR value, which averaged $310 per tonne.
Steelmaking coal production in the third quarter fell 5% to 5. 7 million tonnes from a year earlier. The decrease is basically due to the closure of the Elkview plant described above by Red. Sales volumes were reduced by 5% to 5. 6 million tonnes, which is within the diversity of our disclosed guidance. The minimum is due to the effect of the closure of the Elkview plant and the recently resolved work disruption at Westshore Terminal.
Our significant investment in the Port of Neptune particularly reduced the effect that the closure of the Westshore Terminal would otherwise have had on our coal sales volumes in the third quarter. Neptune operated at nominal capacity in September.
Compared to last year, the site’s sales adjusted currency charge increased 46%, from $63 per ton to $92 per ton, due to declining production and inflationary charging pressures across all major ticket categories inconsistent load, 30%. increase in the value of WTI oil taken into account. 24% of our prices accumulate year after year. And finally, freight prices rise to $48 per ton, up from $46 per ton last year due to the consistent rise in rail fuel. surcharges and partially offset by decreasing demurrage charges.
Going forward, the closing of LC is expected to have an effect on production and sales in the fourth quarter. Our coal production forecast for 2022 has been lowered to 22 million tonnes to 22. 5 million tonnes from 23. 5 million tonnes. to 24 million tonnes, and we expect sales in the fourth quarter of five to five. 4 million tonnes. The closure of the LC plant is also expected to have an effect on our site and transportation charges. Strain on our full-year forecast for the adjusted monetary charge of site sales from $87 to $92 per tonne, and we have increased our transportation direction charge to $46 to $49 per ton due to the expected effect on volumes. and demurrage fees. The LQ plant is expected to restart production by the end of November and opportunistic maintenance of the plant is being completed during the shutdown.
Now let’s move on to slide 26. Our Energy business unit made a gross profit of $84 million in the quarter, compared to a loss of $28 million a year ago. Unit operating prices due to 2 production rates incurred. As Jonathan noted above, we announced the sale of our interest in Fort Hills for gross profit of approximately $1 billion in money and recorded a non-cash after-tax impairment rate of approximately $950 million in the third quarter. The sale agreement is expected to be effective November 1 and is subject to standard final situations and regulatory approvals.
Our interest in Fort Hills will be reported as a discontinued operation beginning in the fourth quarter of 2022. Slide 27 shows our updated forecast for capital investment. 2022 from $100 million to $200 million. And as Jonathan noted earlier, while we continue to expect our capital expenditures for 2023 to be lower than in 2022, we no longer expect $2 billion relief given QB2 capital accumulation and continued inflationary pressures on our business.
Now let’s take a look at slide 28. We continue our strong monetary position. Lately we have $8300 million in liquidity, adding $2900 million in money and a $4 billion unused revolving credit line similar to sustainable development. We have an adjusted net debt of -EBITDA ratio of 0. 5x, investment grade creditsss scores from all four creditsss rating agencies and no primary debt maturities before 2030. We are very confident in our ability to complete QB2 while navigating effectively in this era of macroeconomic crisis. Strength of our balance sheet. And by adhering to our disciplined capital allocation framework, Teck continues its track record of significant returns on money for shareholders, as evidenced through strong third-quarter returns. With that, I will return to Jonathan for closing remarks.
Jonathan Award
Thanks, Crystal. Our continued investment in progression and resource acquisition has resulted in an exceptional workflow to match the expansion that many of our peers simply don’t have. Returning to slide 30, we have updated our expansion-friendly pipeline to reflect recently announced transactions, which are subject to the latest standard conditions, in addition to receipt of regulatory approvals. Cumulatively, those projects have the potential to load new co-seists with an equivalent production of more than 1. 5 million tons per year. QB2 is the first step in our transformation consistent with expansion. QB’s next phase of progression will be the expansion of the CrebradaBlanka plant. The QBME feasibility review, which aggregates all baseline environmental activities, is expected to be completed in 2023. It is expected to be a significant contributor to our near term, consistent with pipeline expansion with first production expected in 2026. We are also making progress on our other consistent with expansion projects. Detailed engineering and updated feasibility are underway on the North Met project. In San Nicolás, we are targeting the finishing touch of the feasibility study paintings in the first quarter of 2024 and the first production due in 2026. And in Zafranal, the feasibility study finished in mid-2019, and we are in the final phase of the authorization process. We will continue to move Zafranal forward on the path to price creation in 2023.
In conclusion, Teck is well placed to generate a sustainable percentage price over the long term. There are significant opportunities as global expansion and transition to a low-carbon economy drive new demand for metallic copper and we have a high-quality metallic copper portfolio. Copper expansion features that are the envy of our peers. As we move forward, we will continue to rebalance our copper portfolio while reducing the share of carbon in our overall business. We will continue to adhere to our rigorous capital allocation framework, balancing expansion and returns on money for shareholders. At the same time, we will maintain our leadership in developing guilty resources. We will encourage more sustainable productive practices and share the benefits of mining with our stakeholders. vision, preparing us for an incredibly exciting future. Merci. Je will now pass the call to Fraser.
Fraser Phillips
Just before we get to the Q&A, I just wanted to point out to everyone if. . . If we don’t have time for the call today, we have a little time, but we don’t answer your questions. We are available, me and my team later to. . . for any mandatory tracking. With that, then, Ariel, I will leave it to you to ask the questions and answers. . .
Q&A session
Operator
[Operator Instructions]. The first comes from Greg Barnes of TD Securities.
Greg Barnes
Jonathan, I just need to get a bigger CapEx concept in the future, obviously, with a top CapEx for QB2 in 2023. Maintain capital, given the inflationary pressures it has experienced over the past year. Should we be at a figure somewhere?between or up to $2 billion to hold capital in Canadian dollars?
Jonathan Award
Thank you, Greg, for the question. I’ll give the floor to Crystal in a moment just to provide more details. Generally speaking, we discussed earlier the relief of $2 billion from around $5 billion to just over $3 billion. Obviously, based on the updated direction we have given you for QB2, there is more capital to spend in 2023 now on this specific project.
To answer your question about inflation, generally speaking, the same points that drove inflation in our unit prices drive inflation in our capital price maintenance. These are the types of points that would be related to fuel, for example, or related to labor, where it’s kind of a cost of benefit. But let me turn to Crystal to see if it has anything to add to our expectations of CapEx, which, as we said, will be consulting us through the general course in early 2023.
Prysai Crystal
Thank you Greg for your inquiry. As Jonathan mentioned, we are running in our forums in February, in accordance with our general practices, and we are still making progress in our budget process. Therefore, I cannot yet respond to your express inquiry about where the maintenance capital will be in 2023. I can tell through our overall capital portfolio for expenses. We still expect it to be lower than where we arrived for 2022, but we will have to wait until we finalize our forecast in February.
Greg Barnes
It is ok. I think I would give it a chance. Just as a sequel. — Again, Jonathan, in the coal sector, cutting the 3-year forecast to 25 to 26 million tons. So have you lost the ability to succeed by 26 to 27 million tons because of all the disruptions you discussed in the merger and acquisition, or do you think you can get back to that point at some point?
Jonathan Award
So, certainly, factories and mines are capable of achieving 26 to 27. However, as discussed in recent years, we have had a number of events, adding many external points, which have led us to produce below this level. And so, from a standpoint make plans from the point of view and help the market consistently with a moderate attitude of production expectations. We started to take that into account in the way we think about this company. Now, if you had a year without external events, then the 26th can still achieve up to 27 million tons consistent with the year. But what I’m going to do is give it to Robin Sheremeta, the president of our coal business. It will just give you a little more information about some of the points we have. included in our thinking here and why we advise long-term production as we did.
sheremet robin
Just, Greg, I need to remind you, let’s say, the last 3 years because I think that gives you an idea of where we are. And maybe why this opportunity is not missed. But if you go back to 2020, obviously, COVID-19 was the headliner that year. This: we go through all the other upheavals with this. At the same time, we had some environmental events. And 2020 was the beginning of what has turned into increased absenteeism in operations because of COVID and some of the measures we took.
By 2021, we had many COVID-19 mitigation measures in place. We have noticed a strong uptick in our production and logistics functionality compared to 2020, despite a maximum and uninterrupted absenteeism rate, which we have also noticed today. and, therefore, we have been able to reduce inventories. We prioritize the capacity of our factories and tap into a strong, smart market. And then we got caught up in summer wildfires, which cut logistics and small production cuts. We are still recovering from summer wildfires, and have been hit by rain and flooding in November, which caused stock-like effects on logistics and production. Therefore, those 2 years have been full of pitfalls beyond our control.
On the 22nd, we started the year with maximum stocks due to rain. And then, at the beginning of the year, we had excessive frost that led to more production problems. So we didn’t start the year well.
Now, thankfully, for the most part, the remaining year has been less environmentally bumpy, but we still have demanding situations with the workforce. We’re still looking to rebuild after 2 years of the pandemic, and we’re still looking to establish grades that help offset that. Therefore, it takes time. It takes time to exercise people, to attract them to operations. And I would say we’re seeing a big improvement in that regard in the last few months. So I’m increasingly convinced that we can rebuild the capacity that we have. had before. So, and this latest challenge with the LQ plant, it’s a one-time incident. We will get through it. The team is working very hard to recover this plant. We have most of the hard parts from the reconstruction, I guess, we, the base is being put in position now, and we have some of the new tubes on the way.
So, all this is still going on and we will be fit until the end of the month. So if you consider all of those things, a lot of which are similar to the pandemic, we felt it was vital to recommend ending a diversity that more reflects some of the uncertainty that’s occurring around environmental situations and things like that. If we have a year in which the world does not conspire against us, I believe we would have enough self-confidence to succeed in those higher years. Degrees of production. Therefore, the plots are capable. It’s just a matter of. . . You’re a little lucky on our side, I guess.
Operator
Next up is from Scotiabank’s Orest Wowkodaw.
orest wowkodaw
Jonathan, his number two priority turns out to be to rebalance the portfolio towards low-carbon metals. I wonder if that, if their strategy is only to expand the copper sector, that is, to dilute the coal sector. Or do you see the option of accelerating this transformation, by divesting the coal business component?
Jonathan Award
Orest, thanks for the question. There are a number of techniques we’ve taken in this regard. The first, as you saw overnight, is the announced divestment of Fort Hills. Obviously, tar sands and carbon are an opportunity for portfolio weight through this divestment. something that we are very pleased to have agreed and to have gone ahead. Secondly, as you point out, really, the key technique for us is the expansion around copper with the doubling of copper production with QB2 coming into operation next year. And then with the projects I discussed as a new diversity being San Nicolás, being the expansion of the QV plant or the addition of more copper assemblies in the portfolio, which orients us more towards green metals and away from carbon.
As we have said before, we are very active and considerate when reviewing the shape of the portfolio and the composition of our portfolio. But right now, the points I’ve discussed are the most sensible execution priorities, and that’s what the team is doing. focusing and that’s what we’re preparing to deliver.
orest wowkodaw
It is ok. And as a follow-up, a query for Network, probably here, right?We have noticed a significant buildup in CapEx for QB2 over the last 2 quarters in total, approximately $1. 2 billion. Can you give us more details about what you see there in terms of what motivates because it can’t just be inflation?
Harry Conger
No. No, we don’t fully characterize inflection forestry. It’s wonderful to be online with you again. There are a variety of things we have dealt with. They keep you updated on all those quarters. First of all, I just need to point out that we have a very powerful formula physically with capital in which we stick to all the trends, the entrepreneurs and then all the other people concerned about what is happening to them, where the prices go, what are the deviations from the initial plans that we have made.
And we bring. . . We move forward on this every quarter, let’s reaffirm it. We do everything we can to resolve the upheavals that arise and not only fear us, but what we can do to replace the outcome. Here is an example of a charge that we have incurred but which, in general, will be very advantageous financially for us. The 12 kilometers of tailings pond that I mentioned in the previous presentation this year, late last year, we were very involved in the fact that the structure approach that the contractor was employing would not allow this part of the structure to be finished in time so that we can start here at the end of the year, which, if that happened, would have a massive impact on charges.
So we went through all of that with them, proposed another method of structure, redid the monetary terms of their contract to take into account the approach of another structure. And now we have a waste treatment plant that is complete, in working condition. Such a clever result there. We’re making changes like that here over the last quarter in significant ways. Another example would be – on the dock we have now put the electric room for this on land and at par. This allowed us to speed up the start-up of the desalination plant, etc. And then all this, you have all the inefficiencies related to counting. I just need to remind everyone that we fly another 13,000 people in and out of this remote location every two weeks. We use five charter planes a day to do this. And at 10% absenteeism and you don’t have key workers posing as crane operators, supervisors, whatever. You’ll have to fill your crews on the fly and do what you can with the skills and craft you have.
Then we adjust and control all those things. And let me finish by saying I was there last week, it was crispy now that you’re there this week. It’s exciting to see this come together. I need the whole critical path. You saw the shots today. It comes together. We’ve done it in incredibly adverse cases over the last two years, everyone stays healthy doing it.
Now, for the first time in October, all our workers were where the mask is optional. They don’t have to wear mask related to virus protocols, etc. This is the first time I’ve noticed the faces of the people there in 2 years. And that’s all very encouraging, and we’re going to finish this in a solid way and it’ll be operational here until the end of the year.
orest wowkodaw
Finally, Red, what is your point of confidence in this updated number, 7. 4 to 7. 75?Do you think that’s it?
Harry Conger
Well, the qualifier is knowing what we know today, all the trends, everything we know today is included there. which are all calculated. So, everything we know is there and has a tendency [indistinguishable] from what’s happening today. We are convinced that this is a smart figure and a smart estimate.
Operator
Our next one comes from Lawson Winder of Bank of America Securities.
Lawson reel
If I may, I would like to ask you about the other concentrate shipping features for QB2. Could you perhaps talk, as far as you can imagine, about what those arrangements are, what they look like in terms of prices, and what they look like in terms of capacity?So, for example, if the processing facility were completely increased, would this concentrated shipping arrangement option be enough to take care of that volume?
Jonathan Award
Lawson, thanks for the question. I’ll talk about that with Real Foley, our senior vice president of marketing and logistics.
Royal Foley
It is ok. Thank you, Lawson, for the question. Yes, we are running those shipping arrangements of choice and we really have invoices in position there and those are really boxes that will live to ship biological trucks to ports of choice. The agreements are in position with ports of choice, also with trucking companies to allow this. Therefore, we are confident that we have the ability to ship the concentrate which will be reduced through QB the year.
We also take a look at domestic sales in Chile to copper smelters in Chile. And shipping arrangements are also evolving to ship to those hubs.
Jonathan Award
The other thing I’d like to add to that, Lawson, is that some of those arrangements are not unusual in Chile, and are used to manage supply chain disruptions and port disruptions due to weather events. So building some of that now will take advantage of us anyway in the medium term.
Lawson reel
That makes perfect sense. And then any indication of the office of this election as opposed to the [indistinguishable]
Royal Foley
Yes, Lawson, this is the beginning for that. We’ll provide recommendations over the next year if it’s something we advise on.
Lawson reel
It is bien. Équit. Et then I also sought to move forward in the sale of tar sands. Congratulations on completing it now. Therefore, you should no longer expand tar sands or percentage of a tar sands asset, but you still have a primary tar sands allocation in your portfolio. Have there been any ideas about the possible sale of Frontier?buyers and maybe buy that?
Jonathan Award
Lawson, I’ll first make a few comments on the divestment of Fort Hills. We have introduced a competitive procedure on this, on our untapped interest in this domain for some time. We have had several parties actively bidding for the asset. have made here, a billion dollars in cash from Suncor, reflects the assumptions underlying the long-term plan through the operator.
And if you take a look at Suncor’s press release, they will talk about some of the demanding medium-term situations related to this asset as they are now understood, and provide more detailed guidance at the end of November. Therefore, I think it will be useful to better perceive the prospective price of this asset now prospectively, perhaps in relation to beyond expectations. The last thing I would say about it is that the multiple we’ve negotiated is really competitive with other than deals for similar tar sands assets.
So we’re very pleased with the valuation here, and we think it’s a smart deal for our shareholders, we think it improves our investment capacity because we know the tar sands have been too much for us and it’s consistent with our strategy of moving from carbon to green metals in the portfolio.
Now let’s move on to your express inquiry about Frontier and Lease 421. Those are valid characteristics. These are not features that we can run and develop. As you point out, we will not be operators in the energy sector or in the tar sands sector in particular. And, therefore, we will compare the characteristics to perform operations with them over time. Fort Hills, although it was an operational asset, was the priority for us and therefore we decided to take care of it from the beginning.
Operator
Next up is from Jackie Prelovszky of BMO Capital Markets.
Jackie Przybylowski
My first question, I think, will be about. . . to fulfill the consultation on Fort Hills. And Jonathan, I know he alludes to that at the beginning of the call, but I’d like to hear a little bit. What are you making plans to do with the billion dollars you are going to bring from this asset sale?And even generally, is this considered to be a one-time significant recovery of potential capital for shareholders?Or do you want that for QB2 or other parts of the business?Or will there be a mixture of those things?
Jonathan Award
Big question, Jackie. Income, when we get it at the end of the transaction, will be allocated to the capital allocation framework. That’s how we talked before. As you know, through the capital allocation framework, the first 30% of the loose coin flow is automatically returned to shareholders and then, of course, we retain, after consultation with our board of directors, the discretion to return additional amounts if justified on the basis of other uses of the coins at that time. So, the key message, there will be a return to shareholders as a result of this due to the operation of the capital allocation framework, minimum 30%, but with upside potential in this.
Jackie Przybylowski
And that would be, just to be clear, would it be a special dividend?Or could it just be a total purchase?Or do you have any concept about the format of this?
Jonathan Award
That resolution is made at the time about the price of the percentage, for example, about discussions with our percentage holders and any specific opinion about personal tastes at any given time, but it can happen either way.
Jackie Przybylowski
Entendu. Et perhaps some other question, only that I have detected in the last few quarters, your MD
Jonathan Award
Yes. Thank you. Good question. I’ll give that to Crystal.
Prysai Crystal
Thank you, Jacky. That’s a smart question. He’s right. We are subject to cash taxes on our 2022 source of income. However, we have – with installment regulations and there are secure calendar regulations of inclusion of source of income related to our partnerships. That’s where the peak of our Canadian coal and copper operations This allows us to defer money tax bills related to earnings from 2022 to 2023, most of which would be deferred until 2024.
So, determining how much of those money taxes will count on our annual source of income for 22, and we can disconnect the proportion to allocate. But I think you can assume that most will go through 2024 in terms of the payment schedule.
Jackie Przybylowski
It is ok. It’s great. You may only touch it online, offline. What if I can swipe one last question? And I hope it’s quick. I guess this will be the revised budget you gave us for QB2, can you give us an indication of how many contingencies are left in the budget for QB2 now that you’ve replaced the bookends?
Jonathan Award
Crystal or red, do you need that one? Array
Harry Conger
Yes, Jackie, the way you would characterize this is that all known gaps faced and things to come are included in this estimate. We also made an estimate of the exchange rate, etc. The things we know, all scenarios are covered at this point.
Operator
The next one comes from Brian MacArthur of Raymond James.
Brian Mac Arturo
Only two follow-ups. First of all, Red or Jonathan, for QB numbers, when you say everything is in place, does that also include construction running capital?Or is there a budget request for this as we move into 2023, given all the calendar adjustments?about that now?
Jonathan Award
Red, do you have that?
Harry Conger
Yes, Brian, when we communicate about structured capital, there is no built-in current capital. We budget the operational aspect for the start of mining operations and everything that happens in them. This is where any current capital that will be represented.
Brian Mac Arturo
That’s how I think he did it. Second question, he talked about the gross product of Fort Hills and the discussion on taxes that took place. Is there a significant tax on this sale? What I am trying to perceive is clearly the prospective product that will be obtained for the repayment of the capital.
Jonathan Award
Crystal?
Prysai Crystal
Thank you Brian. Excellent question. In short, the answer to that is that there are no significant tax implications. We expect a small capital loss in the transaction, but it is not significant in nature for the billions of dollars.
Jonathan Award
So I’m going to say, yes, no capital gain, Brian, as Crystal pointed out.
Brian Mac Arturo
And my third query is simply — and Jonathan, I think the long-term copper slide is wonderful for showing all your options. Maybe he’s going to expand this instead of having a partner, which maybe was the way it was discussed before the funding. Has it replaced something there, given Fort Hills or whatever?Is there a replacement strategy with Zafranal in the future?
Jonathan Award
We are looking to optimize this. Brian, we have a number of features there, of course. You know, in the past, we were looking to get rid of it. We continue to ensure that this is fully permitted with the feasibility examination behind us, so it will be completely risk-free. We may only consider introducing another spouse given that we recently have Mitsubishi for 20% and we have the 80% balance. And we can just continue the progression 100%. It’s: all features are still on the table for us in this case.
We have many other things in the pipeline in the same amount of time that we want to address. Therefore, I would say that we are long characteristics in this period. And the component of the determination we want to make is what the right series is. Progression here for those assets based on their threat and back to profile. So, any component of the optimization is on the next and all the features on the table.
Brian Mac Arturo
Super.
Operator
This concludes the question and answer session. I will now turn my back on Mr Price for concluding remarks.
Jonathan Award
I think we will give the floor to Mr Phillips for concluding remarks.
Fraser Phillips
So thank you all for joining us. If you haven’t answered your questions, and I know some haven’t, let us know and we’ll stand firm and set anything for us to talk about or do. Send an email. Thank you for joining us and looking forward to talking to everyone within a quarter of an hour.
Operator
That concludes the convening of today’s convention. You can disconnect your lines. Thank you for your participation and have a day.