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spk10: ladies and gentlemen thank you for standing by welcome to tech's third quarter 2023 earnings release conference call at this time all participants are in listen only mode later we will conduct a question answer session to join the question queue please press star then one on your touchtone phone anyone need assistance during the conference call, they may signal an operator by pressing star, then zero on their telephone. This conference is being recorded on Tuesday, October 24th, 2023. I would now like to turn the conference over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead.
spk05: Thanks, Charisse. Good morning, everyone, and thank you for joining us for Tech's third quarter 2023 conference call. Please note today's call contains forward-looking statements. Various risks and uncertainties may cause actual results to vary. Tech does not assume the obligation to update any forward-looking statements. Please refer to slide two for the assumptions underlying our forward-looking statements. In addition, we will reference various non-GAAP measures throughout this call. explanations and reconciliations regarding these measures can be found in our mdna the latest press release on our website jonathan price our ceo will begin today's call with highlights from our third quarter results crystal press die our cfo will follow with additional color on the quarter jonathan will conclude today's session with a brief update on our value creation strategy before we open the lines to questions with that i'll turn the call over to jonathan
spk01: Thank you, Fraser, and good morning, everyone. I'm speaking to you today from Iquique in the Tarapaca region of northern Chile, where we're gathering this week to celebrate the opening of our flagship QB2 operation. This is a momentous event for tech, with Crabada Blanca as the cornerstone of our copper growth strategy. More on that later. So starting on slide four, our positive financial performance in the third quarter reflects continued strong pricing for copper and steelmaking coal. in addition to higher base metal sales volumes. Adjusted EBITDA of 1.2 billion reflects lower than expected steelmaking coal sales in the quarter and a localized geotechnical event at Highland Valley in August. During the quarter, we made significant progress to unlock the value of our industry-leading copper portfolio. Our QB2 project continues to ramp up and is expected to achieve design throughput and recovery rates by year end. The assets are performing well, and we are pleased with the strong operational performance we have seen to date. We have a line of sight to double our consolidated copper production when QB2 reaches full capacity, and we continue to advance our actionable portfolio of development options to position tech for our next phase of copper growth. Importantly, we ended the quarter in a strong financial position with $7 billion of liquidity, included $1.5 billion in cash. And we returned $65 million to shareholders through the payment of our quarterly base dividend. In the third quarter, we continued to make steady progress against our sustainability goals. We announced an agreement with Norden to reduce emissions in our steelmaking coal supply chain. The agreement is expected to reduce annual emissions from tech shipments handled by Norden by 25%. And our reported high potential incident frequency remained low at a rate of 0.13. Now turning to QB2 on slide five. We made solid progress on the ramp up during the quarter. And as I just mentioned, we're seeing strong asset performance with the QB2 plant performing well. At the end of the third quarter, it had been operating consistently at 70% of design capacity. Both line one and line two are operating well. Success so far with line two reflects a faster and more effective commissioning as a result of leveraging the learnings from line one. As a result, we generated our first quarterly gross operating profit at QB2. Though modest, it is a key milestone in the development of the project. While we are pleased with the performance of the assets so far, we are not pleased with what we have had to increase capital guidance to US $8.6 to $8.8 billion from $8 to $8.2 billion previously. The increase was driven by delays in construction of both the molybdenum plant and the port offshore facilities, as well as costs associated with contract claims and slower than planned demobilization. The last two outstanding pieces of construction at QB2 are the bolly plant and the port offshore facilities. The molly plant will be completed by the end of the fourth quarter, and the port will be complete in the first quarter of 2024. And significant efforts are ongoing to mitigate risks and cost pressures. Importantly, we continue to expect to be operating at design throughput and recovery rates by year end, although we expect to be near the lower end of QB2's 2023 annual copper production guidance range of 80,000 to 100,000 tons. Turning to slide six, where we outline a summary of our key 2023 operational guidance updates. In our copper business unit, we decreased our annual production guidance for Highland Valley by 10,000 tons to reflect the impact of the localized geotechnical event in August. We did not expect any impact of this event to carry beyond 2023, and our unit cost guidance remains unchanged. Copper capitalized stripping guidance was revised to $395 million, up from $295 million. The increase reflects additional stripping at QB2 while the concentrator was in ramp-up, as well as additional stripping at Antamina, and the change in the mine plan at Highland Valley due to the localized geotechnical event. And in steelmaking coal, we lowered our 2023 production guidance to 23 to 23.5 million tons, down from 24 to 26 million tons to reflect the intermittent plant challenges we've experienced this year. Our unit cost guidance remains unchanged. With major maintenance activities completed and the implementation of our plant improvement initiative, we saw an improvement in plant reliability in the third quarter relative to the first half of this year. Our steelmaking coal operations are well positioned in the fourth quarter and into 2024. Strong raw coal inventories are also expected to provide additional product flexibility and optionality going forward. Across our businesses, we remain laser focused on execution. We intently manage our key business drivers and continuously enhance our operating practices while rigorously managing our controllable costs. For external risks outside of our control, we have solid mitigation plans such as supply chain recovery and strategic sourcing to mitigate inflationary cost pressures. As ever, our focus is to drive reliable operational performance and maintain our competitive low-cost position. With that, I will now hand it over to Crystal for additional color on the quarter.
spk08: Thank you, Jonathan. Starting with an overview of our third quarter financial results on slide eight. We generated $1.2 billion in adjusted EBITDA or $0.76 of adjusted diluted EPS with contributions from each of our business units. However, we fell short of consensus analyst estimates for adjusted EBITDA and EPS in the quarter. The variance was primarily driven by the localized geotechnical event at Highland Valley, consensus expectations for QB2's ramp-up profile, the impact of lower steelmaking coal sales volume and higher than consensus corporate costs. This is partially offset by strong sales at Red Dog in the quarter. Looking forward, we are well positioned for strong fourth quarter results for a number of reasons. First, steelmaking coal prices remain robust, driven by supply constraints and strong demand, particularly from India and China. Prices rose through the third quarter and into October, and FOB premium spot prices currently stand at US$343 per ton. As a result of pricing, plant reliability improvements, and inventory levels, our high-margin steelmaking coal business unit is well-positioned to deliver strong financial performance in Q4. And at current copper prices, we expect QB2 to generate a gross profit in the fourth quarter as the ramp-up continues in production rates. Turning to the key drivers for our financial performance on slide nine. Adjusted EBITDA in the third quarter decreased compared to the same period last year, primarily driven by considerably lower commodity prices for steelmaking coal and zinc, reduced sales volumes of steelmaking coal, as well as copper at Highland Valley, and higher operating costs. These items were partially offset by higher copper prices, positive pricing adjustments, and a weaker Canadian dollar. We continue to experience inflationary pressures in the cost of key supplies, including mining equipment, tires, labor, and contractors, despite the decline in diesel and other fuel costs compared to the same period last year. This is reflected in our sustaining capital expenditures and full-year unit cost guidance ranges, which are both unchanged. Our underlying mining drivers remain relatively stable, and we remain highly focused on managing our controllable operating expenditures. Turning to each of our business units in more detail and starting with copper on slide 11. Copper prices were up 8% year over year. Copper production volumes in the third quarter, including QB2, increased by 8%, while sales volumes, including QB2, increased by 3% compared to last year. At QB2, we produced 18,300 tons of copper in concentrate, more than half of which was produced in the month of September. Sales volumes of 14,300 tons drove our first quarterly gross profit before depreciation and amortization for QB2 of $19 million, in line with our expectations. However, as mentioned earlier, production at Highland Valley was impacted by a localized geotechnical event in the south end of the valley pit in August, which required processing of lower-grade stock-piled ore for the remainder of the quarter. In early October, the Valley Pit was safely reopened and mining of higher-grade ore recommenced. A complete analysis of the failure resulted in a revised mine plan to mitigate production losses for the fourth quarter. Production at Andikoyo was also impacted by a 14-day unplanned shutdown in August, which was due to a conveyor failure. Copper net cash unit costs increased as a result of lower production at Highland Valley and Carmen de Andikoyo, an overall increase in maintenance and repair costs, as well as lower zinc and moly cash margins for byproducts. Despite this, our full year operating cost guidance for our copper business unit is unchanged. Looking forward, we decreased our 2023 copper production guidance for Highland Valley to 100,000 to 108,000 tons to reflect the impact of the localized geotechnical event in August. QB2 production guidance is unchanged at 80,000 to 100,000 tons, although we expect to be at the lower end of this range. We have also lowered our total molybdenum production guidance for the full year due to the delay in construction of the QB2 moly plant. For QB2, as a result of recent changes to IFRS, we are required to recognize sales proceeds and related costs associated with products sold during the ramp up and commissioning phase through our earnings, rather than capitalizing these amounts. In addition, as QB2 continues to ramp up production, we incur costs that are capitalized because they relate to bringing the asset to its design capacity operating level. These costs are referred to as capitalized ramp up costs. We have capitalized $561 million of these costs as of September 30th. For the fourth quarter, we expect capitalized ramp-up costs to be lower than those capitalized in the third quarter. As mentioned earlier, we expect QB2 to generate a gross profit in the fourth quarter as ramp-up continues and at current copper prices. Moving to zinc on slide 11. Profitability was impacted by zinc prices, which were 26% lower compared with the same period last year. This was partially offset by higher zinc premiums on our contracted refined zinc sales. Red Dog has had a strong shipping season this year, and zinc and concentrate sales increased 14% year-over-year to 269,700 tons, which was within our guidance range. However, Red Dog's zinc concentrate production was driven by reduced mill throughput as a result of equipment failure. At trail operations, Refined zinc production was impacted by reduced concentrate supply, and refined lead production continues to be impacted by the Kibset furnace that is nearing the end of its life. A replacement is slated for 2024. Looking forward, we expect Red Dog Q4 zinc sales of 130,000 to 150,000 tons, reflecting the normal seasonal pattern. And while our overall full-year zinc production guidance remains unchanged, we made minor revisions to our site guidance. A 5,000-ton decrease in Red Dog's guidance due to production issues is offset by a corresponding increase in Antamina's guidance due to higher than expected zinc production. Turning now to steelmaking coal on slide 12. While prices for the quarter were lower than that particularly strong third quarter last year, prices remain robust and are well above historical averages. Production was impacted by planned maintenance outages at two of our operations, including Fording River, our largest operation. Sales of 5.2 million tonnes were below our guidance range of 5.6 to 6 million tonnes due to a slower than anticipated supply chain recovery following the impacts of BC wildfires, the labour disruptions at BC ports and intermittent plant challenges. Adjusted site cash cost of sales per tonne was impacted by lower sales volumes and increased maintenance activities associated with the planned outages, while transportation costs reflect higher demurrage and port charges related to lingering impacts from the labour disruptions at BC ports and the BC wildfires. Looking forward, we expect Q4 sales to be between 5.8 to 6.2 million tonnes, maximising use of available inventories. and as mentioned earlier we lowered our annual coal production guidance to 23 to 23.5 million tons for the remainder of the year this lower level of production is expected to put upward pressure on our adjusted site cost of sales and transportation unit costs and we now expect both to be at the upper end of our guidance ranges for the full year overall our seal making coal business is well positioned to continue delivering strong financial performance for the remainder of the year with average steelmaking coal prices above US $355 per tonne month to date, plant reliability improvements, and current inventory levels. Our financial position remains strong, as shown on slide 13. Our liquidity is currently $7 billion, including $1.5 billion of cash, and we continue to maintain investment-grade credit ratings from S&P, Moody's, and Fitch. We have no note maturities due until 2030. In the third quarter, we paid our quarterly base dividend of 12.5 cents per share. Year to date, and in accordance with our capital allocation framework, we have paid 451 million in dividends, purchased 85 million in Class B shares, and advanced our ongoing deleveraging with debt repayment of 457 million. We remain focused on balancing our investment and growth against returning capital to shareholders while maintaining a strong balance sheet. With that, I'll turn it back over to Jonathan.
spk01: Thanks, Crystal. Before I wrap up, I want to provide an update on separation. With responsible value creation as our north star, we continue to engage with a number of parties that have expressed interest in our steelmaking coal business. We're evaluating a range of potential options guided by several objectives. Based on extensive shareholder feedback throughout this process, one of our core objectives is to achieve a full separation of our base metals and steelmaking coal businesses. This is key to unlocking the value of our unrivaled copper growth portfolio. We will ensure tech is well capitalized and positioned to pursue our copper growth potential and deliver strong returns to shareholders. while maintaining a strong balance sheet. At the same time, we aim to realize the full value of our steelmaking coal business for our shareholders. An important consideration will be the certainty of achieving separation, including receipt of the required regulatory approvals. And it is also critical that the transaction allows us to maintain social and environmental commitments to stakeholders in the Elk Valley. Overall, the Board and Special Committee are pleased with the progress we have been making. Separation remains a priority, and we are moving through the process as expeditiously as possible. Driving organic growth through development of our copper project pipeline remains central to our value creation journey. Looking at slide 16, we have made meaningful progress on our near-term development projects during the quarter. We furthered the feasibility studies for San Nicolas and the Quebrada Blanca Mill Expansion Project, And we completed the feasibility study for HVC 2040 in Q3, with the submission of the project environmental assessment in October. Looking forward, we are targeting key milestones for these projects in the fourth quarter, including completion of the feasibility study for QBME, submission of the MIAR permit application for San Nicolas, and commencement of detailed engineering for Zafranau. As shown on slide 17, we have an unrivaled suite of copper growth opportunities, diversified by geography, scale, and time to development. There is significant work underway to advance development of each of these projects, including resource definition, engineering and design, permitting, and stakeholder engagement. And we have de-risked project delivery, financially and operationally, through a partnership approach, such as in the case of San Nicolas. The projects we have in place double our copper production in the near term, with the potential to deliver 1 million tons of annual production by the end of the decade to drive substantial new intrinsic value. In prioritizing our growth options, we take into consideration multiple investment criteria, including strong financial returns, balance sheet capacity and financing options, project readiness, project development capacity, and the social, political, and environmental context. And importantly, each of these projects will have to compete for capital with the rest of the business and generate strong returns. While permitting is a major gating factor in determining potential sanction dates, we are largely in control of project timing. And we will continue to apply our disciplined capital allocation framework that balances growth with returns to shareholders. In closing, on slide 18, This is a very exciting time for tech as we continue our pursuit of responsible value creation for our shareholders. We are continuing to evaluate options for a separation that would realize fair value for our world class steelmaking coal business and unlock the full potential of our base metals business. And we continue to make significant progress against our copper growth strategy with the ramp up of QB2 and advancements in our near term development projects. Guided by our capital allocation framework, we are committed to balancing our opportunities for growth with financial resilience while providing cash returns to shareholders. At the same time, we are focused on execution and ensuring we pursue responsible value creation for shareholders. Thank you. Operator, please open the line for questions.
spk10: Certainly. To join the question queue, please press star then one on your touchtone telephone. You will hear a tone acknowledging your request. We ask that you please limit yourself to one question and one follow-up. If you are using a speakerphone, please ensure you lift the handset before pressing any keys. If you wish to remove yourself from the question queue, you may press star then two. The first question comes from Oris Walkadow with Scotiabank. Please go ahead.
spk03: Hi, good morning. Jonathan, some follow-up questions, if I could, on the planned coal separation. I mean, obviously, this has been going on now for some time. Can you give us a better idea of where you are in that process? Like, are we close to the finish line, or do you think this could just take a lot longer, given more interested parties coming to the table? And could it spill into next year?
spk01: Yeah. Hi, Iris. Thanks. Thanks for the question. Look, we're making very good progress here. I'm very happy as to where we are at present. You know, we have a competitive process, which is the most important thing here to ensure we have options ahead of us to realize a good outcome. As I've mentioned a couple of times recently, you know, I believe we'll be in a position to make a decision before the end of the year. That hasn't changed. The key thing for us is to ensure we make the best decision here possible rather than rush the process. But as I said, we're well positioned right now. We're happy with the level of competition we have, and I'm confident we can get a good outcome for shareholders.
spk03: Okay, and just as a follow-up, you spoke to the fact that certainty of achieving separation is a key criteria here, including regulatory approval. Do you think that a partial sale would be easier from a regulatory approval perspective than a full sale?
spk01: Look, I think every... You know, every different option here has its unique characteristics in terms of what that means from an approvals perspective. You know, the overarching focus here is on the delivery of shareholder value. You know, that has to come first and foremost. In considering that delivery of shareholder value, of course, we have to consider the certainty of execution and the risks associated with any transaction. You know, the requirement for regulatory or other approvals is a function of the nature of any transaction. And ultimately, we will do what we believe is in the best interest of our shareholders, having regard for those regulatory and approval requirements.
spk03: Okay, thank you. And one more, if I could squeeze it in, just if you decide to do the partial sale option, would it be your goal to put control of EVR into the public market or control with an owner?
spk01: Look, I won't be specific on that, Oris, at this point in time. I mean, I think, you know, we've discussed the range of options that we have before us here, you know, with a full sale at one end of the spectrum and a partial sale and a spin at the other end of the spectrum, with the latter providing ongoing exposure to our shareholders in respect of both the steelmaking coal market, the fundamentals of which look very attractive going forward, and of course, a quality high margin business like EVR. Ultimately, the specifics of any transaction will be a subject of the conclusion of this process. So I won't say more on that. now other than, as I mentioned before, we're happy with the options in front of us and we believe we're well set to drive a competitive outcome.
spk03: Thank you very much.
spk01: Thanks, Orest.
spk10: The next question comes from Liam Fitzpatrick with Deutsche Bank. Please go ahead.
spk00: Good morning, Jonathan. Just a couple on QB2. It's clearly a hefty capex increase given you only re-guided earlier this year. And we're only talking about a three month delay for two parts of the project. So the question is, were these issues not largely known about earlier in the year? And can you outline what the major component is behind this increase? And the follow up kind of links to that and your future growth strategy, because clearly a lot of it is based around the next crop of copper projects. What sort of changes are you making or have you made to ensure that we're not going to be faced with similar issues in the future? Thank you.
spk01: Thanks for the questions, Liam. I'll come back to the second question in a moment and I'll hand off the first question to Red Conger, our President and Chief Operating Officer. Just to preface that, I will say, you know, the issues that have caused us to re-guide The QB2 capex, as we have done today, are issues that arose in the third quarter, and they're issues that created impacts to both schedule and costs. But I'll hand over to Red to unpack that in greater detail.
spk12: Yeah. Morning, Liam. We are focusing on delivering a reliable and robust copper circuit. I mean, that is first and foremost in our actions and several unknowns presented themselves during the third quarter. Let me give you a couple examples of those and what we had to do to address them. We commissioned the tailings return water facility early in the third quarter, and we found that all 16 of these huge tailing water return pumps had an internal manufacturing defect that evidenced only when they were operating at full load, all of the pre-ops testing, etc., was unable to detect this default. So once we got them up and running at full load, they were overheating. So we had to do discovery work to understand what that was. We had two responses there. We had to run them at lower rated capacity to prevent the overheating. And then once we discovered what the defect was in the original casing, we had to take out each pump, send it down to a machine shop, have it modified per design specs, then bring it back up to the site, get them installed again. And I'm happy to say they're all running appropriately now, so that fix has cured the problem. you know, there's a major system where you essentially had to build it twice and do some of the manufacturing on the pumps that, you know, should have arrived to us in working order and ready to go. So that was a major unplanned piece of work for us. And, of course, you take resources off of other planned work that you had during the quarter to do that rework. So that's That's one example of something that we discovered and addressed and successfully completed. Additionally, the blast jetty pile that we're drilling out in the port area, the drill bit failed subsurface in the ocean floor, took us two months to get that unit out of the ground and out of our way. We were unable to drill the pile in an alternate location because of the critical nature of the load-bearing requirements there. So that was just something that you had to power through and get done. No way we could forecast that or know that that was going to occur. And that has delayed the port from completion from the end of this fourth quarter into the end of first quarter of next year. We've hired two additional contractors to work on completion of other offshore areas, mooring buoys, et cetera, offshore. So again, those are scheduled delays, overhead continues. You have to hire more contractors to cover in behind and significant cost increases associated with that. And then we have a variety of claims that contractors have submitted that are associated with costs that they believe they've incurred due to owner-directed changes in work plans. So we've got a significant amount of work that we need to do to review all those claims, reconcile those, and determine what what settlements are appropriate in order for us to be complete and truly assess the full impact of that. We've put all of those claim figures into the forecast now, even though we know some of them may not be settled for exactly what was applied for. All of this rework, et cetera, intentionally delayed the Molly plant so that, you know, again, in preference to the the reliability of the copper circuit. And, you know, that approach has served us very well. We're seeing substantial improvements month to month in plant throughput and performance and really very excited about how the plan is performing and what the future holds for the performance of that plan.
spk01: Yeah, thanks, Red. And just, you know, to sort of reiterate there, Liam, you know, as we've said, the only major areas of construction outstanding now are the molly plant and the port. In the guidance that we've provided today, we have included all known risks, as Red has said, and we've included those risks pre any mitigation. And of course, we've included some allowance in here for unknown risks. So we do believe that the guidance we've put forward today will capture all remaining capex through to the completion of the project at this stage. To your second question on future growth and implications here, firstly, of course, we will undertake a detailed lessons learned process from the QB2 experience and make sure that those lessons and assumptions are carried forward to future projects, both in terms of the capital assumptions we make, but also the how those projects are delivered. You know, one example that we've referenced many times through the course of this project has been the challenges we've had with labour productivity. Now, some of that, of course, you know, could be a function of COVID and the hangover from COVID. And some of that, of course, could be a function of the environment in which this project has been built, you know, at 4,400 metres, it's a challenging place to deliver a major project. But we will take those assumptions forward and make sure that they're reflected in future projects. Otherwise, I think if you look at the projects in our portfolio, it's worth noting that they are an order of magnitude simpler in terms of their complexity, in terms of their scale, and in terms of their scope. When you look at QB2 and the full scope of that, it's really five or six major projects rolled into one with port, desal, pipelines, mine, concentrator, tailings, you know, all at world-class scale. The other projects you see in the pipeline here, some of them with capital costs, you know, closer to a billion dollars, you know, reflect a very different proposition for the company. But that said, there's a lot to learn for QB2. We'll make sure we understand those lessons well before we sanction our next project.
spk00: Thank you for the colour. If I'm allowed a very brief follow-up, just on your EVR comments, I just wanted to make sure I'm understanding it correctly, because you mentioned execution risk was key. It's kind of what's being implied here is that a kind of, I guess, a spin of some form is the lower execution routes, or are you just kind of outlining that it's basically a call between the execution risk on a spin versus a sale to a single party?
spk01: No, look, I think, Liam, it's intended to be a general comment. It's not intended to point at anything specific here. When assessing the creation of value for shareholders, you've got to sort of look at that in the broader sense. And of course, the certainty or the risk to delivery of that value is a key consideration. And risks and approvals and those sorts of things can manifest in a number of ways. So it's not intended to be a direct comment to favor one option over another just to sort of give some color to the thought process here that headline price and headline value is important, but as is the certainty of the delivery of that value. Understood. Thank you. Thanks, Liam.
spk10: And the next question comes from Adalton Barreto with Canaccord Genuity. Please go ahead.
spk09: Thank you. Good morning, Jonathan and team. I want to stay on that separation topic of conversation there. And I guess my first question, Jonathan, is given where coal prices are, as well as the implied valuation on the BHP Whitehaven deal, has the thinking on valuation between you and your potential buyers changed at all relative to what was on the table earlier this year?
spk01: Thanks for the question, Dalton. Look, I mean, it's fair to say that, you know, I think the view of the market has evolved, you know, since February when we announced our prior separation. You know, the outlook for steelmaking coal has definitely improved. I think, you know, a recognition here of the favorable structure for that market going forward with, you know, now I think a greater understanding of the long-term need for the role of blast furnaces in the production of steel and limited new met coal supply expected to come to the market. And of course, the growth of blast furnace capacity in India as well is something that is particularly interesting for those structural dynamics. So I think the view of the market has changed long-term. Whilst the spot price is very encouraging right now, we look through that and we look to the long-term assumptions here that underpin the business. I think as well, post the discussions we had earlier in the year regarding separation, the appreciation for EVR as a long life, high margin producer of very high quality hard coking coal has increased in the market as well. So, look, I think there has been a move in expectations, you know, over the last six or eight months as a result of those two factors. And of course, you know, in discussions with our
spk09: shareholders which have been ongoing throughout that period you know they convey to us their expectations here as well and that's something of course we take on board as we think through the options in front of us great thanks for that Jonathan and then just maybe as a follow-up in terms of getting a deal done before year end if you do offer a partial sale as well as a spin co do you anticipate those happening together or could we see an announcement on a partial sale by year end and then just some sort of a lag on the spin go that will allow you to recoup some of these high coal prices.
spk01: I think, you know, Dalton, our proposal here is, you know, if and when we step forward with a transaction, we would expect to step forward with a complete solution for the separation of EVR from the base metals business.
spk09: Great. Thanks for that. And there's maybe one last one on QB2. As you ramp it up, where is the bottleneck currently? Is it at the mine? Is it at the mill? Is it at the supporting infrastructure? And what is the primary hurdle to get to full design capacity?
spk01: Yeah, Dalton, I'll hand you over to Shehzad Barmal, our SVP of the Copper Business Unit here, who is responsible for the ramp-up and future operation of QB2.
spk06: Thanks, Jonathan. You know, as Red mentioned, we are very pleased with the planted design and the robustness of the design and the performance so far. And the insights and lessons from line one, we translated that to line two. And as we started treating line two in August, we were up and making copper within, you know, in less than a month. So very excited about that part. And as part of the commissioning, when we took line two down to, you know, re-torque the mills, check the gap and the air settings on the motors. We also took the opportunity to make some adjustments to the plant, you know, not conveyors and shoots and everything else. And, you know, it's that reliability of the little things that that has been our focus, not the design and the throughput of each of the units in the plant. So we don't see anything that prevents us from getting to design rates. And in fact, after we started up after that shutdown, We have hit above design rates on each of the lines and of the plants together. You know, over 140, 143,000 tons a day. We have achieved that. And so really, to answer your question, it is the reliability and making sure that the small shutdowns are avoided, and we are making great progress on that. With respect to mine operations, We have hit our target numbers regularly. So really, you know, the autonomous fleet is operating really well. The crusher is not a bottleneck at all. And as Red mentioned on the tailing side, the return water system, which is part of, you know, the water recovery and the dilution water for sands is operating really well. The sand quality, quantity is within spec and we're, you know, that's been de-risked as well. So the team is really energized. We're hitting records regularly. We make another record on our journey towards full ramp-up, and it's this reliable delivery that we hope to achieve by year-end.
spk04: Great. Thank you for taking my question. Thanks, Dalton.
spk10: The next question comes from Chris Lafamino with Jefferies. Please go ahead.
spk11: Hi. Hi. Thanks for taking my question. I just wanted to ask about Sorry, back on QB2 on the CapEx budget there. So the $8.6 to $8.8 billion CapEx guidance is for the project, and then you have this ramp-up CapEx, and then you also have the operating costs, and presumably the copper sales that you're making in the normal course of business, the offsetting costs there are expensed, they're not capitalized. So I'm trying to first understand exactly what is included in the ramp-up CapEx, and then secondly, do you have a guidance for what that ramp-up capex will be before all the costs are ultimately expensed? Because I'm not sure if that ramp-up capex was ever guided to earlier on in the project. It seems like that sort of came out of nowhere, and it's adding to the overall capex of the project. So just trying to understand what comprises that and what that number should ultimately get to before it ends. Thank you.
spk01: Yeah, thanks for the question, Chris. I'm going to hand you over to Crystal on this one, given the, you know, the relation to the IFRS treatment of these costs during ramp up. So, over to you, Crystal.
spk08: Thanks, Chris. I think maybe I'll take your question in a couple pieces as you've sort of framed it. I think the first just being the change in IFRS that now requires us to obviously recognize cost through earnings as we sell products. So we've done that in the third quarter as we've had sales volumes come through. So those amounts are in the P&L and you can see what our margins are and you can see the breakdown in our mine operations reporting that we've included in the MD&A. And then in the context of the ramp up capital, during the time where we're ramping up operational rates to designed capacity, we're trying to get to a minimum minimum threshold, and at that time we're incurring costs to operate the assets, but we aren't producing at the levels where we expect to be producing. And so during that time, we capitalize those costs. If we were producing at higher levels, those costs would be going into inventory and then going through the P&L. We haven't guided to that amount, just given that obviously the ramp-up is is ongoing and it's a hard number to predict. But I can say that as we get to higher levels of production, the amounts that we capitalize in that ramp up capital bucket are lower. And so I expect them to come down in the fourth quarter compared to what was capitalized in the third quarter. And as we get to the end of the year and we're at full production rates, we won't be seeing any further amounts capitalized in that bucket. That amount has peaked, and I expect it's going to come down over the rest of the year. Does that answer your question?
spk11: Well, I guess sort of. So if you're operating the asset and you're selling copper, I'm not sure why. I'm a little bit confused as to why expenses would then be capitalized if they're associated with actually operating the asset and selling copper. I mean, what exactly comprises that capex? Is it stripping? Is it an investment in the infrastructure? What exactly is going into that bucket?
spk08: It's all the cost of operating those assets until you reach a minimum operational threshold. So any cost associated with the products being sold is going into your cost of sales number.
spk11: So none of the costs associated with the sales are going, sorry, so the costs associated with the sales are going into expense or going into CapEx?
spk08: They're going into expense, that's right, into cost of sales on the income statement.
spk11: Okay, thanks. I'll follow up offline. Thank you for that. I appreciate it.
spk01: Okay. Thanks, Chris. Yeah, the answer is accounting, I think. So we'll take the next question, please.
spk10: The next question comes from Bryce Adams with CIBC. Please go ahead.
spk07: Good morning, and thanks for taking my question. It's one more on the ramp up. So the low end of QB2 guidance for the concentrator, 80,000 tons of copper, and we are guided to the low end. So that implies Q4 production of just under 60,000 tons. What from the ramp up so far gives you confidence that that's possible? 60,000 per quarter is not the full run rate, but it's getting closer to it. So just looking for some more color on your Q4 expectations for the ramp up.
spk01: Yeah, thanks, Bryce. Back to Shehzad on that one.
spk06: Thanks, Bryce. So as I mentioned, early in Q4, we did the modifications, and we have been running well since then. And really it's ramp up from October, getting closer in November, and then finally getting to pretty much full rates by the end of the year. And, you know, one is the throughput aspect, which we are relatively bullish on. And then the other is the recovery. Our recoveries have been pretty strong as well. And as we ramp up all our analyzers and our control systems now, which is we're in the process of doing actually this week, you know, and then moving forward, we're looking at some good gains on recovery as well. And of course, the last factor being grade. You know, based on our mine sequence, we're looking in good shape there. And so with those three things, we think we'll be able to hit that 58, 59,000 tons.
spk01: Yeah, I think it's also worth noting that it won't be a straight line through the next two months here, that sort of week on, we'd be expecting production rates to improve into the end of the year.
spk07: Yep. Got it. Okay, thanks for that. Looking forward to the Q4 update. I think if you get that 59,000, 60,000 tons in Q4, that's a good setup for next year. So the rest of my questions are answered. That's it for me. Thanks so much. Thanks, Bryce.
spk10: The next question comes from Bill Peterson with JP Morgan. Steve, go ahead.
spk04: Yeah, hi, good morning. Thanks for taking my questions. A lot of questions on QB2 and Elk Valley have been answered, but I wanted to talk more about near-term development projects. So I guess first, when do you expect the project environmental assessment for the mine extension for Highland Valley to be approved? And hopefully get a bit more color on the expectations for the permitting and feasibility studies for the near-term growth projects, such as San Nicolas, QBME, and so forth.
spk01: Yeah, thanks for that question, Bill. I'll just start with Shahzad on the HVC piece, and then I'll hand you over to Tyler Mitchelson, our SVP responsible for copper growth, to talk a bit more about the other projects in the portfolio and their status.
spk06: So, Bill, on Highland Valley, as we said, we were able to submit our EA. It was a long process, and it was really quite robust, and we do expect approval by the end of 2024, before the end of 2024. And then, of course, there will be a decision for the board on sanctioning that My Life extension.
spk01: Okay. Thanks, Shuzad. Tyler, can you handle the balance of the question, please?
spk04: Sure. Thanks.
spk03: Look, I think, you know, the key near-term projects, if you start with San Nicolas down in Mexico, working through the feasibility study as we speak and we're targeting famous shot in the first half of 2024 um the permit paperwork and everything's been prepared we're just doing a lot of stakeholder engagement right now ensuring that uh we've got the right things lined up before we submit the permit we anticipate putting that permit in uh in q4 of 2023 On Zafranel, working through the CapEx and OpEx update with a little bit more engineering, we should have that done first part of 2024. We do have the permit in place for that one. We got that in May of 2023. Next step from a permanent perspective for Zafranel Peru would be the construction permit, which we need to do a bit of engineering for. And the intent is we would apply for that mid 2024. And then the other near-term one is QVME, progressing the feasibility study. We should be done that in the fourth quarter of this year and still working through the permitting process there as well. So a lot of the other longer-dated projects, we're doing some of the early work on baseline work and working through some of the technical aspects of the early-stage study work on that. But those are the key near-term projects we're working through. Does that answer the question?
spk04: Okay. Yeah, thanks for the update. You know, I guess more on the near-term working capital. So how should we think about the cadence through the remainder of this year and then the next year as QB2, you know, ramps more meaningfully? I guess are you still expecting to build for the year?
spk01: Crystal, can you pick up that one, please, on working capital for QB2?
spk08: Yes, sure. Thanks, Bill. I think we are at the working capital levels we expect to be. Obviously, we're building some inventories on-site as we produce and we move things into sales, but I don't expect there to be a material change in working capital outside of our normal sort of timing of sales and accounts payable. I think we're looking to kind of achieve about a $400 million level there.
spk04: Okay. Yeah, thanks for that. Thanks, Bill.
spk10: The next question comes from Brian MacArthur with Raymond James. Please go ahead.
spk02: Good morning. My two questions, I apologize, are in QB as well. So just my first one was sort of the last question. Just crystal that increase in CapEx through all the accounting. Does that include some of that working capital? Because originally there was a capital cost investment and then there was going to be this $400 million increase. working capital, is that working capital on top of the new guidance? Or how do I think about that? And I guess it gets a little bit back to Chris's question.
spk08: So the $400 million of working capital is not included in ramp up capital. And it's always been the amount that we've communicated. So there isn't a change in that amount based on what we've communicated today.
spk02: Okay, great. Thanks. And my second question was back, Jonathan, you talked about permitting being a challenge and we talked a little bit about QBME expansion. There was a report, I think, earlier this week in the Tarabaca region, you know, sort of recommending against the expansion. Does that, can that impact the timing of your feasibility for that expected in Q4 or I don't know what you can comment on that situation?
spk01: Yeah, thanks for that question, Brian. Yes, you know, there was a report issue recently with respect to the permitting process. That process is ongoing. There hasn't been a decision taken yet. You know, I would say that, you know, as I've mentioned before, is sort of the normal course of the permitting of major projects. Your question around the feasibility, no, it won't impact that. We continue to progress the feasibility study and expect to have that done in the current quarter. Great, thanks very much. Thanks, Brian.
spk10: I will now hand the call back over to Jonathan Price for closing remarks.
spk01: Thank you, operator, and thanks to everyone for joining us on the call today. As I mentioned, we're thrilled to be in Chile and officially opening QB2 this week, which is a momentous event for tech. We look forward to doubling our consolidated copper production as it ramps up to design throughput and recovery rates, as well as to our next phase of copper growth beyond QB2. As always, please reach out to Fraser and our IR team if you have any further questions. Thank you all very much and have a good day.
spk10: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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