Feb 13, 2014
Executives
Gregory Waller - Vice President, Investor Relations and Strategic Analysis Donald Lindsay - President and Chief Executive Officer Ronald Millos - Senior Vice President, Finance and Chief Financial Officer Ian Kilgour - Executive Vice President and Chief Operating Officer Réal Foley - Vice President, Coal Marketing
Analysts
Sal Tharani - Goldman Sachs Mitesh Thakkar - FBR Orest Wowkodaw - Scotiabank Meredith Bandy - BMO Capital Markets Greg Barnes - TD Securities Jeremy Sussman - Clarkson Lucas Pipes - Brean Capital Brian Yu - Citi Kerry Smith - Haywood Securities Grant Moenting - Paradigm Capital Oscar Cabrera - Bank of America Daniel Rohr - Morningstar
Operator
Welcome to Teck's fourth quarter 2013 results conference call. (Operator Instructions) I would now like to turn the conference call over to Greg Waller, Vice President, Investor Relations and Strategic Analysis.
Please go ahead.
Gregory Waller
Thanks very much, operator, and good morning, everyone. And thank you for joining us for our fourth quarter 2013 investor conference call.
Before we start, I'd like to draw your attention to the forward-looking information cautioned on Slide 2. This presentation contains forward-looking statements regarding our business.
However, various risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward-looking statement.
Before I turn it over to Don, I'd just like to point out that we're going to limit the call again to an hour today. So we'll have a fairly brief presentation portion and then got a Q&A.
And at this point, I'd like to turn the call over to Don Lindsay.
Donald Lindsay
Thanks, Greg, and good morning, everyone. I am going to begin with the highlights of our yearend and also go through our fourth quarter operating and financial results.
And then I'll turn it over to Ron Millos, our CFO, to provide additional color on the financial side, including our 2014 guidance. And then we'll conclude, as Greg said, with the Q&A session.
So starting with Slide 4. Operationally, we achieved very solid performance in 2013.
I am pleased to report that we met or exceeded all of our production targets, which I will review in a moment. We also set a number of significant operating and sales records, including record annual coal sales and record annual throughput at each Greenhills, Antamina, Carmen de Andacollo and Red Dog.
We also exceed the goals of our cost reduction program, which we had increased midway through the year, due to the success of the program. And in total, we identified over $380 million of annual ongoing potential cost savings at constant production levels and we implemented approximately $360 million of them as of December 31.
And we will continue with this program to see if we can identify and implement additional savings. We are prudently allocating capital to the best risk/reward projects for future growth and we are responding to market conditions in the short-term to manage our capacity to invest.
We have reduced our sustaining capital where it make sense, we've also deferred projects and their related capital expenditures, including delaying the Quintette mine restart and slowing down development of QB2 over and above the delays related to permitting. We announced with our partners that we are proceeding with the construction of the Fort Hills oil sands project.
And this is the first step towards building an energy business unit that will become a significant growth driver for Teck. And this in line with our strategy as a diversified mining company that develops long-life assets with world-class resources with competitive margins in mining.
We've also returned cash to shareholders through dividends and buybacks over the year, while maintaining a strong balance sheet. We've retained our dividend at an annualized rate of $0.90 and our cash balance at yearend was almost $2.8 billion.
So looking at the overview of the full year results on Slide 5, the benefits of our diversified business model are showing through. Coal prices were down 23%, as new sources of supply have put significant downward pressure on market.
Copper prices and zinc prices were much better supported. And as a result, their adjusted profit came in at about $1 billion or $1.74 per share.
Overall, revenue was down approximately 9% to $9.4 billion, primarily again due to lower prices. Coal and zinc sales and production were higher than last year.
Copper sales and production were both down about 2%. On Slide 6, we've reported our achievements against the 2013 guidance.
As I mentioned, we met or exceeded all of our production targets for the full year and we set a number of significant operating and sales records. In steelmaking coal, we are pleased with production of 25.6 million tons, which is broadly in line with the top-end of our guidance range, which we raised in the middle of the year.
Coal sales were a new record of 26.9 million tons, resulted from increased global steel production. In addition, we achieved more than a 10% reduction in our coal site costs, coming in at the bottom-end of our guidance range.
In copper, we slightly exceeded the annual production target, with our second highest copper production year ever. In Zinc, we significantly exceeded our production target for concentrated production, due to record annual ore throughput at Red Dog and Antamina.
And we also met the top-end of our guidance range for revising production. Ron Millos will address our guidance for 2014 later in this call.
Turning to some highlights for the fourth quarter on Slide 7. We had very strong operational results in the quarter.
Production was higher than the previous year for all of our principal products and copper production of 105,000 tons set a new quarterly record. However, prices for all of our principal products continue to decline with coal price is down 11%, copper price is down 10% and zinc price is down 2% over the same quarter last year.
Softer prices were partially offset by the strengthening of the U.S. dollar, which averaged to US$1.05 in Q4 compared with $0.99 in the fourth quarter of 2012.
As I mentioned, the Fort Hills oil sands project commenced construction in the quarter as well. We declared a semi-annual dividend in December, and we paid it in January.
And subsequent to quarter end, I'd like to point out that Teck's leadership and sustainability was recognized again in one of the most credible corporate sustainability rankings worldwide. We were named to the Global 100 most sustainable corporations list for the second consecutive year by Corporate Knights at the World Economic Forum in Davos, Switzerland.
Companies are evaluated based on a range of sector-specific sustainability metrics, such as water, energy and carbon productivity, and of course safety performance. This year Teck was the only mining company in the world on the list.
Looking at an overview of Q4 results on Slide 8. Revenue declined 13% to $2.4 billion, primarily due to lower prices for all of our principal products.
Gross profit before depreciation and amortization and bottomline profit attributable to shareholders were $875 million and $232 million, respectively. On an adjusted basis profit attributable to the shareholders was $227 million or $0.40 per share and EBITDA was $766 million.
Now, going through our Q4 results by business units, starting with steelmaking coal on Slide 9. Production was up 300,000 tons over the previous year.
Sales volumes were slightly ahead of last year in the quarter contributing to the new annual coal sales record, which was 2.9 million tons above the prior year and 1.9 million tons higher than the previous record, which was back in 2004. And this reflects strong sales growth worldwide, particularly in the traditional markets of Asia.
In addition, our logistics providers have had consistently strong performance, including the recently expanded Neptune Terminals. However, steelmaking coal prices declined, remaining below the level that we believe is required to sustain adequate production in this sector long-term.
This was partially offset by the effect of the stronger U.S. dollar.
Site costs were negatively impacted by a write-down of thermal coal inventories, which represented an additional $3 per ton. Excluding this impact, site costs were $52 per ton, and important to point that with the new exchange rate at US$47 per ton.
We estimate that our cost reduction program reduced coal site costs by $6 per ton this quarter compared with the first nine months of 2012, before the program began. The program is focused on savings in areas such as productivity improvement and mining, maintenance and processing operations as well as reducing input and overhead cost.
However, additional factors impacted site costs this quarter such as, higher fuel costs, contracted labor rate increase and the completion of deferred maintenance activity. So after coal prices impacted revenue and gross profit for our steelmaking coal business, quarterly gross profit before depreciation and amortization declined by $83 million to $352 million.
Looking at some highlights of our steelmaking coal business unit on Slide 10. The chart on the left shows the positive trend in our rolling four quarters steelmaking coal production.
Full year production was 25.6 million tons, and I should say that in the small box above the pie chart, it says 25.6 in 2014, that should say 2013. We have completed the expansion program that is underway for the past three years and currently we have the capacity to produce 28 million tons of coal, which was our objective.
Our actually production rate, however, will be a function of market conditions, and at this point we are planning to run somewhat under-capacity. We also have the option to grow capacity by a further 3 million or 4 million tons by restarting our Quintette mine.
We are continuing detailed engineering work at Quintette, so that if market conditions turn favorable, we will be in a position to be able to move quickly. Production could commence within 14 months of the construction decision, and at this point we don't contemplate making a decision until closer to midyear.
In the Elk Valley, we had record annual ore throughput at Greenhill's. Construction of the first water treatment plant to reduce selenium is progressing satisfactory at Like Creek, and that facility is expected to be commissioned in the second quarter.
In terms of the first quarter outlook for steelmaking coal, benchmark price for premium product is US$143 per ton. Demand remains strong and we expect total sales to be at or above 6.3 million tons.
I should note here that we are no longer providing guidance on realized price. We have concluded that providing this detailed guidance is problematic.
However, if you look at our realized price versus the benchmark over the past two years, we have realized around 94% of the benchmark price on average on an annual basis. This discount is reflective of our product mix and is as good as or better than most of our peers, which reflects the high quality of our product.
The discount does vary somewhat from quarter-to-quarter, reflecting a direction of quarterly benchmark prices or spot prices or product mix, the last one being quite important. The discount can be particularly influenced by carryover tonnage.
So if you watch these factors closely, you should be able to reasonably estimate the realized price. Turning to our copper business unit on Slide 11.
We had a record copper production quarter of 105,000 tons in Q4, which was driven by our record annual ore throughput at Antamina following its expansion and subsequent debottlenecking activity. And also improved productivity at Quebrada Blanca, and another strong finish to the year at Highland Valley.
However, we note that we expect copper production to begin declining in 2014. Copper sales were behind production with a 7% decline due to timing of shipment.
We did achieve a reduction in unit operating cost, particular at our Chilean operation. Copper cash unit cost declined by 7% in the fourth quarter.
Gross profit before depreciation and amortization for our copper business unit decline by $79 million, primarily due to lower commodity prices which also reduced by product revenues and lower copper sales. Looking at some highlights of our copper business unit on Slide 12.
The chart in the left shows the progress we've made in increasing copper production over the past four years. It has stabilized at somewhat lower rate over the past few quarters and this decline is expected to continue.
Throughput was strong at Highland Valley, at over a 125,000 tons per day, benefiting from the new pebble crushing facility. The mill optimization project achieved substantial mechanical completion in the quarter and commissioning of the new flotation facility has commenced.
Antamina continues to run very well, following recent throughput improvement initiatives. Q4 throughput was over a 136,000 tons per day and we broke the quarterly records for copper production and ore throughput.
We also set an annual ore throughput record in 2013. At QB, production was up in Q4 compared with the previous year's quarter.
We continue to see a significant improvement in operating cost as the result of our restructuring plan and cost reduction initiatives, with a 33% reduction in copper unit cost in Q4. For QB2, we have continued ramping down engineering and procurement activities and their related costs, and the scope of the work on QB2 will be much reduced in 2014.
At Carmen de Andacollo, copper unit costs declined 15% in Q4 and a new quarterly throughput record was set in 2014. And finally, Relincho's feasibility study was completed.
Although the project will be economic at consensus long-term prices, we will not be moving ahead with significant development at this time due to market conditions. In 2014, we will work on optimization studies focused on capital and operating cost reductions, but we will be spending very little money.
And turning to the photo on Slide 13, for the latest update on Highland Valley's mill optimization program. I'd like to point out, we have bubbles.
We achieved a key milestone last week, when the first feed went into the new flotation plant. Two of the five grinding lines, line D and line E, are now connected and running at expected recoveries and concentrate grades, and we're actually making concentrate, and that's a very positive start.
So approximately 40% of the plant feed has been transferred to the new plant with the remainder expected in early March, so we're very pleased about that. Turning to our zinc business on Slide 14.
Red Dog broke its annual mill throughput record with 3.9 million tons milled, primarily due to softer and favorable ore types. Zinc mine production increased slightly in Q4 compared with the previous year's quarter, as Antamina's mill feed mix contained a significantly higher amount of copper zinc ore.
We include Antamina's share of zinc production in these production figure that Antamina's financial results are reported in our copper business unit, as zinc is considered to be a byproduct at this mine. Red Dog had lower sales volume in the quarter, as a result of the timing of shipment.
In 2012, shipments were higher than the normal in Q4, as poor weather resulted it shipments schedule for the third quarter of last year being pushed into the fourth quarter. Also in 2013, some customers requested deliveries of zinc scheduled for Q4 2013 to actually be delivered in Q1 2014.
Trail's refined zinc production increased, as a result of better roaster throughput and improved operating efficiencies. So in the end, gross profit before depreciation and amortization declined by $56 million to $138 million, primarily due to the substantially lower sales volumes from Red Dog.
Turning to our energy business units on Slide 15. On October 30, we were very pleased to announce with our partners the construction of the Fort Hills project would proceed.
Now, this is an attractive project with very competitive margins and expected mine life in excess of 50 years. It will create significant value over the long-term, as it generates substantial cash flow across many price cycles.
And it's a strategic diversification as well into a mining product that is consumer driven. Projects are aligned with Teck's core competency of large truck and shovel operations, and as a bonus the investment is very tax effective for us, as we already generate much very income in Canada.
Our share of production is expected to be 36,000 barrels of bitumen per day or 13 million barrels per year. Project is schedule to produce first oil as early as the fourth quarter of 2017 and achieve 90% of planned production capacity within 12 months.
In terms of capital expenditures, Suncor has indicated planned total project spending of $3.16 billion in 2014, of which our share is $850 million, including our earn-in commitment. A similar level of spending is expected in 2015 and 2016.
The partners are working closely together to minimize execution risk at every stage with the project benefiting from Suncor's operational project development experience in the oil sands. 2014 project activities are expected to focus on completion of detailed engineering, procurement across all areas of the project and construction of mine and extraction infrastructure, including filings and foundations.
With that, I'll now turn it over to Ron, to provide some additional color on the financial side.
Ronald Millos
Thanks, Don. I'm on Slide 17, where we've summarized changes in our cash for the quarter.
Our cash flow from operations was $636 million, which reflects lower prices for all of our primary products. We spend $541 million on capital projects in the quarter, including $243 million on sustaining capital.
Capitalized production stripping costs were $185 million in the quarter. Expenditures and financial investments and other assets were $47 million, which is primarily for Fort Hills.
And you should note that effective October 30, we've changed how we account for our Fort Hills investment to recording our proportionate share of the project. So the capital expenditures are now captured in property, plant and equipment.
We previously accounted for the investment using the equity method. We also paid $46 million in principal interest on our debt and we received $498 million in proceeds from the sale of various marketable securities.
After these items, distributions and non-controlling interest, foreign exchange translation and other changes in working capital, we ended the quarter with a strong cash balance of about $2.8 billion. On the next slide, Slide 18, our pricing adjustments for Q4 are summarized.
We had positive pricing adjustments of $10 million on a pre-tax basis in the fourth quarter compared with $20 million of negative adjustments in the fourth quarter of 2012. These adjustments are included in our income statement under other operating income and expense.
The pricing adjustments are driven by the change in the quarter end commodity prices. And in Q4, the average copper price increased by about $0.04 per pound and zinc increased by about $0.02 per pound.
The chart on the right side of the slide simplifies the relationship between the change in copper and zinc prices and the reported settlement adjustments. And as a reminder, the Canadian/U.S.
dollar exchange rate and refining and treatment charges should be considered in your analysis of the impact of price changes in the adjustment. And you should also consider taxes and royalties, when analyzing the impact on our net profit.
I'd like to touch on the balance sheet for a moment on Slide 19. As mentioned, we have a strong cash balance with almost $2.8 billion at the end of the year, which is about US$2.6 billion at the December 31 exchange rate.
We have a balanced debt maturity profile with an average maturity of approximately 15.5 years, and importantly we only have US$300 million of notes due in the next three years to the end of 2016. Our note rollovers averaged about US$600 million when they mature.
Our average coupon rate is 4.8% and our annual interest payments are about $346 million. We also have a mid-BBB investment credit rating with stable outlook from all four of the major agencies, and we are committed to retaining that rating.
Looking forward to guidance on Slide 20. In steelmaking coal, our 2014 production guidance is 26 million to 27 million tons, which represents a modest increase from the 2013 production of 25.
6 million tons. And this is lower than our current capacity of approximately 28 million tons, as we align our production rates with anticipated demand and effectively mange our inventories based on market condition.
In terms of cost, coal site guidance is between $55 and $60 per ton, which is equivalent to US$50 to US$54 per ton at the current exchange rate. This is based on our current production plans, reflecting longer haul distances and higher fuel prices, which are offsetting our cost reduction initiative.
Our coal transportation cost guidance is between $38 and $42 per ton for the full year. And on a combined basis that's $93 to $102 per ton or equivalent to US$85 to US$93 per ton at current exchange rates.
In copper, our 2014 production guidance is 320,000 tons to 340,000 tons. This represents a decline from the 364,000 tons produced in 2013, given lower expected production from Antamina, as it enters a period of lower grades as per the mine plan.
In addition, QB supergene deposit, as it nears the last period of its life, production is down a little bit there as well. Antamina is expected to gradually increase production after 2014, as grades improve.
We expect our copper cash unit cost to be between US$1.70 and US$1.90 per pound, US$1.70 and US$1.90 per pound net of byproduct credit. And in zinc, production of zinc and concentrate is expected to be between 555,000 tons and 585,000 tons in 2014.
This includes both Red Dog and our share of production from Antamina. Refined zinc production at Trail is the same as last year between 280,000 tons and 290,000 tons for 2014.
Moving on to the next slide, total capital spending is expected to be approximately $2.6 billion in 2014, and this includes the $850 million for our share of Fort Hills and $700 million for our capitalized production stripping cost. Overall, we are reducing our sustaining capital spending figure to $620 million.
We are able to respond to the current market conditions and to do so in the short-term, because of significant investments over the past few years. As an example, our truck fleets are basically relatively new with the spending that we've had over the past few years.
Our major enhancement project spending at our existing operations is also reduced to $170 million and that includes about $70 million for the final completion of the mill optimization project at Highland Valley and $70 million at our coal operation. Major projects spending on new mine development is expected to be $1.1 billion.
Biggest piece is our investment in building the energy business unit that Don mentioned, and again, our share of the Fort Hills spend is estimated at $850 million for 2014. We also expect to spend $105 million on advancing the Frontier project.
And in addition, we have a $100 million for QB2, and $25 million for the Quintette project. As always, the amount and timing of actual capital expenditures is dependent upon numerous factors.
I mean, our ability to secure any permits that are necessary and the necessary equipment, labor, and supplies and to do so at cost level expected. And of course, we may change our capital spending plans depending on commodity markets, results of feasibility studies and various other factors.
Moving on to Slide 22. I would like to highlight the sensitivity of our profit and EBITDA, the changes in prices and exchange rates based on the midpoint production estimates we have provided and assuming the Canadian U.S.
dollar exchange rate of a $1.10. As a starting point, our EBITDA was $3.2 billion in 2013.
For coal, our estimated EBITDA sensitivity for each U.S. dollar per ton, change in the coal price is $29 million.
For copper and zinc, the estimated sensitivity for each U.S. cent, change in the price is $7 million for copper and $10 million for zinc.
And the one to watch closely at the moment is the exchange rate. The Canadian U.S.
dollar exchange rate has moved significantly into our favor over the past months and the U.S. dollar is now approximately $0.08 stronger than 2013 average.
Our estimated sensitivity to every $0.01 change in Canadian dollar versus the U.S. dollar is approximately $62 million.
So the current exchange rate continues with a balance of 2014, we could have a possible $500 million or so increase in our EBITDA for the year. So with that, I will now turn the call back over to Don for some closing comments.
Donald Lindsay
Thanks, Ron. So in summary, on Slide 24, we had strong operational performance in 2013 and we met or exceeded all of our annual production targets.
We exceeded our cost reductions targets in 2013 and we retained our sharp focus on those operating costs. We are prudently allocating capital to the best risk reward projects and we've maintained our dividend at $0.90 on an annualized basis.
We're maintaining the discipline and focus on the long-term, while remaining mindful of the short-term. And with that, we'd be happy to answer any questions.
Operator, back to you.
Operator
(Operator Instructions) We have a question from Sal Tharani from Goldman Sachs.
Sal Tharani - Goldman Sachs
In your press release, you've mentioned about the cost inflation, which is offsetting the cost reductions you're implementing, I was just wondering, and you had alluded that there could be some significant cost inflation in some of those areas you mentioned. I just was wondering if you can give us some color on that.
Donald Lindsay
I'll just make a quick comment before turning it to Ian Kilgour, our Chief Operating Officer, but what we said in the release is that while we've had good success on our cost reduction program on a number of items, we still can't ignore the affect of grade or haulage distance or strip ratio and what that might do to the overall cost. And so we just want to make sure that people are keeping those key factors in mind.
Ian, over to you.
Ian Kilgour
Thanks, Don. So we still, will be, certainly keeping up the focus on our cost reduction programs, bedding in the ones that we implemented last year and looking for extra cost reductions as we look to incorporate all the projects that have been implemented at our mines, throughout the other mines across the business.
But we are pricing annual differences in things like haul distance and that's going to increase a little bit in 2014. We're also at a period in our maintenance cycle when we bought quite a lot of new trucks in the last couple of years and some of those are reaching the first engine overhauls and things like that.
So there will be factors changing from year-to-year, but our focus on continued cost reduction and trying to come in as well as we can in the range of our cost guidance is a focus for all our people.
Sal Tharani - Goldman Sachs
And my second question is, a recent press report about your involvement in the last Las Bambas project, I was just wondering if you can give us some color on that also?
Donald Lindsay
Well, we don't comment on that kind of speculation. So we can't give you anymore color, but that is just the policy that we have to have one those kinds of things.
We see a lot of speculation, and part of the reason that we see the speculation is because we have a large cash balance and we are able to look at opportunity. You can assume that our corporate development department is mandated to look at everything.
Some things they look at for five minutes, some things they look at for five days, and some times they look at for five weeks and with a lot of detailed due diligence. But we're never really going to comment on any specific opportunity.
Operator
The next question is from Mitesh Thakkar from FBR.
Mitesh Thakkar - FBR
Just a quick question on Relincho. With the feasibility study behind us now, what kind of market conditions are required to bring that project online?
And is it more of a copper market situation that you are focused on right now or just where the coal markets are and the amount of cash flows and other CapEx priorities?
Donald Lindsay
I think it's more of a company decision in terms of prioritization of our capital allocation. We have done a lot of work comparing QB2 to Relincho, and for a number of a reasons, including the fact, that there is current Quebrada Blanca in operation with the work force, and the rest of it, we've put a priority on QB2.
And so we would want to be doing two projects at once, from a project development capability and use of people and skills and executive experience point of view and also from a balance sheet point of view with Fort Hills going ahead. So we like Relincho and we know it's going to be something that world needs and it's going to be very valuable one day.
But in terms of its just place in the queue, it's behind. So I think finish the feasibility is a bit of optimization to do, but we're just going to put it on hold until these other things run their course.
Mitesh Thakkar - FBR
And just switching gears to Highland Valley a little bit, you had a pretty good quarter, the fourth quarter. It produced about 135,000 tons kind of a run rate.
Can you explain to us how the 2014 guidance looks kind of flattish versus '13, even though the optimization should be done and you should get some benefit from there?
Donald Lindsay
I'm going to turn that over to Ian.
Ian Kilgour
As the optimization comes in we're already getting benefit from the increased throughput due to our pebble crushing circuits and with the flotation circuits coming on line, fully bought at the end of March, we expect a little bump in our copper recovery and that will be fully in place by the second half of the year. However, the guide is fairly stable, so that means that we're not going to see a significant increase in overall production.
Operator
The next question is from Orest Wowkodaw from Scotiabank.
Orest Wowkodaw - Scotiabank
Two questions. First of all just getting back to the coal cost.
I mean back on the October conference call, we certainly got the indication that you expected costs to stay around $50 a ton for the foreseeable future. Just curious what's changed between then and now in terms of the guidance for this year at $55 to $60?
Donald Lindsay
Ian, over to you.
Ian Kilgour
Well, I guess the things that are a little bit different going forward in 2014 are, as we said, our haul distance increases somewhat, and that means that we have to have more trucks operating to move the same amount of material. We do had, as I said, some cyclic increase in the maintenance costs.
There are a few other factors that come in. We've got labor inflation, just the yearly increases in all of their labor agreements.
Fuel prices have gone up a little. It will be the first year, where we do had some operating cost for our selenium plant.
So all of those things combined to give us that increase for 2014.
Orest Wowkodaw - Scotiabank
Is there any impact from say, just lower volumes than maybe you thought before in terms of spreading fixed costs?
Donald Lindsay
No. We expect to produce more coal in 2014, than we did in 2013.
So there is no sort of dilution.
Orest Wowkodaw - Scotiabank
I just mean in terms of kind of previous expectations. And just second question in terms of copper, I mean at the Investor Day you guys made it pretty clear that you made it a high priority to try to find some copper growth to bridge you to QB2.
I mean, given the feasibility study results for Relincho, can you give us some color on where your heads at in terms of copper growth between now and QB2 and Relincho, which both looked like they're kind of end of decade projects?
Donald Lindsay
Nothing has changed from our comments at the November meeting. We are constructive, quite positive on the long-term outlook for copper, in fact, maybe even more so today than we were in November.
I note as each new forecast comes out for the surplus in copper in 2014, 2015, the number seem to get smaller and the drop-off in copper production in Chile that is forecast for the second half of this decade is quite material. So yes, we would be interested in adding to our copper portfolio.
And second part of the answer would be similar to what I said earlier, our corporate development department, it is their mandate to look at everything. And they are certainly looking at everything that's available in copper.
But at the moment, we haven't found anything that make sense for us. One other point I would make is that while we would like to do that and that would sort of fit backfilling some decline in production that we have in the next couple of years.
We don't have to do that. In the end, we are diversified company.
Our diversified strategy is based on having the flexibility to allocate capital to where the highest returns are. So if we see something, that we think, that the returns long-term are better in the project in some other commodity, we can do that even though we have decline in copper production.
So I think it's important to understand that principal.
Operator
The next question is from Meredith Bandy from BMO Capital Markets.
Meredith Bandy - BMO Capital Markets
I just wanted to ask, I guess this is sort of a follow-up on the other one. QB2, it sounded to me, and I could have gotten this wrong, but you're resubmitting the SEIA in Q2, which I thought was up a couple of quarters.
But then it also sounds like that is still a little bit on the back burner. Could you just update us on what sort of the timeline could potentially be at QB2?
Donald Lindsay
Yes. That's not quite right and that we understand it is a bit confusing.
Ian, why don't, I turn it to you for the timeline?
Ian Kilgour
Thanks, Don. Meredith, we are going full steam ahead on our QB1.
SEIA, we expect that to be submitted in Q2 this year. And as soon as we do that we'll be turning our attention to the QB2 SEIA in moving that forward.
We've been working very closely with the authorities in Chile and have very, very good relationships in terms of being able to handle all the -- anticipate all of the issues, which may be rising as part of this SEIAs. So we're very confident that we can move through a very orderly program to get, first of all, QB1 and then QB2 approved.
Meredith Bandy - BMO Capital Markets
So the SEIA for QB2 would still be late 2014, is that right?
Donald Lindsay
Yes. We would be willing to submit that as soon as we basically get approval for the QB1, SEIA, which of course depends on the government, but certainly by the end of 2014, start of 2015.
That's where we'd hope to be.
Meredith Bandy - BMO Capital Markets
And then just quickly on the CapEx budget, is there any of the selenium cost in there? I mean have you just taken out the $600 million over the next five years given that you are working on a new plan for that?
Or how should we think about this?
Donald Lindsay
It is included in the sustaining capital. Earlier, I had given the indications that we hope to have sustaining capital to $500 million not counting selenium.
So you're seeing $620 million including corporate, so $600 million that includes selenium cost for 2014.
Meredith Bandy - BMO Capital Markets
So for now we'll just leave that with the $600 million previous five-year estimate, right?
Donald Lindsay
That's correct.
Operator
The next question is from Greg Barnes from TD Securities.
Greg Barnes - TD Securities
I'm surprised, I'm going to ask this question, and be the first one on the coal pricing. Don, or someone else, I guess, you talked in the discussion about more of your coal sales going into spot price contracts.
I think the last guidance we had was around 30% of volume will be spot price, is that increasing?
Donald Lindsay
Yes. It is.
And I will turn it over to Réal Foley to give more detailed answer.
Réal Foley
Thanks, Don. So Greg, the guidance that we gave before, talks about our overall ratio of sales price on shorter than quarterly basis, above 40%.
That's what we were expecting for 2013 and that's what our sales came in. That compares to around and above 30% in 2012, so maybe that's where the 30% that you're remembering comes from.
And it was 15% to 25% prior to 2012. So the majority of our coal continues to be priced on a quarterly basis, but there is more coal being priced on a spot basis in the market.
The important thing to remember is that we have long-term relationships and contractual arrangements with our customers and that gives us a level of certainty on volume. So yes, the pricing mechanisms are gradually changing in the market, but the basis for the business is really the long-term relationships and contractual arrangements.
Greg Barnes - TD Securities
Is 40% good against the 2014 then?
Réal Foley
Yes. We are expecting 2014 to be somewhere around that level or maybe slightly higher.
Greg Barnes - TD Securities
And just one other question, quickly, on the capitalized stripping at $700 million this year. That's a quite a bit higher than I was expecting.
Is that a go forward number or should that come down?
Ronald Millos
It will gradually come down, Greg, but it's a number of that it can get whipsawed quite easily because if you change where you're mining and what you're intending to do for any reason, it can be volatile number, because its done on a sort of that pit-by-pit or area-by-area basis.
Donald Lindsay
Unfortunately, it's one of the hazards of IFRS. It's not something that we have a choice on it.
Operator
The next question is from Jeremy Sussman from Clarkson.
Jeremy Sussman - Clarkson
Your 2014 coal sustaining CapEx of $215 million seems to compare favorably to 2013 levels even when I account for selenium. Just curious if you can kind of walk us through where you've been able to save on the sustaining CapEx front?
Donald Lindsay
Over to you, Ian.
Ian Kilgour
We expected to be able to reduce sustained capital in this year, because of the investment we've made in the business over the last three years, and so we have come to the basically the end of our sort of brownfields growth phase. So basically the sustaining capital on things like truck, shovels, drills has decreased, that's probably the mine area, where it is lower than previously.
Jeremy Sussman - Clarkson
And then just can you remind us if you do decide to go ahead with Quintette where it kind of fits on the cost curve within your mines?
Ian Kilgour
Quintette would come in around the middle of our range in terms of cash costs.
Operator
The next question is from Lucas Pipes from Brean Capital.
Lucas Pipes - Brean Capital
Don, if I understood you correctly you said in the prepared remarks that copper production will begin declining in 2014. Is it right to interpret that as that at 2015 production could yet be lower than 2014 even though Antamina should recover?
Donald Lindsay
Yes, it's right. We haven't put out a number as yet, but I think you will see in the quarterly today that Duck Pond will be showing down, so there is lots of production there.
And QB will continue to decline somewhat, so it will be declining this year versus last year and then stabilize a bit. So we have some moderate losses there and then we hope to make some of it on the Highland Valley.
And then in Antamina's case, of course, I really should be letting Ian speak to this, but it really depends on the grade and the mine plan for that particular year. As you know we're going to already into a lower grade phase.
Ian, do you want to add some color on that.
Ian Kilgour
I guess, Antamina is a complex deposit and as the mine plan progresses, the percentage of copper only ore versus copper zinc ore changes. It was always foreseen that there would be a period of time lasting a couple of years, where the copper production reduced and the zinc production increased as well as percentages of ore types changed.
So that's a period we're going through now, and the overall trend will be back towards gradually higher copper production.
Lucas Pipes - Brean Capital
And then on Quintette, do you have a sense on CapEx in terms of what it would take to complete that project?
Ian Kilgour
At this stage, we're working very hard to save every cent off, we can of that project. So it will be a bit pretty premature to give a number on that.
Operator
The next question is from Brian Yu from Citi.
Brian Yu - Citi
I have just got a follow-up on the prior question about coal contracts, spot versus contract. And we saw something similar in the iron ore markets where your customers were going more towards spot and prices were falling and then leaning towards contracts where prices are increasing.
Can you maybe elaborate a little bit more on the term, how long these things last? And is there any flexibility in there for your customers to move around between those two types of purchases?
Donald Lindsay
Good question. Réal?
Réal Foley
Thanks, Don. So when we look at the last year, Brian, starting from about the second quarter in 2013, a number of customers actually reduced the portion of quarterly price tons and requested the suppliers to price the portion of their contracts on the spot basis.
And it was an environment of low steel prices, I guess, that helps to control cost. And really, our coal sales profile reflects that.
What we're seeing in the market this year is there is the continuation of that. A number of customers are continuing to request that a portion of their contract should be priced on the spot basis.
So we expect, as I said earlier, to sell somewhere around 40% or maybe a little bit higher than that in 2014 on the spot price basis.
Brian Yu - Citi
And these requests are they made or committed on an annual basis or do they make these requests on a quarterly basis? And I guess, I'm trying to get a sense of, say, we do get a recovery in the coal prices and spot time moves up above contract, that it's still good for us to use this 40% number and that it's suddenly not going to start to drop-off as spot prices go up.
Réal Foley
So typically those arrangements are made on an annual basis. So the ratio of spot to annual, if a customer has a contract like that, will be agreed at the beginning of the year.
So that when the market changes, as you say, it's for both parties. At the beginning of the year, nobody knows where the market is exactly going to go.
Operator
The next question is from Kerry Smith from Haywood Securities.
Kerry Smith - Haywood Securities
Don, in the Q1 report you had given some guidance on what you thought the operating cost would be for the selenium management program. And then now, in this quarter, you've kind of said you're not sure what the capital operating cost would be, but that you are starting out the first plant at Line Creek.
So should I interpret that to mean that you're thinking you can do better than the cost that you talked about previously or should I interpret that to mean that you're thinking the cost might be higher?
Donald Lindsay
I don't think we've said that we're not sure. We have a distinct plan with real numbers and real program that we've gone through with the government.
But we do hope to be able to do it for less. There are several different technologies that people are looking at that could change the game.
And so in the longer-term, we hope one of those things will come to pass and help reduce cost. Maybe either Ian or Marcia could add further color.
Ian Kilgour
We are currently working with the provincial government on developing our Elk Valley Water Quality Plan. And how that evolves will determine the level of control that we need to put in for our selenium management.
And to some extent, that will vary the expected capital and operating cost. And we hope to have that plan submitted to the government in early in the third quarter this year.
But as Don said, we also have a very expensive laboratory pilot plan program occurring at the moment with our Applied Research and Technology Center looking at all the alternatives technologies for selenium management and we are working actively to come up with the technology that is the most cost-effective.
Kerry Smith - Haywood Securities
So the costs you have given us previously are still accurate, it's just you are looking for ways to lower those potentially then, okay. And then the second question I had was just on Relincho again, Don, because you've kind of deferred this project.
Is it more a function of the moly price that's driving that decision or is there something else that's giving you returns that aren't adequate?
Donald Lindsay
No. It's exactly what I said before, that the sequence of projects that is QB2 first.
And we haven't got the permit for QB2 and we won't have for sometime. And balancing that with the cash available, balance sheet and so on, just means that it's going to be further out.
So we are on the way with Fort Hills. QB2 will come after that if and when we get the permit and Relincho after that.
Operator
The next question is from Grant Moenting from Paradigm Capital.
Grant Moenting - Paradigm Capital
Just a follow-up to some of the other questions. In terms of your core dev team looking at copper, is there any potential that Teck would consider by immediate production versus build strategy?
Or would you prefer to look only at projects that your team can develop in advance internally?
Donald Lindsay
We would look at all options. And so yes, we could buy current production.
We could buy a project if we thought it was a better project than the ones we already have in the pipeline. One of the advantages of having 76% of QB or 100% of Relincho is that we control the schedule and if there is something that was much better than those, then we could always put those in the backburner and go ahead with the new one.
But we're looking at all the options.
Grant Moenting - Paradigm Capital
And do you think you are sort of in an environment now where buying production, do you guys see it as cheaper as sort of maybe some of the other projects that you could develop or build or compare to Relincho or QB2, are we there?
Donald Lindsay
It all depends. The landscape does shift from more value in buying to more value in building.
In the long-term what we really want is a high quality long-life resource, and those are usually pretty difficult to buy. The most value creation for shareholders, if you can get one of those, it goes through cycle-after-cycle.
And as I said, on different occasions, in the commodity business, whether it's copper, zinc or anything else, you're going to have cycles and inevitably you get all your money back in two or three good year, you just don't know when the two or three good years are going to be. So if you have a 50-year mine life, the odds of getting two or three good years five or six times are quite high, and if you back calculate your IRR then, you'll see that you get a very good return.
So for us the priority is quality of resource and mine life, and that's what's going to really drive the value creation for shareholders.
Grant Moenting - Paradigm Capital
And price I assume?
Donald Lindsay
Well, yes. It's always trying to get the right value proposition.
And as you noticed, we haven't been able to find that yet. So the sellers' expectations are often very high and we haven't been willing to pay it.
Operator
The next question is from Oscar Cabrera from Bank of America.
Oscar Cabrera - Bank of America
So a question on copper and then a question on coal, if I may. In terms of the projects and disciplined capital allocation in the current macro environment, could you provide some more color in terms of how you're thinking about the development of QB2?
And I'm assuming that you'll be able to get permits within the next 18 months, should we think about this project as being developed until after Fort Hills is finished?
Donald Lindsay
So here's how we think about it. If we get the SEIA filed in end of this year, just conceptually, and then it takes maybe 18 months to get the permit.
Historically, it's been faster than that, but I think we have to consider that. My guess is by that stage copper will have gone through its period of time, when it's had a slight surplus and we'll be starting to move into a very deep deposit.
And so my guess is that the cash flows that we'll be experiencing, and by the way we kind of have a positive outlook on zinc by that stage too. We'll probably be quite strong in that and we'll have the financing capability to go ahead with construction.
Certainly, we think QB2 is an excellent project, solid returns, lower half are better than the cost curve, good geopolitical jurisdiction, very long life, expandable, and so on. So if we could snap our fingers and have that built, we would.
We think it will be a core part of our portfolio for generations. We just have to get from here to there, and when we get there we'll then take a look at what the financing options are.
And I suspect by the time we get the permit, we'll be in different commodity price environment.
Oscar Cabrera - Bank of America
And then, in terms of the coal, getting back to the pricing spot versus quarterly. I just want to understand a little bit better, if you can tell us, which are the clients?
So I guess a better way to ask this is, on a regional basis, how are the coal sales segmented? And do you see the same mix in 2014?
Donald Lindsay
Réal?
Réal Foley
So, Oscar, 2012 if you recall, our sales profile was about 75% of overall sales into the Asian market that included around 30% to China and then the balance is sold to a Europe and the Americas. For 2013, our sales mix was pretty similar again.
And just looking at what is happening in the market, we expect maybe slight rebalancing towards traditional markets. So it's a little bit of that maybe 1% or 2% in 2013.
But we expect again maybe a little bit of rebalancing towards traditional customers in 2014, as the recovery continues to take hold across the majority of the market areas.
Oscar Cabrera - Bank of America
In fact, you're getting then requests from everyone, not just Asia?
Donald Lindsay
That's correct. Operator we're coming up in the hours.
So maybe just time for one more question, and then we'll have to cut it after that.
Operator
The next question is from Daniel Rohr from Morningstar.
Daniel Rohr - Morningstar
A couple of questions. Highland Valley unit cost looked pretty good in the fourth quarter, I guess the operating cost at about $1.51 a pound, and I understand some of that's due to good grades.
But can you comment on how much of the improvement you saw sustainable into 2014?
Donald Lindsay
Ian?
Ian Kilgour
I think we view that improvement is sustainable into 2014, and the parameters don't change particularly. And we are going to be getting the full positive impact of the new flotation plant.
I guess we'd hope that with operating of that new plant with fewer larger flotation cells, we would actually get some improvement there. But we of course are going through a period where we're tying in that new system to the existing plant and there will be a period of bedding that down.
So all-in-all, outlook is fairly similar.
Daniel Rohr - Morningstar
And then with respect to currency sensitivities in the coal business, you've got site costs forecast at $55 to $60 a tone in 2014. Of that figure, what portion might be true Canadian dollar expenses like labor and services?
And what share might be more globally fungible in nature, so diesel and explosives and parts and alike?
Ronald Millos
This is a guess, probably it's best to get back you on that with the details, because I'd be guessing on the number. All of the labor would be Canadian.
A big chunk of the supply would be U.S. and other big chunk of supply would be Canadian.
But in reality, they are based on U.S., so it's hard to say. We'll have to get back with some detail on that.
Gregory Waller
Great. Thanks very much, and just before we turn it back to the operator for a moment.
For those of you who are still in queue, we didn't get a chance to answer your questions, Ron Millos and I will be available to take calls. So give us a call or send us an email, and we'll get back to you.
Donald Lindsay
Greg, maybe I'll just make a summary comment.
Gregory Waller
Sure.
Donald Lindsay
Just wanted to repeat what I said on institutional road shows. The Teck itself is operating very well.
We are meeting our targets. The balance sheet is very strong.
We had our best safety record in our history. We've been named the most sustainable mining company in the world.
So the company is in very, very good shape. But we are in a period of commodity price weakness or in particular coal price weakness, and that means in the short-term, in the next couple of quarters you're going to see weaker financial results.
And I don't know how many people invest for the medium-term these days, we're sort of three to four years out. But if you look out at that 2017 or so period, three years for now, we believe at that stage zinc is going to be in a very significant deficit and price should be very favorable.
By that stage copper should have created a year or two of small surpluses and be going into significant deficit as well. We think the coal market will be cleared and Fort Hills will be almost built.
So in terms of what Teck looks like at that stage, it could be very, very exciting. So for anybody who is a medium-term investor, you get paid a pretty good dividend along the way and the three-year outlook is very exciting.
As miserable the next quarter or two is, the three-year outlook is equally and oppositely exciting. I just wanted to leave you with those thoughts.
Gregory Waller
Thank you all for joining us. And we look forward to the next quarterly call.
Operator
Thank you. The conference call has now ended.
Please disconnect your lines at this time. And we thank you for your participation.