Feb 12, 2015
Executives
Gregory A. Waller - Vice President of Investor Relations & Strategic Analysis Donald R.
Lindsay - Chief Executive Officer, President, Director and Member of Executive Committee Ronald A. Millos - Chief Financial Officer and Senior Vice President of Finance Ian C.
Kilgour - Chief Operating Officer and Executive Vice President Timothy C. Watson - Senior Vice President of Project Development Réal Foley - Vice President of Coal Marketing
Analysts
Sohail Tharani - Goldman Sachs Group Inc., Research Division Greggory Price - Barclays Capital, Research Division Aleksandra Bukacheva - BMO Capital Markets Canada Jeremy Sussman - Clarkson Capital Markets, Research Division Mitesh Thakkar - FBR Capital Markets & Co., Research Division Jorge M. Beristain - Deutsche Bank AG, Research Division Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division Lucas Pipes - Brean Capital LLC, Research Division Kerry Smith - Haywood Securities Inc., Research Division Oscar Cabrera - BofA Merrill Lynch, Research Division Alex Terentiew - Raymond James Ltd., Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Teck's Fourth Quarter 2014 Conference Call.
[Operator Instructions] I would now like to turn the conference over to Greg Waller, Vice President, Investor Relations. Please go ahead.
Gregory A. Waller
Thanks very much, operator. Good morning, everyone, and thanks for joining us for Teck's Fourth Quarter and Full Year 2014 Results Conference Call.
Before we start, I'd like to draw your attention to the forward-looking information 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.
Our presentation is a little bit longer this morning since we're dealing with year-end results as well as guidance for 2015. So bear with us, and we'll get to your questions.
And at this point, I'd like to turn the call over to Don Lindsay, President and CEO.
Donald R. Lindsay
Thanks very much, Greg, and good morning, everyone. I'll begin with a brief overview of our annual results and then followed by our fourth quarter results, and then Ron Mills, our CFO, will provide additional color from a financial perspective, and we will conclude with a question-and-answer session when Ron, myself and several additional members of our senior management team will be happy to answer any questions.
In these market conditions, we have continued to execute well by controlling the controllables. We had excellent performance in 2014 with solid delivery against our guidance.
And for the full year, we also had record production in Steelmaking Coal, record throughput at Antamina and record production at Red Dog. Our focus on cost reduction continues to deliver results with significant sustainable operating cost reductions being achieved.
In 2014, this contributed to reduced unit cost at 10 out of our 13 operations, and that all of our operations generated positive cash flows. We also reduced our full year CapEx compared with our plans at the start of the year.
We maintained a solid financial position with the year-end cash balance of $2 billion, also an unused revolving credit facility of USD 3 billion and no substantial debt due in the next 2 years. Looking at the overview of full year results on Slide 4.
While demand remained strong, revenue was down 8% to $8.6 billion, primarily due to lower prices for steelmaking coal and copper. However, gross profit in our zinc business unit is up 50%, driven by a 13% increase in zinc prices and also record production at Red Dog.
Overall, gross profit before depreciation and amortization was $2.9 billion, EBITDA was $2.3 billion and bottom-line profit attributable to shareholders was $362 million. After removing unusual items, adjusted profit attributable to shareholders was $452 million or $0.78 per share.
Going forward, our profitability benefit significantly from the stronger U.S. dollar and from lower oil prices, and Ron will provide some detail on that later on.
On Slide 5, we reported our achievements against our original 2014 guidance. And you may recall that in Q3, we raised production guidance for all of our business units and reduced our cost guidance for coal and copper.
And as I mentioned earlier, we had solid delivery against this guidance. We also set a number of significant operating records.
In Steelmaking Coal, we were in the top half of our production guidance and set a new annual production record at 26.7 million tonnes. At the mine level, new annual production records were set at both Elkview and Greenhills.
Our continued focus on cost reduction contributed to us coming in below site cost guidance at $54 per tonne, including inventory adjustments. We also met the bottom end of the coal transportation cost guidance range at $38 per tonne.
Overall, including inventory adjustments, combined coal costs were CAD 92 per tonne or around USD 84 per tonne. In copper, we hit the top half of our original production guidance at 333,000 tonnes, and Antamina set a new record for throughput for the full year.
We also came in below our cash unit cost guidance range at USD 1.65 per pound. In zinc, we significantly exceeded guidance for concentrate production at Red Dog.
At Trail we came up a bit short of the bottom end of the guidance range but by only 3,000 tonnes. And this was due to lower production in the first half of the year prior to the commissioning of the new asset plant, which obviously will make a big difference, and that was shown in the second half when production was stronger at 143,000 tonnes.
We also significantly reduced our CapEx with actual expenditures around $400 million below what we expected to spend at the start of the year. So overall, we delivered well against the 2014 guidance and Ron Millos will address our 2015 guidance later in the call.
Now looking at an overview of Q4 results on Slide 6. Revenue declined 5% to $2.3 billion, primarily due to lower prices for all of our principal products.
Overall, gross profit before depreciation and amortization was $757 million, EBITDA was $582 million and bottom line profit attributable to shareholders was $129 million. Adjusted profit attributable to shareholders was $116 million or $0.19 per share.
Turning to Slide 7 and the operational highlights from the fourth quarter. Our operations performed well.
We set fourth quarter production records for coal overall at 6.8 million tonnes as well as at Elkview and Fording River. Zinc production also increased, and we restarted our Pend Oreille mine on time and under budget.
We also continued to achieve significant operating cost reductions. We declared a $0.45 in November and paid it in early January.
We also had some key achievements on the sustainability side. We received BC [ph] government approval for the Elk Valley Water Quality Plan, which is the culmination of an extensive multi-stakeholder process.
The plant establishes short, medium and long-term water quality targets, and it will guide future regulatory decision-making regarding water quality and mining in the Elk Valley. And then subsequent to quarter end, Teck's continued leadership and sustainably was recognized again in one of the most credible corporate sustainability rankings worldwide.
We were named in the Global 100 Most Sustainable Corporations list for the third consecutive year by Corporate Knights and was announced at the World Economic Forum in Dallas. 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 top-ranked mining company worldwide and the second ranked Canadian company on the Global 100 list. Slide 8 summarizes the fourth quarter results in our Steelmaking Coal business unit.
Coal sales were in line with the target we gave last quarter at 6.5 million tonnes, and we met the previous record for highest sales in the fourth quarter. However, oversupplied market conditions continue to impact coal prices.
And while the benchmark price for the highest quality product drop by only USD 1 in Q4 relative to Q3 to USD 119 per tonne, prices are significantly lower than the same period last year. Our average realized price was 17% lower on a Canadian dollar basis at CAD 123 per tonne.
And overall, our revenue declined by 14% to $824 million. And as I mentioned earlier, we set a fourth quarter production record overall, but there was potential for higher coal production.
We temporarily had to idle some of the mines in December due to high site inventory levels. Our cost-reduction efforts are continuing to produce significant results.
We lowered coal site cost by $4 per tonne to $48 before inventory adjustments. And total unit cost were down by $3 per tonne to $91.
Gross profit before depreciation and amortization declined by $118 million to $234 million. And looking forward, coal prices for the first quarter 2015 have been agreed with the majority of our customers based on a USD 117 per tonne with the highest quality products, and we expect sales at or above 6.5 million tonnes.
Turning to Slide 9 and coal markets. Oversupply continues to keep prices at an unsustainable level.
Approximately 30 million tonnes of cutbacks and closures have been announced since January 2014, but they are slow to be implemented. We estimate this slightly less than half of these cuts had been implemented by year-end.
And even when the announced cuts were implemented, this will now be insufficient to bring the market back into balance. With the additional production that's come on in Australia and elsewhere, we expect the market to remain imbalanced unless further cuts are announced and implemented.
Cuts and closures continued to be announced though and if they continue with the same rate we've seen in the last few weeks and months, there is potential for the coal market to be back in balance as early as the second half of 2015. But we need those cuts.
One important point is that despite weaker coal prices in U.S. dollar terms, the strengthening of the U.S.
dollars has meant that prices have actually increased in Canadian dollar terms. You'll see that in the graph on the right.
In Canadian dollar terms current prices are more than 10% higher than the levels of last July. I'll now review our base metals businesses starting with copper on Slide 10.
Sales were down 13,000 tonnes, reflecting lower production. Antamina had record throughput for the full year and Highland Valley ran at a very high throughout rate following the mill optimization project.
However, production was lower in the quarter due to lower grades and recoveries. Production was also lowered at [indiscernible] due to reduced throughput resulting from harder ore conditions and unplanned maintenance downtime.
With the copper price down 9% in U.S. dollar terms, our revenue declined 14% to $656 million.
Our cost reduction efforts are producing significant results, but lower grades put upward pressure on unit cost during the quarter. Unit cash cost after byproduct credits were up about 9%, but we expect those costs to decline materially this year.
Overall gross profit before depreciation and amortization declined by $110 million to $274 million. Turning to the copper market on Slide 11.
For a couple years now, analysts have been forecasting a surplus in the copper market both in 2014 and 2015. For example, these charts show Wood Mackenzie's forecast of surpluses for 2014 on the left and 2015 on the right and how they evolved over the last 3 years.
And as you can see, the size of the expected surplus has been steadily declining. We had maintained that greenfield projects that were due to come on stream in 2014 and 2015 would be slower than anticipated and that current operations would continue to have difficulty, meeting projected operating rates and that the combined effect of these 2 factors would impact on the expected surplus.
For 2015 and 2016, we currently expect a small surplus of approximately 2% of the global market. However, some projects for 2015 are already being pushed out and recent announcements from other producers are pointing to lower production in 2015.
So longer term, we remain optimistic about the outlook for copper. The lack of current investment will leave a gap in the market in future years.
Turning to our zinc business unit on Slide 12. I should first note that Antamina and Duck Pond's zinc-related results, as usual, are reported in our copper business unit as zinc is considered to be a byproduct at both of these operations.
So gross profit in zinc before depreciation and amortization increased sharply to $248 million representing an 80% increase and reflecting improving zinc market fundamentals. The decreased profitability was driven by increased zinc prices.
The favorable effect of the strong U.S. dollar and a 21% increase in zinc and lead sales volumes at Red Dog.
Production in zinc in concentrate was up by 13,000 tonnes and leaden concentrate production was up by 12,000 tonnes or almost 50%. The higher production at Red Dog was driven by higher mill throughput due to softer ores and improved recoveries.
Refined zinc production was up by 4,000 tonnes due to higher throughout at Trail and resulting from improved operating efficiencies, including the benefits of the new acid plant. As I mentioned, Pend Oreille was restarted on time and under budget.
The restart will benefit from Arctic conditions and provide additional benefits to the company, and we expect to reach full production of 44,000 tonnes per year in Q2. Now looking at the zinc market on Slide 13, there has been a steady decline in zinc stocks with the market in deficit for the past 2 years.
LME stocks have declined by about 600,000 tonnes over this time. Now we do recognize that there are some unreported stocks held around the world as well.
We have seen on numerous occasions over the last 2 years when LME stocks have increased sharply within a matter of days, and we believe that this is mostly metal from those unreported stocks, which has simply contractually moved on to the LME without physically moving between warehouses. But in spite of this inflow, LME stocks have still moved down markedly.
And behind all of this, of course, is the long expected mine closures, which commenced in 2013. A number of others will close this year, and we believe this will push the market further into deficit and accelerate the rate of stock decline.
And as these closures materialize and the inventories continue to decline, we do expect the zinc market to improve significantly. And I would note this morning that zinc stocks have now dropped on the LME below 600,000 tonnes; so it's starting to look like 2006 all over again.
Turning to Slide 14 and an update on Fort Hills. We are now more than a year past sanctioning and well into construction.
The project achieved all critical milestones set for 2014 and engineering activities were approximately 65% complete at the end of Q4. Construction is progressing per plan with deliveries of fabricated equipment started, civil works well underway, and some off-site modular and process facility constructions also started.
Current workforce is around 3,000 people, and we will continue to ramp up to a peak in 2016. And in addition, the partners have contracted for pipeline capacity for diluent to Fort Hills and for diluted bitumen to Hardisty.
This site is quite big, so it's hard to get one picture that gives a good overview of the project progress. The picture here of the primary extraction component gives some idea of the excellent progress being made.
Capital cost and schedule outlook have not changed since project sanctioning, and our 2015 share of CapEx is estimated at $850 million, including our remaining earning commitments, which we expect will be fulfilled in Q2. The partners are focused on capital discipline, working with our contractors to take advantage of the current economic environment.
And first of all, it's still expected in Q4, 2017, which is now less than 3 years away. Looking at the economics of the Fort Hills project, on Slide 15.
We are well aware that many analysts and investors are questioning the partners commitment to the project in light of the recent decline in the oil price. I would like to emphatically state that short-term oil price weakness does not affect our decision to proceed with a 50-year project, and Suncor has also reiterated their commitment to the Fort Hills project, Suncor being the operator.
The economics of this project are quite robust. The Fort Hills project is expected to have significant free cash flow yield over a range of all prices and exchange rates.
The chart on the right shows the yield over the range of WTI prices and Canadian dollar exchange rate, assuming a WTI price of USD 90 and the Canadian to U.S. dollar exchange rate of $0.90.
Fort hills would have a pretax cash flow yield of around 15% during the capital recovery period. At WTI of USD 70 and an $0.80 exchange rate, the pretax yield is still expected to be about 12%.
And the even at the current spot price, Fort Hills was still free cash flow positive. So despite the recent price drop, the long-term fundamentals of oil remain healthy and demand continues to grow year-over-year.
There's some oversupply. But reduced drilling activity is going to impact that pretty quickly.
And in addition to client [ph] rates for existing oil production in the order of 8% annually will require significant new oil supplies to meet that demand. And looking at Slide 16, I would like to spend a moment on why lower oil prices are unequivocally beneficial for Teck until Fort Hills comes into production in late 2017.
We are not selling oil yet, and oil related costs are a major portion of the operating costs in our zinc, copper and coal business units. At current oil prices, we will save hundreds of millions of dollars annually, each one U.S.
dollar per barrel reduction in oil price currently reduces our operating costs by about $5 million annually. A weak Canadian dollar has also accompanied the drop in oil prices.
And every $0.01 change in the exchange rate, relative to the U.S. dollar, currently generates about $52 million of additional EBITDA annually.
Lower oil prices have also caused many companies to cut back on capital spending and drilling activity. If the low oil prices continue, it will take pressure off of labor and contractors, and pressure off on delivery schedules for major equipment.
And this will enhance the ability to deliver this project on time and on budget. And importantly, it also reduces competition for pipeline capacity, which will benefit Teck long after the project is built.
We're in an excellent position in terms of being able to enter into a long-term take-or-pay pipeline agreements because of the long life of the Fort Hills asset. Oil production and exploration will also start to decline due to reduced drilling activity and the much higher decline rates in shale oil.
And we believe this will start the inevitable correction back towards higher long-term prices and, hopefully, just in time for the first production at Fort Hills in late 2017. Low oil prices will also provide a positive macro-economic stimulus to drive additional metal consumption, which will benefit Teck's base metal businesses.
And with that, I'll now turn it over to Ron Millos to provide additional color on the quarter from the financial perspective.
Ronald A. Millos
Thanks, Don. I've summarized our changes in cash for the quarter on Slide 17.
Our cash flow from operations was $743 million in the fourth quarter and that included $220 million from working capital changes, as normally happens during the fourth quarter due to the sales profile at Red Dog. We spent $420 million on capital projects, of which $195 million was on Fort Hills and that included our remaining earning commitments.
Capitalized stripping costs were $167 million, and we paid $34 million in interest payments and $16 million on principal payments on our debt for a total of $50 million. After these items, distributions to noncontrolling interest and foreign exchange translation, we ended the year with cash and short-term investments of $2 billion.
And in addition, our USD 3 billion line of credit remains undrawn at this time. And in early January, as Don mentioned earlier, we did pay our semiannual dividend, which totaled about $259 million.
Our pricing adjustments for the fourth quarter were summarized on Slide 18. The lower prices resulted in $70 million of negative pricing adjustments in the fourth quarter compared with positive pricing adjustments of $10 million in the same period in 2013.
Copper was down $0.18 and zinc was down $0.05 compared with the third quarter of 2014, and these adjustments are included in our income statement under other operating, income and expense. As a reminder, refining and treatment charges and the Canadian U.S.
dollar exchange rate 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 earnings. The chart on the right represents a simplified relationship between the change in copper and zinc prices and the reported settlement adjustment, and usually provides a good estimate of our pricing adjustments each quarter.
In the fourth quarter, the actual settlement adjustment was just on the outside edge of the normal range due to the price declines for our other byproducts sold with provisional pricing and that includes lead, moly and silver. In most quarters, byproducts are not material, but in Q4 we saw declines in the prices for all of these products.
And of course, the weaker Canadian dollar also resulted in these adjustments translating into a larger dollar amount. Turning to the balance sheet and liquidity on Slide 19.
Teck is in solid financial position with $2 billion in cash at December 31 or USD 1.75 billion at that December 31 exchange rate. And of course, we have no substantial debt due in the next 2 years.
We have 300 million of notes due at the end -- in October of this year, nothing in 2016. And further out our average maturity is approximately USD 600 million.
And as mentioned earlier, we have do have the undrawn revolving credit facility of $3 billion, which gives us over CAD 5 billion Canadian of liquidity. At current commodity prices and exchange rate, and if we meet our guidance for production, cost and our capital expenditures, we expect to end this year with over $1 billion in cash without materially increasing our U.S.
dollar debt, and that assumes no unusual transactions or events. And earlier in January, S&P downgraded our credit rating by one notch to BBB- and changed the outlook from negative to stable.
The other 3 major rating agencies have a rating of mid-BBB or equivalent with negative outlooks or equivalents. And of course, we are committed to retaining our investment grade credit rating.
And as a reminder, we have just one financial covenant in our debt agreements, which requires us to maintain a debt-to-debt plus equity ratio that does not exceed 50%, and our ratio at December 31 was 31%. Looking at the summary of our 2015 guidance on Slide 20.
In steelmaking Coal, our production guidance is 26.5 million to 27.5 million tonnes, which represents a modest increase from 2014 production of 26.7 million tonnes. Our site cost guidance is between $49 and $53 per tonne and transportation cost guidance is between $37 and $40 per tonne.
On a combined basis, that's between $86 and $93 per tonne, which is the equivalent to around USD 69 to USD 74 per tonne using the current $0.80 exchange rate and a reduction of 2014 cost of USD 84 per tonne. In copper, our production guidance is 340,000 to 360,000 tonnes, this represents a 5% increase from the 333,000 tonnes produced in 2014 with Antamina expected to gradually increase production as grades improve in the second half of the year and higher production at Highland Valley expected after the first quarter due to higher grades.
Overall, we expect a weaker first quarter and a strong fourth quarter for production in 2015. And in 2016, copper production is expected to be closer to 2014 levels with more normal grades at Highland Valley, full closure of our Duck Pond mine and lower production at our Chilean operations.
We expect our copper cash unit cost, net of by-products, to drop to between USD 1.45 and USD 1.55 per pound reflecting higher production favorable exchange rates and our continuing cost-reduction initiatives. And in zinc, our production guidance for zinc in concentrate is 635,000 to 665,000 tonnes and that includes production from Red Dog, Pend Oreille and our share production from Antamina.
Our guidance for refined zinc production is 280,000 to 290,000 tonnes. Looking at the details of our planned 2015 capital expenditures on Slide 21.
Excluding capitalized stripping, our guidance for capital spending is just under $1.6 billion for 2015. The only major development project being funded this year is Fort Hills where we expect to spend $850 million, including our remaining earn-in commitments.
We also expect to further decrease our sustaining CapEx to $490 million. Major enhancements are expected to be about $60 million, which is mainly development of new pits at coal.
Capital for facilities under the Elk Valley Water Quality Plan are included in sustaining capital spending. In 2015, we expect to spend around $36 million on preconstruction activities for the second water treatment plant, which will be at Fording River.
We anticipate construction starting in 2016. Following approval of the plan, we have reviewed our capital cost estimates, and we continue to expect our capital spending to remain in the range of our original estimate, which is approximately $600 million over the 5-year periods starting from 2013 and that includes the $120 million already invested to build the Line Creek facility.
Again, this is already included in our sustaining capital. Capitalized stripping is expected to be $775 million in 2015 compared with $715 million last year.
And as always, the amount and timing at our actual capital expenditures is dependent upon numerous factors including our ability to secure permits, equipment, labor and supplies and to do so at the cost levels expected. As always, we may change our capital spending plans depending on commodity markets, results of feasibility studies or various other factors.
And I should point out that some of you will note that our capital spending has actually gone up a bit and the key reasons for that would be the increase in the deferred spending at Fort Hills -- or in the deferred stripping and the Fort Hills spending is $235 million higher than it was last year. Last year, the incurred costs were as expected, but the timing of the bills coming in gets delayed.
And that will catch up probably at the tail end of the project. In addition, there's about a $60 million increase in our capital spending because of the effect of the higher exchange rate.
But overall, all other capital spending is down about $120 million in the sustaining and other projects, and our major enhancement is down about $100 million. On Slide 22, I'd like to highlight the sensitivity of our 2015 profit and EBITDA, to changes in commodity prices and exchange rates based on the mid-point of our 2015 production guidance and using a Canadian to U.S.
dollar exchange rate of $1.20. In coal, our estimated EBITDA sensitivity for each $1 per tonne change in the coal price is about $32 million.
And copper and zinc our estimated sensitivity per each U.S. $0.01 per pound change in the metal price is $8 million and $12 million, respectively.
Our estimated sensitivity to every $0.01 change in the U.S. Canadian dollar exchange rate is about 82 -- sorry, $52 million, which generate significant additional EBITDA if it remains at current exchange rate.
And this is lower than the sensitivity reported last year, and that's due to mainly to the lower commodity prices. In addition, the recent decline in oil prices that Don talked about earlier has a significant effect on our operating costs with each USD 1 change in the price of a barrel of oil affecting our operating cost by approximately $5 million.
With that, I'll turn it back to Don for some closing comments.
Donald R. Lindsay
Okay, thanks, Ron. In summary, on Slide 23, we are controlling what we can control, such as operating costs and CapEx, and we're focused on conserving cash to maintain a strong financial position.
As we noted in our release, with our current production and capital spending plans and on the basis of current commodity prices and exchange rates, we expect to conclude the year with at least $1 billion in cash and no draw on our credit line. And this will leave us with a strong balance sheet to enter into the final full year of construction spending on Fort Hills in 2016 and then we'll look forward to completing the project the next year.
And with that, we'd be happy to answer any questions. And I should say, please note that some of our management team members are on the line in different locations, so there may be a brief pause after you ask your question as we decide who to have answer it.
Okay, over to you, operator?
Operator
[Operator Instructions] The first question is from Sohail Tharani from Goldman Sachs.
Sohail Tharani - Goldman Sachs Group Inc., Research Division
A couple of questions. The guidance you gave for the cash cost before byproduct of $1.90 -- sorry, $1.65, is that what your cash cost -- I'm sorry, you have $1.75 to $1.85.
Just one thing...
Ronald A. Millos
That's the [indiscernible] byproduct amount.
Sohail Tharani - Goldman Sachs Group Inc., Research Division
Yes. And I was just wondering how does this compare to what you thought earlier this year?
Because I think the guidance you gave early this year was with the byproduct and obviously byproduct changes as the moly and other product prices change. I was just wondering what was your guidance -- what was your thought at that time when you started the year?
Ronald A. Millos
I'm not sure I understand the question.
Donald R. Lindsay
I think I do. Sohail, so what you're really asking is what we're comparing the last year's guidance to this year's guidance.
We came in a little bit under our costs in our copper business unit compared to our guidance for 2014. And now we've decreased our guidance again for 2015, reflecting the success of our cost management program, and we've provided the numbers there.
So they'd come down. Ian, the main contributors to the lower cost this coming year or...
Ian C. Kilgour
Basically, lower costs are coming through increases in production. And that's mainly due to better grades at -- in particular, at Highland Valley and Antamina.
Sohail Tharani - Goldman Sachs Group Inc., Research Division
Is there any change on the cost reduction because of the currency or diesel, I'm sure in there also, fuel prices?
Ian C. Kilgour
Yes. The reduction in diesel is helpful right across our operations predominantly in coal, but also in copper.
Sohail Tharani - Goldman Sachs Group Inc., Research Division
Okay, great. And just one more question.
What are management costs? This year brought it down to $4 per tonne.
Is it like half on capital and half on operating costs? Is that the way we should assume?
Ian C. Kilgour
We basically have a capital program over the next 5 years. We've completed the Line Creek plant.
We'll be planning this year for the Fording River plant, and then a couple of years after that for the Elkview plant. So the capital of around $600 million over that 5 years and then our operating costs will be moving up to the $4 a tonne level as each of those plants gradually comes online.
Operator
The next question is from Harry Mateer from Barclays.
Greggory Price - Barclays Capital, Research Division
This is Greg Price in for Harry. Quick question with respect to the cash balance and the maturity this year.
[indiscernible] there won't be any draw under the revolver. I was wondering if the $1 billion guidance assumes any pay down in cash or if you look to refinance the maturity?
Ronald A. Millos
We intend to refinance the maturity likely out of the revolver, given the small size. So it's $300 million.
Operator
The next question is from Sasha Bukacheva from BMO Capital Markets.
Aleksandra Bukacheva - BMO Capital Markets Canada
Question on the investment trading. So we've seen 1 downgrade in January, so there seems to be a bit of a disconnect where you are in full compliance with your covenant with respect to debt: To debt to Equity ratios.
What else can you do to make sure there are no further downgrade? Or how -- what else can you do to maintain the credit rating?
Ronald A. Millos
Yes. We're in discussions and get reviews on a regular basis of all of the rating agencies.
S&P just recently downgraded us. You're starting to see downgrades from other agencies as well.
So we're not -- we won't be shocked if there's a move there, but we think that we have plenty of room to continue to maintain our investment grade rating with -- so not concerned at this stage.
Aleksandra Bukacheva - BMO Capital Markets Canada
Right. But are there any particular ratios or metrics that you used to evaluate your performance and those -- is there's anything you can do to improve on those metrics?
Ronald A. Millos
No. They look at the debt equity ratio, the interest coverage, the leverage ratios.
They look at our capital spending plans. We give them our sort of forecast, so the -- a number of years, and they take their own views on commodity prices.
And based on their views of where commodity prices might go and the opportunities that we have, they would look at that. But we certainly have a very good sense of what the metrics are that drive their rating, and we are looking at all the capital spending plans.
We're looking at conserving cash and those are the type of things that we would do to maintain those ratings. We have assets on the books that are sort of in development stage that they're small.
We potentially could sell some of those if -- to generate small amounts of cash. So there's things that we can do to protect that rating.
Aleksandra Bukacheva - BMO Capital Markets Canada
Perfect. So my follow-up question is then where does the dividend payments fit into that plan?
Is that something you might be willing to reduce to release your cash balances? Or like how much of the maintaining dividend is a priority with respect to your credit rating and balance -- general state of the balance sheet?
Ronald A. Millos
Okay. I'll take that one.
So first, I want to add a bit more color on your initial question because I know you haven't been following the company for that long. The ratings at each of Moody's, S&P and [indiscernible] were BBB-mid with either negative outlook or negative trend for quite a while, probably 6 months or longer.
And so this rating that we've got from S&P was exactly as expected for some time. So it really wasn't anything that was a surprise to us.
Most important aspect was, it was a stable rating meaning that, for the foreseeable future, they don't anticipate another significant review and it did include us paying the dividends. With respect to the dividend question specifically, that is, as we've described before, a board decision, the next dividend isn't payable until early July.
So the decision will be made sometime between the April board meeting and the June board meeting. At that stage, we will look at the business conditions in all of our commodities but, in particular, we'll be watching the cutbacks in the coal business and to see whether they've actually been implemented.
And whether the -- if they've been implemented, they've actually taken the market back into balance or closer to it such that it effects price. We'd note that even a $10 move in the coal price had $320 million of EBITDA per year, and it's not hard to see a price move greater than that because generally if you went back over the last 10 years, price moves were much more than $10 on a great many occasions.
So those are the kind of things that the board will look at that time and depending upon what the result of that review is there may be a cut in the dividend or there may not. If the coal price moves at all, significantly it does not like there would be a need to.
If it doesn't move, then we may decide to be a bit more conservative and retain the cash that otherwise would have been used for dividend. In the end, it's a capital allocations decision.
We might find that there's other opportunities as well that we'd rather devote that cash, too. So we'll just have to see when it comes to that April to June period.
Operator
The next question is from Jeremy Sussman from Clarkson Capital.
Jeremy Sussman - Clarkson Capital Markets, Research Division
One potentially favorable development is on the oil service side. Obviously, service costs have come down significantly.
Any chance that we could maybe see CapEx move a bit lower on Fort Hills going forward? How should we think about that?
Ronald A. Millos
Well, first, we should say that Suncor is the spokesperson for the project as the operator. So we don't want to presume much or get into too much detail.
What we have said is that it's definitely a favorable environment to be building a large project. And certainly, Steve Williams and his team have conveyed to us that they're seeing lots of opportunity to be more efficient, higher quality work, better access to labor and particularly, the key skills.
The top skills being at your project is your real advantage for productivity. But we haven't disclosed anything in terms of quantifying what those benefits would be.
And I think you have to let us run its course for a while before you really see that. But given a choice, we'd much rather be doing a large construction project in this environment than the environment 2, 3 years ago.
Jeremy Sussman - Clarkson Capital Markets, Research Division
Sure. That's helpful.
And just my follow-up is on the copper side. I'm looking at obviously solid production in terms of up year-over-year in 2015 and driving down costs as well.
Can we just get a sense? Obviously, most of the production increase is coming from Highland Valley.
But on the cost side, how much is sort of increased production versus exchange rates, et cetera?
Ian C. Kilgour
The predominant factor is the increased production, which results from [ph] the increasing grade. There's a little bit of addition there from the byproducts from Antamina as well.
But we're really going to be focusing this year on maximizing the utilization of our assets, our projects to maximize throughput really looking to get the very best we can out of our assets and continuing to focus on cost reduction as well, a particular focus on usage of contractors in South America. So we'll be continuing to improve those unit costs.
Operator
The next question is from Mitesh Thakkar from FBR Capital Markets.
Mitesh Thakkar - FBR Capital Markets & Co., Research Division
So my first question is just kind of -- you mentioned that on coal side, you're feeling some upward pressure due to increased strip ratios, is that increase outside of the normal increases, which you see or is it just in line? And how should we think about annual creep in strip ratios going forward?
Ian C. Kilgour
The outlook for 2015 is fairly similar to 2014 actually. If we look at overall strip ratios, haul distances, the key fundamentals, continue to be at similar levels to 2014.
Going forward, we're always looking to optimize our mine plans and look for ways of improving those fundamentals, and that will be continuing activity for us.
Mitesh Thakkar - FBR Capital Markets & Co., Research Division
Okay. But you don't see any abnormal increases or decreases in the near future as far as this annual creep is concerned?
Ian C. Kilgour
No, no, we don't.
Mitesh Thakkar - FBR Capital Markets & Co., Research Division
Okay. And just on the Highland Valley side, you mentioned that the production is going to come down in '16 by almost 20,000 tonnes.
Directionally, how should we anticipate it goes from there? Should we assume it just stabilizes at that kind of level or that could be a meaningful upward or downward moment?
Ian C. Kilgour
Basically, it's looking to stabilize at that level. This year, we are going through particularly higher grade section of the Valley pit for about 9 months, and then we return to that normal grade profile.
Mitesh Thakkar - FBR Capital Markets & Co., Research Division
Okay. And on the copper CapEx side, $105 million in new mine development.
Assuming about $15 million of that is towards other copper projects, is the remaining $90 million all towards QB2? Or is there anything else there, which I'm missing?
Ian C. Kilgour
It's basically towards QB2. We're moving as efficiently as possible to achieve the permitting for our QB2 project and that involves quite a lot of things like drilling to verify the water balance and a number of other activities, engineering activities to define the project sufficiently to produce a high-quality permit application and essentially, that's what that money is focused on.
Operator
The next question is from Jorge Beristain from Deutsche Bank.
Jorge M. Beristain - Deutsche Bank AG, Research Division
I just wanted to follow-up as well on QB2 a little bit and how we should think about the CapEx on that project if you were permitted, effective tomorrow, how would -- how should we think about the balance sheet to accommodate that level of CapEx? And should we think about maybe the actual hard dollars on QB being pushed until you're done with Fort Hills?
Ronald A. Millos
I may start with that and then turn it over to Tim or Ian. But we don't need to think about the latter part of the question, there is no chance the project would be permitted today.
We won't see a need to even review how we're going to fund it for at least about 21 months, 1 1/3 years, so a lot can happen in the meantime. So that kind of scenario is just not something that we need to sort of stress test our balance sheet for.
We probably will be on the schedule where Fort Hills will be just about to finish before any major CapEx needs to be devoted to QB2. Now in terms of the rest of the question, Tim, do you want take that?
Timothy C. Watson
Sure. In terms of when the decision is actually made to begin to move forward with the execution phase of the project, we would actually see the ramp up in capital spending probably over about an 18-month period.
So we would probably see in that first year a doubling or tripling of the capital expenditure levels of what we're seeing today as we begin to ramp back up on the engineering front and the procurement of the long-lead [ph equipment. And following that, we will go back to the capital expenditure profiles that we had previously identified for the project over the remaining 48 months of the project.
Ronald A. Millos
I might just clarify, just -- you heard the words doubling and tripling, but that's from today's amount of about $90 million. So if you go to 2017, which is the last half a year of construction of Fort Hills, which is about 400 million you might start QB2 at that stage with 200 million or 300 million.
And then in 2018, you'd start to -- getting into larger amount. So it looks like a pretty good sequence at the moment.
Jorge M. Beristain - Deutsche Bank AG, Research Division
And so if I could just follow-up. My -- drilling this down, what I'm asking concretely is there a risk that QB1 effectively runs out of production before you can fully ramp QB2 and have a kind of seamless handoff?
Or is there the risk that maybe in 2019, you are without copper production if you have to differ the CapEx on QB2 because of Fort Hills or -- and/or permitting issues?
Ian C. Kilgour
We've looked at the mine plan for QB1 and identified several mechanisms to lengthen the life span of the supergene project, including maximizing material to the heap leach and looking at re-treating other materials available on-site. So at this stage, we think we would be able to achieve continuity to QB2.
Operator
The following question is from Orest Wowkodaw from Scotiabank.
Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division
In terms of your guidance on the cost side for 2015, what oil or diesel price have you actually baked into that guidance? And we appreciate you giving us the sensitivity.
Ronald A. Millos
We've used a $65 a barrel.
Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division
$55 a barrel, okay.
Ronald A. Millos
6-5, that's $65.
Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division
$65 a barrel, okay. And in terms of that cash target of $1 billion by the end of '15, is there any working capital changes, either positive or negative, built into that?
Donald R. Lindsay
It would be the normal changes in working capital we have, nothing substantive.
Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division
Nothing material?
Donald R. Lindsay
No.
Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division
Okay. And then just finally, on QB1, at what point in the future do you anticipate that we would see production start to materially roll off, like would it occur as early as 2016?
Or do you see sort of the slow grinding decline?
Ian C. Kilgour
Frankly, at this stage, it's declining year-on-year. But as I've said, we're looking at quite a number of opportunities to limit that decline.
And so we're optimistic that several of those opportunities will actually materialize.
Ronald A. Millos
Okay. And just as evidence of what he is talking about, when we initially looked at the budget for QB for 2015, that kind of decline, he was mentioning was, what was contemplated and yet when we finish all the work, we're actually hoping for it to be up a couple of thousand tonnes for 2014's results.
So that's at least next year's example of what he has talked about. And then back to the oil price, we budgeted it $65 and then as you pointed out for every dollar a barrel it's below that, which is about $15 a barrel and more below that right now.
If that lower price flows through we would save about $5 million in operating cost for each dollar.
Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division
Okay. And on that point, what kind of delay typically do you get in terms of lag on the falling oil price before you actually realize the lower price?
Donald R. Lindsay
Really, it's not that much. I was asking that a couple of times, but does anyone have the specific answer?
Because I know it started to come down to very fast.
Ronald A. Millos
Yes. We've looked at that recently, Don, and if there is a bit of a lag and, of course, what's happening right now in the Western North America as well the refinery strikes are resulting in the refining margins being a little higher than normal.
So we're not seeing quite as much of a gap between WTI and diesel prices. But overall, it does.
We're pretty much in synchronous change on our price. The one big change for us or the one difference is, of course, the Red Dog where we buy the oil or the diesel there for the year in the spring.
So we incur that cost, whatever the cost is in the spring and then we run that through the operations. That take a little longer to work through our cost, but that's only, say, probably 15% of our overall diesel costs.
Donald R. Lindsay
So we're hoping oil will be about $35 then.
Operator
The next question is from Lucas Pipes from Brean Capital.
Lucas Pipes - Brean Capital LLC, Research Division
Maybe just a quick question on the coal markets, Réal. What we're seeing -- spot prices continue to languish in the Pacific Basin, I was curious to hear your update on maybe how you look at the Q2 benchmark at this point.
We continue to see further -- there seems to be further risk of softening there And then just, in general, how would you say the sentiment is in that market at this time?
Donald R. Lindsay
Thank you. Because Réal was getting really worried he wasn't going to be asked a question.
It would've been the first, Lucas.
Réal Foley
So I had problems hearing the first part of your question, but I think what I understood is you're looking to get a bit of insight as to what we're seeing in the market now and with respect to the Q2 benchmark, is that correct?
Lucas Pipes - Brean Capital LLC, Research Division
You got it.
Réal Foley
Okay. So I guess, going back and looking at 2014 and what happened over the year, Lucas, prices trended down generally, but got pretty stable in a range somewhere around $110 million plus or minus.
Since the beginning of the year, we've seen spot price assessments trend down a little bit more from there. That's a bit early to talk about the quarterly benchmark for Q2, but what we're seeing is a number of things in the market, either benefiting or impacting demand.
And I guess on the positive side, we're seeing good demand in Asia, outside of China. And we're seeing good demand in the Atlantic Basin, a lot of that is related to lower production or strikes, disruptions in Eastern European production, that is a benefit in that Atlantic basin.
In the Pacific, we're seeing slower imports into China since the beginning of this year as a result of the new quality testing standards. So I guess, overall, there's been a little bit of a trend down on the spot price assessment.
We're seeing good demand in markets outside of China and currently, we're able to place our tonnes. And if you look at our guidance for the quarter, we're still expecting to sell similar tonnage as what we did in Q4.
So yes, that's kind of a brief outlook on the market, Lucas.
Lucas Pipes - Brean Capital LLC, Research Division
That's helpful. I appreciate that.
And then maybe a quick question on Trail. When we look at that asset, '15 versus '14, should we model in major change to margins there with the change in FX and so from a U.S.
dollar basis?
Donald R. Lindsay
Yes. There is certainly some impact there, Lucas.
Maybe one of the best things that I can point to is we do that modeling workshop every few years and there's a good overview there and how to capture the economics of Trail, there certainly is some leverage to Canadian dollar impact there. Of course, the startup on Pend Oreille is a benefit to the company as well, that you'll see part of that, of course, flow through Trail.
Ian C. Kilgour
And I guess, operationally, the expectations are for a very good year for Trail when we started the year. Last year, we were completing the acid plant project.
And now that that's completed and operating well, that provides a very solid basis for operations of our roasters [ph]. And then later in the year, we had a very successful Kivcet set shut down.
So that our lead production levels are trending -- our ability for Kivcet throughput has increased. So the year started well at Trail and operationally, we're set for a slight uptick in zinc, although we have guided towards lower lead production.
Operator
The following question is from Kerry Smith from Haywood Securities.
Kerry Smith - Haywood Securities Inc., Research Division
Don or maybe somebody can just comment with the proposed strike by CP rail, I can't remember exactly what percentage or volume get shipped over in CP. But just wonder whether you've got much inventory stock pile at the port and how long a strike could potentially have to last before it would really impact your sales.
Ian C. Kilgour
All right. Yes.
Well, the -- I guess, there is a possibility of a strike. I guess, discussions are still ongoing with the unions concerned.
We're in touch, closely, with CP on this. I guess that the history is that the government has intervened fairly quickly if -- when strikes do occur.
CP also has the capacity to man significant proportion of its trains using staff, and we've got a couple of weeks of inventory at the port. So we don't expect any strike action to affect our sales.
Kerry Smith - Haywood Securities Inc., Research Division
Okay. As long as the strike didn't last for, say, more than that a couple of weeks in rail or...
Ian C. Kilgour
Yes, in general.
Kerry Smith - Haywood Securities Inc., Research Division
I got you, okay. And Don or maybe somebody else can comment.
Your cost-reduction target, you've already kind of blown through the number and you've reached a $640 million. Do you have a new cost-reduction target?
Or -- I mean, it would incremental from here, but I'm just wondering if you've maybe kind of changed your target as it were?
Ian C. Kilgour
Well, I guess, we have focused very much on ensuring that the cost reductions that we've achieved over the last couple of years are sustainable. So that they -- the cost reduction we achieved in 2013 was repeated in 2014, and then your new initiatives that came in 2014 will be repeated in 2015.
And we're looking for at least $100 million on top of that as well, so that our focus on cost reduction will absolutely continue this year.
Operator
The next question is from Oscar Cabrera from Bank of America Merrill Lynch.
Oscar Cabrera - BofA Merrill Lynch, Research Division
If I may just round up the question on the target for cash balance of $1 billion, you state that your assuming current commodity prices. What hard coking coal price are you seeing?
The settlement for the first quarter are $117 a tonne or are we using spot prices of $106?
Donald R. Lindsay
Yes, we're using what our current realized is in these quarters, and we're reflecting current prices, are -- would be our current realized.
Oscar Cabrera - BofA Merrill Lynch, Research Division
Okay. And then the second question just that I have this is clear in my mind in terms of your capital structure and capital allocation, would it be fair to say that the debt rating sits higher in your priority list than the dividend and then Don also mentioned that there would be other opportunities, can you just clarify that as well?
Ronald A. Millos
Yes. That will always be a board decision, and we can't predict, say, in June when we're looking at which way it will go, it will depend on conditions at that time and what other potential uses of the capital might be.
But I've made some pretty strong statements before about wanting to stay investment grade and nothing's changed on that side of it from my point of view.
Ronald A. Millos
Again, it is a board's decision.
Oscar Cabrera - BofA Merrill Lynch, Research Division
It's great. No, no, it's well understood.
But I think investors would -- perhaps somebody brought this up to my attention the other day, perhaps the question should be phrased as, what is management proposing to the board? But understood.
Ronald A. Millos
We -- I mean, to try and be helpful, we, too, will wait until that time period to see what the world looks like. Yes, I think it's just too early to tell.
We're seeing shutdowns every week of some sort. They've been pretty small so far, but if it continues we could be in a very different world in June.
I'll just -- I was going to save this for the end, but I'll do it right now. If you look at the latest Wood Mack reports on cost curves, and the like, and how much of the coking coal -- hard coking coal industry is underwater.
In Australia, it looks like at a price of $106 that about 16.5 million tonnes is losing cash. And in the U.S., which doesn't get the benefit of a currency depreciating, it looks like 30 million to 35 million tonnes are losing cash.
We think that we need roughly 12 million tonnes on top of what the 30 we talked about before to shut down. So there's quite a tonnage that certainly candidate to get shut down between now and June.
And if it does, then your question will be somewhat academic because the coal price will have started to move. And if it doesn't, then it becomes a very valid question, and we don't know the answers.
So we can't be more helpful on that.
Operator
The next question is from Alex Terentiew from Raymond James.
Alex Terentiew - Raymond James Ltd., Research Division
Just sort of a follow-up, I guess, from the last question on the coal prices. You note that the current coal prices are unsustainably low and I concur that most forecasts out there for a met coal prices to rise longer term to even in the $140 to $150 range.
However, with the decline in the Canadian and Australian dollars and lower oil fuel cost combining to lower the cost curve, can you give me a little bit of color on what your recent analysis or what you think about the market today? And what the met coal price should rise to?
Or may be to put it another way, what a sustainable met coal price is in today's market?
Ronald A. Millos
So I think you've raised a really good point and for us to give you an answer to that, we'd almost want to ask you what exchange rates would you like us to use? What would you forecast a Canadian dollar and Australian dollar would be at, because that's one of the key things that affects the cost curve and the cost curve will affect the answer to your question.
But normally, what I say is that we think the price could move to $150 benchmark, $140 spot without much production coming back that's been shut down certainly around here in Canada. So a normalization of $30 or more could happen fairly easily once the mark gets to balance.
Just looking back in history, when the coal price was $300, the deficit was only 10 million tonnes. And so now we think we need another 12 million tonnes of cuts to get to balance.
So these aren't sort of huge, huge moves in terms of tonnes that have to come off to market before you see things change quite a bit. So is there a possibility to go to $140, $150?
Absolutely. And what that does for Teck, a $32 million of EBITDA for every $1, that would add $1 billion or more to our EBITDA and be whole new ball game.
Donald R. Lindsay
Operator, gone through hour. If anybody is left on the line with questions, we're certainly happy to take up questions with Ron Millos and myself afterwards.
But other than that, I think we'll call the Q&A at this the point.
Operator
Thank you. Please go ahead.
Donald R. Lindsay
Do have any other closing comments, Ron, you really got your closing comment in there.
Ronald A. Millos
I guess, just to summarize, solid operating results. The company continues to execute well on its plans.
You have noted most of the analysts, I think, have said that our guidance for 2015 is a little bit better, certainly in copper than people expected and then in costs on coal. So it's now our challenge to deliver against that.
The coal market remains weak. We're waiting for the shutdowns to occur.
We are seeing their progress each week on that, but we'll wait until later in the year before we see whether that has any effect on capital allocation in terms of dividends or other things we might do. In the long term, the business is well positioned on the cost curve, and we're looking forward to seeing Fort Hills get built and become the fourth leg of the business.
So -- and time is coming along with that. That will happen before we know it.
In the meantime, coal prices are very good with that. With that, thanks very much, all.
We'll talk to you next quarter.
Operator
Thank you. The conference has now ended.
Please disconnect your lines at this time. Thank you for your participation.