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Teck Resources Ltd (NYSE:USA) (NYSE:TCK)

Q2 2013 Earnings Call

July 25, 2013 11:00 am ET

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

Dale E. Andres - Senior Vice President of Copper

Timothy C. Watson - Senior Vice President of Project Development

Réal Foley - Vice President of Coal Marketing

Ian C. Kilgour - Chief Operating Officer and Executive Vice President

Robert G. Scott - Senior Vice President of Zinc

Raymond A. Reipas - Senior Vice President of Energy

John F. Gingell - Vice President and Controller

Analysts

Meredith H. Bandy - BMO Capital Markets Canada

Jorge M. Beristain - Deutsche Bank AG, Research Division

Ralph M. Profiti - Crédit Suisse AG, Research Division

Curtis Rogers Woodworth - Nomura Securities Co. Ltd., Research Division

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division

Greg Barnes - TD Securities Equity Research

Oscar Cabrera - BofA Merrill Lynch, Research Division

John Hughes - Desjardins Securities Inc., Research Division

Kerry Smith - Haywood Securities Inc., Research Division

Lucas Pipes - Brean Capital LLC, Research Division

Steve Bristo - RBC Capital Markets, LLC, Research Division

Alec Kodatsky - CIBC World Markets Inc., Research Division

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Gary Lampard - Canaccord Genuity, Research Division

Paretosh Misra - Morgan Stanley, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teck's Second Quarter 2013 Results Conference Call. [Operator Instructions] This conference call is being recorded on Thursday, July 25, 2013. I would now like to turn the conference call over to Greg Waller, Vice President, Investor Relations and Strategic Analysis.

Gregory A. Waller

Thanks so much, operator. Good morning, everyone, and thanks for joining our second quarter 2013 investor conference call.

Before we start, I'd like to draw your attention to the forward-looking information slides in our package, Slide 2. This presentation contains forward-looking statements regarding our business. However risks and uncertainties may cause actual results to vary. Teck does not assume the obligation to update any forward-looking statement.

And at this point, I'd like to turn the call over to Don Lindsay. President and CEO.

Donald R. Lindsay

Thanks, Greg, and good morning, everyone. We will be following our usual presentation format this morning. I'll begin with the highlights of Q3 -- or Q2 2013 operating and financial results, and then I'll turn it over to Ron Millos, our CFO, to provide additional color on the financial side. We will conclude with a Q&A session, where Ron, myself and additional members of our management team will be available to answer your questions. And I should say upfront that a number of the members of the management team are on different lines and different locations, so there may be a little pause after your question as we decide which direction to turn the question to.

So starting with Slide 4. Overall, we had solid operating performance in Q2. However, commodity prices have certainly weakened, including a 23% decline in steelmaking coal compared with the same quarter last year. We remain focused on shareholder value. As a result, we are taking prudent steps to continue to adapt to these market conditions.

First, we have made excellent progress in our cost reduction program, and certainly, we exceeded our initial goal. We've identified, at this point, over $250 million of ongoing potential cost savings at constant production levels, and we've already implemented $220 million of those savings. So we are continuing to focus and manage on costs and have increased our target now to $300 million for the year.

Second, we are reviewing our capital spending in light of current market conditions with the goal of deferring a substantial portion. Reductions approved to date include delaying the Quintette mine restart and slowing the development of Quebrada Blanca Phase 2, and I'll speak to these 2 later in the call. Our forecast for full year capital expenditures is now approximately $1.85 billion, which is lower than our previous guidance of $2 billion, and further reductions are also expected.

In addition, we are continuing to strengthen shareholder value through the capital markets. We purchased 10 million Class B shares under our normal course issuer bid in the past 12 months, including 5 million shares in Q2. We've also renewed our normal course issuer bid this quarter, which will allow us to buy up to 20 million additional shares through to June 27, 2014.

And on July 2, we paid a semiannual dividend of $0.45 per share. And in the past 12 months, that means we have returned approximately $1.3 billion to shareholders through dividends and share buybacks.

Turning to an overview of our Q2 results on Slide 5. Revenues were $2.2 billion. Lower prices for all of our principal products reduced our revenues by approximately $350 million in Q2 based on 2013 sales volumes. The result is that this also, of course, affected our profitability, with gross profit before depreciation and amortization of $871 million compared with $1.1 billion in the same quarter last year. Our profit attributable to shareholders was $143 million, EBITDA was $670 million and adjusted profit, excluding onetime and unusual items, was $197 million.

Looking at our adjusted profit in additional detail on Slide 6. As you can see, we had a number of unusual items in Q2 that should be adjusted to calculate the comparative earnings figure. Including these items, adjusted profit declined to $197 million for the quarter or $0.34 per share, compared with $398 million or $0.68 per share in the same period last year. And this decline was primarily due to lower prices for our principal products, especially coal. And this is partially offset by reduced operating expenses from our cost reduction program and by lower finance expenses.

I'll now review our Q2 and year-to-date results by business unit, starting with the steelmaking coal on Slide 7. Production of steelmaking coal increased 5% over Q2 last year to 6 million tonnes, despite several days of lost production related to the late June flooding in southeastern BC. The mines effectively managed inventories and successfully aligned production rates with margin demand. We continue to expect to achieve our 2013 steelmaking coal production guidance of 24 million to 25 million tonnes and, in fact, have increased that by about 0.5 million tonnes for the full year.

While steelmaking coal sales were down 6% quarter-over-quarter, they grew in the first half of the year to a new record high of almost 13 million tonnes, nearly 0.5 million tonnes above the previous record set in 2004. Revenue from steelmaking coal declined to just over $1 billion in Q2, primarily due to significantly lower coal prices.

Cost reduction efforts at the mines continue to be successful and ongoing. Site costs declined 18% or $9 per tonne to $50 per tonne. Distribution costs were 5% or $2 per tonne higher at $39 per tonne, primarily due to higher port charges resulting from an outage at Neptune while a new stacker reclaimer was erected. The total combined cost of $89 per tonne represents a decline of 8% from Q2 last year. And we expect our 2013 annual cost of products sold to be in the range of $51 to $58 per tonne per coal based on our current production plans. As a reminder, this incorporates new accounting rules around capitalized stripping which we discussed last quarter. I should also say it doesn't incorporate changes in exchange rates that have occurred over the last quarter.

Gross profit before depreciation, amortization for our coal business unit declined by $275 million to $444 million, with significantly lower coal prices driving the reduction and with a partial offset from lower unit operating costs as a result of the cost reduction efforts.

On the graph on Slide 8, you can see our rolling fourth quarter steelmaking coal production, which has stabilized over the past 1.5 years. We are currently operating approximately 10% below our 27 million tonnes annual capacity.

Looking forward to Q3, contract prices for our highest-quality steelmaking coal have been agreed on, with the majority of our quarterly contract customers based on USD 145 per tonne, which is consistent with the prices that our competitors are reporting. We expect to realize an average price on all of our products of approximately $143 per tonne, and note that any remaining volumes under Q2 contracts that are shipped in Q3 will utilize the higher Q2 contract price, which are based on the premium benchmark of USD 172 last quarter.

We expect steelmaking coal sales to be at least 6 million tonnes in Q3. The proportion of sales under shorter-term contracts were on spot basis is expected to be similar to Q1 levels.

Looking at the steelmaking coal projects on Slide 9. As I mentioned earlier, we've elected to delay the final decision to place the Quintette mine into production to minimize our production volumes and capital expenditures in these market conditions. The revised project plan defers $650 million of our expected capital expenditures over the next 12 months, of which $300 million will be deferred in 2013 and $350 million deferred in the first part of 2014. Note that these totals include some capital spending that was not included in our original CapEx guidance. We've also diverted deliveries of mobile equipment from Quintette to our other sites. At the same time, we're continuing the detailed engineering work, so that if a decision to proceed is made in early 2014, Quintette could be in commercial production in mid 2015.

At Neptune Bulk Terminals, the new stacker reclaimer was installed on schedule, as you can see from the photos on the slide, and commissioning is expected by the end of this month, which will increase Neptune's capacity to 12.5 million tonnes per annum, which will give us a lot of flexibility going forward. So we're very pleased with that.

Turning to Slide 10. Gross profit before depreciation and amortization for our Copper business unit decreased by 8% or $30 million in Q2 compared with the same period last year. And that's primarily as a result of lower copper prices and importantly, reduced byproduct revenue. And this was partially offset by lower unit operating costs resulting from our cost reduction initiatives, as well as slightly higher copper sales volume due to timing of shipments, following the resolution of a strike in Q1 at the port that serves Quebrada Blanca. Total copper production declined by 5,000 tonnes to 85,000 tonnes in Q2, primarily due to lower copper production at QB.

The chart on Slide 11 shows the progress we've been making on increasing copper production over the past 3 years. Now looking at highlights of our copper projects from 2013. Highland Valley, the production there was 7% lower at 26 million tonnes in Q2, primarily -- sorry, 26,000 tonnes in Q2, primarily as a result of lower mill throughput and lower ore grades. However, production is 14% higher year-to-date at 54 million due to higher mill throughput and higher ore grades. Throughout the first half of the year, production has been affected by scheduled downtime as part of the mill optimization project, which I'm pleased to say is on track.

Ore throughput in Antamina increased 19% to 137 million tonnes per day in Q2...

Ronald A. Millos

Thousand tonnes, Don.

Donald R. Lindsay

Yes, thousand tonnes, sorry. As maintenance problems were resolved, production increased slightly year-to-date to 23 million tonnes following the mine and mill expansion completed in the first half.

At QB, we're seeing the benefit of our initiatives to reduce operating costs since Q4 2012, with a 34% decline in unit cash costs. Since the restructuring, the operations returned to profitability in Q2. However, we continue to confront permit issues for Phase 2. Timetable for the SEIA resubmission is unclear, but we now do not expect it prior to Q4 of 2014.

Given these issues and current market conditions, it makes sense to slow development of QB Phase 2. And as a result, we now expect to defer approximately $180 million of CapEx at QB in 2013. The earliest construction could commence now would be early 2016, with first production in 2019.

Copper production at Carmen de Andacollo has increased 7% year-to-date to 38,000 tonnes, due to increased mill throughput and improved mill recoveries, partially offset by lower grades.

Overall, on our copper business unit, we're on track to meet our production guidance of 340,000 to 360,000 tonnes for the full year.

Slide 12 provides an update on the Highland Valley mill optimization project. The project is on track for completion by the end of 2013. Construction is now 52% complete, with the steel structure and major equipment in place, as you can see from this photo. Note that the third quarter production will be affected by one-month partial shutdown of the mill that is required to connect the new pebble crushing circuit to the existing grinding lines. However, we still expect to meet our Highland Valley copper production guidance of 100,000 to 110,000 tonnes for the full year, as the mill is expected to increase throughput and production in the fourth quarter.

Turning to our Zinc business on Slide 13. Overall, in Q2, zinc and concentrate production was up 12,000 tonnes to 161,000 tonnes, while refined zinc remained relatively flat. At Red Dog, zinc production rose by 7% to 139,000 tonnes due to increased mill throughput and improved mill recoveries, partially offset by lower ore grades. As a reminder, we include Antamina's share of production in these figures, but Antamina's financial results are reported in our Copper business unit as zinc is considered to be a byproduct at this mine.

Overall, in our Zinc business unit, we continue to expect to achieve our 2013 production guidance of 560,000 to 590,000 tonnes of zinc in concentrate and 280,000 to 290,000 tonnes of refined zinc. Production of lead in concentrate at Red Dog and refined lead at Trail were both similar to Q1 in 2013 and Q2 last year. Revenues from our zinc business remain similar to a year ago, as the higher zinc sales at Red Dog offset significantly lower silver revenues from Trail due to a 21% decline in silver prices and a modest decline in zinc prices in the quarter.

Turning to our Energy business on Slide 14. Permitting is ongoing at our Frontier energy project. We expect the environmental assessment process will extend to 2015. And during the quarter, we announced a lease exchange with Shell at our Frontier property. The map on the right shows the areas that we're involved, with Shell's leases in the dark green transferring to Teck, and Teck's leases in the dark blue transferring to Shell. It is expected to strengthen both projects' economic recovery and have a net positive impact on project resources.

At Fort Hills, the partners are moving towards a sanction decision for Phase 1 in the latter half of 2013. And if approved, production would not be expected to start until 2017. We expect to speak on this in more detail on our Q3 results call.

And with that, I'd like to turn it over to Ron Millos to provide additional color on the financial side.

Ronald A. Millos

Thanks, Don. We've summarized our changes in cash for the quarter on Slide 16. You can see cash flow from operations was $584 million in Q2, we spent $443 million on capital projects and capitalized production stripping costs of approximately $189 million. We had $111 million in expenditures on financial investments, which was principally our contributions to the Fort Hills project, and we paid $37 million in debt, principal and interest. Also, as Don mentioned earlier, we purchased approximately 5 million Class B subordinated voting shares in Q2 pursuant to our normal course issuer bid.

Adjusting for these items, as well as distributions to non-controlling interests, foreign exchange translation and other items, our cash and short-term investments declined by about $151 million in Q2, and we ended the quarter with a strong cash balance of approximately $2.8 billion.

Moving on to Slide 17, we've summarized our pricing adjustments for the second quarter. So pricing adjustments in Q2 were negative $74 million this year on a pretax basis compared with $84 million in the same period a year ago, primarily due to the decline in copper prices. And these adjustments are included in our income statement under other operating income and expenses. Our pricing adjustments are driven by changes in quarterly -- quarter end commodity prices. And in Q2 of this year, copper prices declined by $0.38 and zinc declined by $0.02. 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, refining and treatment charges on the Canadian/U.S. 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 of net earnings. It's a relatively quiet quarter from a financing perspective, so I don't have a lot to say this quarter.

And with that, I'll turn the call back to Don.

Donald R. Lindsay

Thank you, Ron. So in summary, on Slide 19. Teck is adapting to current market conditions, we're matching our coal production to market demand, we continue to reduce costs and we've increased our cost reduction targets now. We are prudently deferring projects and capital expenditures, and we're continuing to pay a strong dividend and continue to buy back shares. So we're demonstrating a very disciplined capital allocation process. We remain sharply focused on shareholder value. And with that, we'd be happy to answer any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Meredith Bandy of BMO Capital Markets.

Meredith H. Bandy - BMO Capital Markets Canada

I was wondering if you could clarify on QB2. In the release, it mentioned issues linked to permitting for existing operations. What do you mean by that?

Donald R. Lindsay

I'll turn that over to Dale Andres, our new Senior Vice President of Copper.

Dale E. Andres

Thanks, Meredith. So for the issues of the existing operation, the operation was originally permitted back in 1991, and that was under a very different regulatory environment. The operation started in 1993 with a 14-year mine life, and while there has been many amendments since that time, these were all approved before the new environmental regulations were enacted. And in connection with further extending that original mine life, we need to update our permits. And we've decided to make a separate regulatory submission based on those updates for the current mine life and for the extension of that mine life. And we've decided to make 2 submissions -- 2 submissions, so one before to update the current mine life and then doing that before submitting the SEIA for QB Phase 2. And that's primarily the reasons for the further delay in QB2.

Meredith H. Bandy - BMO Capital Markets Canada

And at what point -- or could you potentially have Relincho leapfrog QB2? Could you do Relincho first? And where do we stand on important power for Relincho?

Donald R. Lindsay

Okay. I'm going to turn that to Tim Watson, but I do want to observe that that's a question that's been asked many times around here, not just recently with the developments at QB2, but the engineers working on Relincho have always sort of been keen to build it first. But Tim, why don't you...

Timothy C. Watson

With respect to Relincho and the status of our feasibility study, we remain on track to complete the feasibility study at the end of the fourth quarter of this year. With respect to power, we have had preliminary discussions with numerous different power suppliers of the region. And at this point in time, we do not have any definitive agreements in place. We continue to progress those discussions. But as you can imagine, certainly, power is a key requirement in the development of Relincho going forward. Certainly, with respect to the potential of Relincho leapfrogging, as you put it, QB2, we, as of yet, have not started the regulatory approval process for Relincho. And the assessment of that will be made following the completion of the feasibility study at the end of this year.

Operator

The following question is from Jorge Beristain of Deutsche Bank.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Jorge Beristain with Deutsche Bank. My question maybe is more for Don. If we could think about 2014, you've been pretty clear that you're now taking your maintenance CapEx down to a run rate of $500 million, which is impressive. But there are going to be some other financial investments and other assets, such as Fort Hills, which may move ahead in 2014. And I just wanted to understand if you could kind of give us a baseline as to where you could see growth CapEx for 2014 and then some of these investments in other assets as well?

Donald R. Lindsay

Okay. So in our disclosure, we have a chart that's listed in 3 different columns. I'm just going to try to flip to the right page here.

Gregory A. Waller

Page 25.

Donald R. Lindsay

25. And these are just observations or comments. We won't give you exact numbers for 2014 because we aren't there yet. But as you mentioned under the sustaining column, that would reduce to our target of $500 million. Under major enhancement, the copper line is mostly related to the mine -- the mill optimization project at Highland Valley, which is on track and should be finished. There'll still be a little bit of the spending left in 2014, paying bills where we incurred the expense and so on, but not very much. And likewise in coal, our expansion to 28 million tonnes should be done by then. And the acid plant at Trail will be not finished but getting close. So that column should reduce substantially, not to 0, but I'm just ballparking it to 50 to 75. And then the new mine development line is, the big one in copper, is QB2, and as we've said, we are reviewing over the next short period of time, 2 to 4 weeks exactly, what the plan will be there. But you can certainly assume that the dollars will go down. And the coal line is related to what we decide in Quintette, which we have currently deferred, as we wait market conditions improving. And that will sort of substantially reduce the total in anticipation of a decision on Fort Hills. So that's basically how it looks.

Jorge M. Beristain - Deutsche Bank AG, Research Division

I guess what I'm trying to get a baseline is, some of these projects, such as QB2, Quintette, are going to be somewhat suspended over the next 2 or 3 years. I'm putting words in your mouth on Quintette. But I'm just trying to get an idea of what is the sort of maintenance CapEx to keep those projects kind of idling before you make the full decision?

Donald R. Lindsay

Quintette is very low. QB2, as we've said in our disclosure, we're determining that over the next 2 to 4 weeks.

Operator

The following question is from Ralph Profiti of Crédit Suisse.

Ralph M. Profiti - Crédit Suisse AG, Research Division

Don, the Q3 realized price is currently tracking $143 a tonne. That's the lowest discount versus the benchmark that we've seen. And just a point of clarification, is that strictly coming from favorable carryover tonnage? Or are you seeing any mixed changes, i.e., so you're not -- you're choosing not to sell sort of less economic, lower quality and non-seaborne coals. And sort of over the longer term, you're still going to sort of maintain that 5% to 10% discount?

Donald R. Lindsay

The short answer is yes to the first part of your question, but I'll turn it over to Réal Foley.

Réal Foley

Thanks, Ralph, for your question. Actually, the average price guidance reflects our overall sales mix, and that includes carryover tonnes, quarterly and also shorter-term priced tonnes. So the carryover tonnes in this case from the previous quarter are pushing our average realized price up. And in Q3, we will also have more [ph] sales of lower-priced energy coal. So that is also pushing our average realized price up. Now another thing that is happening is, as the market seems to be stabilizing, the gap between the spot prices and the quarterly benchmark price is narrower, and that is also a positive effect compared to when the market was falling in the previous quarter.

Ralph M. Profiti - Crédit Suisse AG, Research Division

I see. As a follow-up question on the new capital plan, and if there is a next phase to these initiatives, Don, is this taking, in your view, the form of a more thorough project review? Or are you anticipating most of the new plant to come from sort of cost relief as industry pressures subside? And if you are seeing that, where are some of that relief coming from?

Donald R. Lindsay

I think there's a couple of parts to the answer of that one. On the first part, in the case of QB, we are going through regulatory changes, and so we just have to evolve with that. It's not really so much related to the thoroughness of the project. We're still very, very positive on QB2 and look forward to the day when we can build it. But we got to work with the regulatory authorities there and get through that process, so it's a little bit different. On the second part of your question, I think the overall statement is that we're matching our CapEx to the market conditions that we see for the next period of time and deferring decisions to move ahead on things. And then also clearing the decks if you like to and be able to move ahead with Fort Hills later in the year, if it does get sanctioned.

Operator

The following question is from Curt Woodworth of Nomura.

Curtis Rogers Woodworth - Nomura Securities Co. Ltd., Research Division

I was wondering if you could comment on just kind of your general strategy towards pricing in the met market. A lot of what we read in flats and various news sources are showing spot pricing in the $130 level. I think in the past, you guys have commented on how you see a disconnect between some of these low spot price being reported in the market and what you've been able to sell. Do you -- are you guys willing to sell at that $130 price level? Would you look to pull tonnes back from the market if price started to weaken from here?

Donald R. Lindsay

I'll make an overall comment, and turn it over to Réal Foley. The overall comment is this. What we are witnessing in the market is a battle between Australia and the U.S. And fortunately, in our case, we got our business in really good shape. You've seen our cash costs down to CAD 89. So U.S. equivalent would be a little bit lower. And that compares very favorably to what U.S. is and in particular, where Australia got to now. Australia is really focused on cost reduction there as they need to be given what the spot price is. So while we're certainly affected by the decline of price as a result of the market share battle between Australia and U.S., we're at least in a very good position on the cost curve. When we bought Fording, we were probably 80% down the cost curve. We're now, we think, below 40%. So the work we did on improving our businesses has given us some flexibility to be able to continue to place tonnes at a very good level and record volume in the first half of the year. But quarter-to-quarter, in terms of our mix on short term versus contract, or spot versus contract, I'll turn that over to Réal Foley.

Réal Foley

All right. Thanks, Don. So in terms of our contracts, we have long-term relationships and contractual arrangements, so that gives us a level of certainty on volume. We have mentioned that before, so no change there. But starting from Q2 this year, there is a number of customers that are reducing the proportion of quarterly priced tonnes and requesting suppliers to price portion of the contract volume on the spot basis. So with a larger number of customers moving to shorter-term pricing, we're expecting a larger proportion of our 2013 sales mix to be on shorter, rather than quarterly basis. We were expecting somewhere around 40% to be priced on shorter term. And to give you a bit more perspective, Curt, quarter 2 priced sales pre-2012 were in the range of about 15% to 25% of our sales book. And in 2012, they were in the range of about 25% to 30%, as the market started to move gradually to shorter-term pricing.

Curtis Rogers Woodworth - Nomura Securities Co. Ltd., Research Division

Okay. And just a follow-up on -- in terms of your price book right now for met [ph] at 6.4 million tonnes, it's up about 1 million tonnes from your price position last year. Do you think that's -- is that a function of demand maybe getting a little bit better? Or is it some of the carryover volume that just got pushed out into this quarter?

Donald R. Lindsay

Go ahead, Réal.

Réal Foley

So okay. So there is definitely signs that the market's maybe bottoming out, and we are seeing spot prices has been stabilizing. So there's a number of market areas where we see either improved or stabilizing fundamentals, and demand is reflecting that. But at the same time, there is still uncertainty around the world, so that is what is keeping pressure on the steel and coal prices.

Operator

The following question is from Mitesh Thakkar of FBR Capital Markets.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

This is Mitesh Thakkar from FBR. My first question is just on the cost side. You made a comment about the attractive position on the cost curve. When you think about today's spot price because as 40% of your volume goes into the spot market, is there any of your mine which is not above that spot pricing? Or are pretty much all the mines below spot prices?

Donald R. Lindsay

Sorry, could you repeat the question, please?

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Yes. So the question is, at the current spot market prices, do you have any mines which do not make a cash margin when you look at on an all-in cash basis?

Donald R. Lindsay

No.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Okay. And looking at the cost for the second half of the year versus the first half, can you explain us the delta because it looks like your costs have been really attractive in the first half and then there is a little bit of ramp-up in the second half, which kind of -- if you used the midpoint of the guidance range, how should we think about that?

Donald R. Lindsay

Great. For that, I'll turn it over to Ian Kilgour.

Ian C. Kilgour

Thanks, Don. The -- one of the main reasons for that is that we tend to carry out more of our planned maintenance -- our annual scheduled maintenance shutdown in the second half of the year. So those costs tend to come through in quarter 3. Other than that, we're going to be continuing with our cost reduction program and seeking to continually reduce our costs. And we certainly look forward to coming in well within the range that was given as guidance.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Okay. And just a follow-up question. When you think about share repurchases and mobilizing capital on the growth side, how do you think about -- with QB2 getting pushed out and opportunities coming up in the copper space, is that something which you are still considering vis-à-vis returning capital to the shareholders?

Donald R. Lindsay

The answer to that hasn't changed from previous quarters. We are always reviewing opportunities that are out there. We have a corporate development department as with any other company, whose job is to review them all. Some of them get a 5-minute review, some of them get a 5-day review and some of them get a 5-week review detailed due diligence and the rest of it. And they are then compared to capital allocation opportunities such as QB2, and we allocate capital to the best returns. So really, nothing has changed on our policy there.

Operator

The following question is from Orest Wowkodaw of Scotiabank.

Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division

Just wanted to follow up on the coke and coal market. I'm just wondering if you're seeing any signs of restocking by mills, specifically in China. It seems to be that inventories have been pretty low so far this year. And also curious, in terms of your estimation, if the current spot prices stick around below 130s, how much of the kind of global production in met coal do you think is losing cash at current levels? And as a follow-on, how much of that, if any, has been announced for closure, and if you actually -- have you actually seen any tonnes come out of the market?

Donald R. Lindsay

Okay. Well, why don't we start with Réal Foley on the first part and you can carry on the second part or we'll take that here.

Réal Foley

All right. Thanks, Don. So on your question with respect to China restocking, China is running at very high production level right now. If we look at total crude steel production in the world, it's up over 2%. But excluding China, it's actually down 3% versus 2012. So China is a big part of that increase. And of course, they need more coal and they are importing more coal from the seaborne market in order to do this. We're seeing regular intake that we would expect with the level of production that the steel mills are running at right now. And then the other part of your question was around spot pricing, and whether or not we're seeing cuts and the level of cuts, is that correct?

Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division

Yes, and your estimation of how much of the production is losing cash, if that spot price sticks?

Réal Foley

Okay. Well, whether or not the spot price sticks, I guess that's speculation. So what we can say is that we're seeing sign of bottoming out, and it seems like the market is stabilizing. But there is still uncertainty in the world, and so that keeps pressure on price. Now the low coal pricing environment so far has generated in our estimate around 40 million tonnes of production cuts, and we're expecting further cuts from the higher-cost producer. And if you look at the weakening of the Australian dollar, the Australian dollar has lost over 10% of its value, Canadian dollar maybe a little bit less than half of that. The U.S. suppliers do not benefit from that exchange gain, so they will be under pressure, for sure. In terms of volume, we had said in a previous presentation a while back that you may have seen that we were estimating at a price of $107 [ph] that there was around 20% of the steelmaking production that was uneconomical. And that's equivalent to about 52 million to 58 million tonnes. Now with the prices at the level that they are now, you can imagine that there would be more tonnes under pressure.

Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division

Okay. And of the 40 million tonnes of global production cuts, how much of that has actually come out of the market so far in terms of announced versus actually shut in, in your estimation?

Réal Foley

Yes, that's a good question. I'd be estimating as a lot of these cuts have actually been made. They were announced -- the earlier ones were announced when the price was quite low in Q3 and early Q4 last year, and there's been more announced since the beginning of the year. So I don't know...

Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division

So do you think that we're still yet to see the impact on the price because these cuts haven't really kicked in yet?

Réal Foley

I think the majority of the cuts have actually been made, and there will be more coming.

Donald R. Lindsay

I'll just turn it over now for some more color to Greg Waller. And I know that this is quite a moving target, particularly with the volatility in exchange rates. So Greg, anything to add there?

Gregory A. Waller

Yes. Orest, as Réal talked about, and you referred to that margin we've used in our presentation for the last number of quarters and pointing out that around 20% of the industry we think will be uneconomic at the previous quarter's price. So clearly, that would be more would be uneconomic. We haven't updated that chart yet. We expect to do that for probably the launch in September sometime, but more will be uneconomic. There have been a couple of more closure announcements from the last month, but they are closures to come. For example, there was one in the U.S. announced that's going to close in September, so it's going to take a while for that to clear through the market. Of course, there's another announcement in Australia recently that really hasn't come out. But there's a couple of other factors that work as well. in the U.S. market, where we think a lot of the coal is a lower-quality product and -- or it's not even getting that high price anyway, it's getting a lower price, reflecting the quality there, they sell a lot of their coal domestically, of course, on a calendar year contract in North America. That's a much higher price than what we're seeing right now. That was at last, let's say, November, December sometime, took effect in January. It's still in place. That's supporting a lot of U.S. coal in the marketplace. When those prices come off and that changes, that's going to change the economics of their business, and we expect there could be some more closures there. And then I'm sure, as you've heard, there's a lot of discussion in the last couple of months about these take-or-pay arrangements that exist in the logistics side in Australia, and that's probably keeping some production on that isn't sustainable longer term. So as Rèal said, I think we can reasonably expect to see some more closures.

Operator

The following question is from Greg Barnes of TD Securities.

Greg Barnes - TD Securities Equity Research

Just switching to the Copper business. With the delay at QB2, are we going to see a dip in production with QB -- the existing QB mine going off the line before you can bring the new QB2 on -- back on line?

Donald R. Lindsay

I'll turn that to Dale Andres.

Dale E. Andres

Thanks, Greg. In conjunction with our permit submission and update for the existing operation, we are running scenarios of extending the mine life. Right now, some of those scenarios, we feel have the potential to extend that mine life out to 2019, and that will be part of our permitting submission as well. So yes, we think there is opportunity to fill that gap with the delay of QB2. As far as production rates, until that time, they will be coming off a little bit from where we expect this year, primarily due to slight reduction in our heap leach grades and a reduction on our dump leach material. But we still think it's an economic business and has a good chance to transition out to the delayed start time of QB2.

Greg Barnes - TD Securities Equity Research

Don, on the $500 million sustaining target for next year, that seems really, really low. Is that sustainable? Or is that sort of a level that you could sustain during a low market price environment and then you'd have to recover from it?

Donald R. Lindsay

There is 2 or 3 parts to that answer, but the overview statement would be that it's not a long-term sustaining capital number, but it's certainly something that we can do now given what we've spent in the last 2 or 3 years. So Ian, do you want to comment or -- we'll start with Ian Kilgour. Go ahead.

Ian C. Kilgour

Yes. Thanks, Don. The fact is that we've invested heavily in the coal business over the last few years, our mining fleets are in very good shape. Our truck fleet is much lower average hours than it ever has been. We've done a lot of work on our preparation plants. So we're actually in very good shape to be able to continue to produce at our desired levels with a reduced sustaining capital for an amount of time.

Greg Barnes - TD Securities Equity Research

Okay. And just quickly on the Coal business. The carryover tonnes in Q3, what percentage of your sales would be at that higher price?

Ian C. Kilgour

I'll hand that over to Réal.

Réal Foley

We don't usually provide a breakdown, Greg.

Operator

The following question is from Oscar Cabrera of Merrill Lynch.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Just interested in -- you're increasing your met coal production guidance by 0.5 million tonnes in what appears to be a weakening pricing environment, and so there's 2 parts to this question. So the first one is, are you -- is this increase just based on expectations of a stronger demand on the second half of the year? And the second part of that is, are you -- based on the previous question, you appear to be targeting higher spot sales, which I'm assuming are in China. So could you comment on those 2 things, please?

Donald R. Lindsay

The basic answer is that on a volume basis, things are going very well for us. I'll turn it over to Réal Foley for more detail.

Réal Foley

So with respect to the question on the stronger demand, we are seeing signs that the market is actually stabilizing. There are a number of areas outside of China, where crude steel production is actually higher for the first half compared to the same period last year. Crude steel production has actually increased in Japan, Taiwan, India versus 2012, so there is demand in a number of the areas. And in others, it seems like the market is actually stabilizing. And the other question is, regarding the distribution of our spot sales. So as I indicated earlier, there's a number of customers -- spot price sales now are no longer only in growth markets, they are also in traditional markets. So when -- as the pricing cycle is changing, we're adapting to the market in order to keep on delivering on time.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Yes, but could you provide a breakdown of that 40% you mentioned?

Réal Foley

You mean by country?

Oscar Cabrera - BofA Merrill Lynch, Research Division

By country, yes, that will be helpful.

Réal Foley

Yes. No, we don't disclose that.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Okay. Let me ask it this way. Out of your estimates, I think in the last quarter, you mentioned that you were targeting about 25% sales for China in 2013?

Donald R. Lindsay

Réal, are you still there? We lost you.

Réal Foley

No, I'm here, and...

Ian C. Kilgour

Sorry, it's Ian here. With respect to our sales to China, we're continuing to have good sales to China. Last year was a record. And this year, we will be around the same volume to China as we achieved last year.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Okay. So the reason I'm asking that is that during this quarter, you had -- you're basically at the top end of your guidance for logistics. So the guidance, if I remember correctly, were from $36 to $40 a tonne. So if you're increasing your -- if you're increasing your sales into that market, that's -- should we expect that the logistic costs would be at the higher end of the range for the balance of the year or in the future?

Donald R. Lindsay

I think I'm just going to make a comment here. This business is a very competitive business, and so we don't get too granular with our disclosure on both logistics or regions or customers or spot. We try and give you guidelines, and we understand fully that you've got to run models and so on and you want to get as detailed and as exact as possible. But at the same time from our side, we have to protect the competitive nature of our sales book. So I appreciate where the questions are coming from, but not all of them are we going to choose to answer.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Okay, fair enough. And then if I may, in terms of your decision on QB2, can you comment on the sales process or the process of one of your partners to exit the investment? And have you received still expressions of interest from other smelters that could reduce the amount of CapEx for you in the project?

Donald R. Lindsay

At this stage, I'd say that while have a good dialogue with our partners, we shouldn't make any comment on process that is really theirs.

Operator

The following question is from John Hughes of Desjardins Capital Markets.

John Hughes - Desjardins Securities Inc., Research Division

Just a couple of quick ones. Ron, could you let us know for Quintette what the book value was at the end of June?

Ronald A. Millos

We'll just pick that one up.

Donald R. Lindsay

Look that up. Maybe we'll go on to the next question and come back to you on that.

Gregory A. Waller

Do you have another question, John, while we're looking that up?

John Hughes - Desjardins Securities Inc., Research Division

Oh yes, yes, no problem. I know it's talking about granular, that was a fairly granular one. Just more general, Don, I guess, Las Bambas is, obviously, up for sale. And I guess a year ago, nobody expected it to be, but today it is. And I'm just wondering from tax perspective, now that you're pushing QB2 off and trying to gain -- match development time frames with the markets and when you received permits, et cetera, whether Las Bambas is any -- is that a type of asset that you might look at?

Donald R. Lindsay

I have heard of Las Bambas, but no, the reality is and the answer I would give would be the same for most of these things that we do review all the situations. You know Ron Vance well. In his department, that's their job to monitor these things. And some of them we'll look at in detail. Others not so much. That's really all we could say about that at this time.

John Hughes - Desjardins Securities Inc., Research Division

Okay. So are we safe to say sort of $4 billion to $5 billion single acquisitions are really not in the cards for now, given how you're managing your balance sheet?

Donald R. Lindsay

We just couldn't comment. I think directionally, we're going to be very conservative with our balance sheet.

John Hughes - Desjardins Securities Inc., Research Division

Okay, great. Last point, the feedback that I think a lot of people get on Teck, certainly on your stock, is any funding exposure to Fort Hills. And you've done a great job in sort of laying out where you're going on a sustaining CapEx side with existing assets. And can you sort of help us with regards to what kind of funding exposure Teck may have for Fort Hills in 2014 in the event that the project's given a green light in the fourth quarter?

Donald R. Lindsay

We can't do that at this stage, but it's coming soon. So the sanction decision, one way or the other, will be disclosed later this year, probably October. I'm just picking a month, but don't hold me to it, and then you'll get all the details. And -- but suffice to say, we've seen it, looked at it very closely and we're not concerned about our ability to fund that. It is spread over a number of years. And we've said in our disclosure that first oil would be 2017, so you can kind of see it spread over 3 full years and then another part of the year. So the spending per year is certainly very manageable from our point of view.

John Hughes - Desjardins Securities Inc., Research Division

Okay, that's great. And Ron, I can get back individually, if you want, on that Quintette...

Ronald A. Millos

Sure. We're just down finding the guy that's got the number.

Operator

The following question is from Kerry Smith of Haywood Securities.

Kerry Smith - Haywood Securities Inc., Research Division

Don, the $9 a tonne operational saving on the operating side at -- on the coal division that you've realized, if you annualized that over 25 million tonnes, you get about $225 million. So I'm curious where -- is that where the bulk of the $220 million of annual savings have come from, and you haven't really cut costs in any of the other operations? Or can you kind of give me in a general sense what -- where the numbers have come from to get to that $220 million?

Donald R. Lindsay

You just probably prompted some people to jump up and down here if they think that they haven't contributed to the cost cutting. Cost cutting is across the board throughout the whole company. I appreciate your calculation in annualizing. The cost in each quarter is going to vary with different factors, and I'll turn it over to Ian to speak to that. But I do want to attest that all divisions have contributed to cost cutting in a significant way, in head office in IT and exploration, they've all been coming through my office and getting the focus on their costs, so it isn't just coal. So Ian, as Chief Operating Officer, over to you to summarize that.

Ian C. Kilgour

The cost reduction exercise has been broad across all of our operations and support areas, as Don mentioned, and it is giving us significant results. It comes from examining a wide range -- the full range of our input costs, consumables, contractors, consultants, all those sorts of things, combined with really looking at where we can continue to improve our productivity in our unit processors; a real focus on truck haulage productivity, which is a key cost for us in our coal mines and our largest copper mine; and improving the throughput of our mills, improving the recovery of our copper, a yield of our coal. So it really is a focus right across the organization and will continue as such.

Kerry Smith - Haywood Securities Inc., Research Division

Okay. I guess that kind of answers it. I was just kind of curious just how it would split out like between the different operating units. But that's fine, that's okay. What -- and secondly, what impact would the mill optimization have on your cost per tonne at Highland Valley? Will it drop your -- is it going to drop your milling costs by 10%? Or can you kind of give me an idea as to how it might affect your unit costs?

Donald R. Lindsay

Dale?

Dale E. Andres

Yes. So the mill optimization will really start to take some effect in the fourth quarter of this year, but really full effect in 2014. We do anticipate improved unit costs going forward, partly due to decreased maintenance costs having a new and modern facility. But there's still higher strip ratios, and the grades going forward are going to be very linked in with our reserve grades. So we don't expect a huge change in our unit costs going forward, but we do expect incremental improvements as we bring that optimization project online.

Kerry Smith - Haywood Securities Inc., Research Division

Okay, okay, that's good. And then just lastly, how long will it realistically take to permit a greenfield project in Chile like Relincho?

Donald R. Lindsay

I don't think that we can answer that question. At this stage, things are changing in Chile. We have lots of people having lots of interaction with the regulators, but I just don't think there's a degree of certainty that we could give you a clear answer.

Kerry Smith - Haywood Securities Inc., Research Division

Okay, okay, that's good.

Ronald A. Millos

Just before we go on to the next question, John Hughes asked the previous question on the book value of Quintette. It's approximately $230 million.

Operator

The next question is from Lucas Pipes of Brean Capital.

Lucas Pipes - Brean Capital LLC, Research Division

My first question is in regards to the new mine development CapEx for next year. It's been very helpful to hear your color on the sustaining and major enhancement CapEx. I was just wondering if you can kind of give us a range on where things could shake out, based on Quintette and some of the energy projects?

Donald R. Lindsay

I'm not sure we understood your question here. Which range are you looking for?

Lucas Pipes - Brean Capital LLC, Research Division

So if we look at the new mine development CapEx for next year -- I think earlier in the call, you gave us directional indications that coal is going to be down. But then when it comes to copper, so QB2 and energy, could you give us a rough ballpark for where new mine development CapEx in 2014 could end up?

Donald R. Lindsay

Okay. So if you are referring to the chart on Page 25 in the quarterly financial statement, I go back to the answer I gave previously on copper, that the majority of that is QB2, and we will be reviewing our plans there over the next 2 to 4 weeks before we come to an answer on that. So we know it will be lower, but we can't give you a number just yet.

Lucas Pipes - Brean Capital LLC, Research Division

Okay. And then as in regards to Quintette, are there certain parameters that you're looking at in terms of pursuing this project? Again, is it price of $160 for how long? Where -- how do you look at that project in this price environment? What would be necessary to pick that up again?

Donald R. Lindsay

I'd say, first, it's more general market conditions, along the lines of what you've heard Réal Foley had been talking about that we do see some encouraging signs. Spot price is up a bit over the last week or 2, and we've seen -- we've had some good conversations with customers in countries other than China, Japan and India still growing and so on. We'd like to see that continue to improve and certainly to see spot price to continue to move up. The project itself, as we've noted, we will finish the engineering and finish all the final smaller permits and so on so that it's definitely ready to go. We can push the button and start. But we're going to be waiting till we have the right confidence level in market conditions before we do that.

Operator

The following question is from Steve Bristo of RBC Capital Markets.

Steve Bristo - RBC Capital Markets, LLC, Research Division

I'm just wondering if you could give us a little more light on capitalized stripping going forward in future years?

Donald R. Lindsay

Ron Millos.

Ronald A. Millos

Sure. The numbers will change, obviously, depending on mine plans. But sort of on average over the next 5 years, we would be in the order of about $500 million would be capitalized per year.

Steve Bristo - RBC Capital Markets, LLC, Research Division

Okay. And then volumes of coal sales, you said so far, you sold 6.4 million tonnes. I know last quarter, you said that there was going to be at least 6 million because you were going to expect a number of spot sales. So is there sort of a number you have in mind, including spot sales, about where your volumes could end up?

Donald R. Lindsay

No, I think we just have to stick with the disclosure that we gave, that we do expect to sell more.

Steve Bristo - RBC Capital Markets, LLC, Research Division

All right. And then the last one, just on the capital for the new mine development and projects enhancing in the copper. It looks like from what has been disclosed, there's an unallocated amount of about $35 million in each of those. I'm just wondering if you could maybe shed some more light on where that capital is being spent.

Donald R. Lindsay

Greg Waller?

Gregory A. Waller

Yes, Steve, at each operation, there's always a series of small projects that are -- that you don't -- they're not material enough to individually talk about in terms of but there are things that are being done to enhance the operations. It might be $5 million to $10 million being spent in the Red Dog, and $5 million to $10 million being spent at Andacollo. So over the 13 operations, it doesn't take very much of that kind of spending in small projects to add up to the kind of number you're thinking of. So none of them are individually material enough, I don't think, to talk about. But there will always be that level of enhancement kind of capital being spent on the operations.

Steve Bristo - RBC Capital Markets, LLC, Research Division

Okay. And then just going back quickly to capitalized stripping. So far this year, it's been about $430 million, I think it was. I'm just wondering what's going to happen there that's going to make that drop from an annualized rate of about $860 million down to $500 million?

Ronald A. Millos

It really just depends on the various phases of the mines that we're in at any given period. They'll be up and down on a site-by-site basis, on an annual basis. Basically, it's really tied into what you're blessed with by Mother Nature more than anything.

Steve Bristo - RBC Capital Markets, LLC, Research Division

All right. That's it for me guys.

Ronald A. Millos

It's not something where we can give you a real precise answer because it's based on plans, which change. It's based on the actual mining, and it's a pit-by-pit or area-by-area calculation. It's quite a complicated exercise for the accounting to go through to give that.

Donald R. Lindsay

And just to -- and this is related to IFRS accounting. It's not a tech issue. It's just something that we have to comply with the accounting standards.

Operator

The following question is from Alexander Mack [ph] of FDA [ph].

Unknown Analyst

Talking about zinc, do you see already an increase in the usage of zinc for fertilizer?

Donald R. Lindsay

We do. There are several manufacturers now in both China and India that are including zinc in their fertilizers. I don't think anybody else has -- it's not a lot of tonnage right now, but the trend line is definitely good. And it has tremendous results in terms of productivity crop by crop with the use of that. I think Rob Scott wants to make a comment.

Robert G. Scott

Thanks, Don. We don't have a precise figure. But as Don says, the initial indications are the take-up on zinc and fertilizer is positive, starting to get better over time.

Donald R. Lindsay

But since you prompted the thought about zinc, we haven't heard much about zinc so far. I do want to make note of that it looks like we now had zinc market in deficit for 2 months. So we're pretty excited about that [indiscernible] but it's now gone from surplus to deficit, so we're pleased.

Operator

The following question is from Alec Kodatsky of CIBC.

Alec Kodatsky - CIBC World Markets Inc., Research Division

I know you've attacked the coal market from pretty much every direction, but I'm just curious if you had any commentary, either anecdotal or through your own observation as to how coal production is actually progressing within China, and whether there's any indications from your customer base there as to where they expect things to settle out in the longer term?

Donald R. Lindsay

That's a good question, though always very difficult to answer. I'll ask Réal Foley to take a stab at it first, and then check around here if anyone else has additional color. Réal, do you want to comment?

Réal Foley

Yes, yes. So what we're hearing from customers in China, Alec, is there's been consolidation at the mines in Shanxi province. And coal production has increased, but it's not increasing at a rate that is keeping up with the increase in steel production. And that's the reason Shanxi province is the province that produces the majority of the hard coking coal in China, so that not keeping up with the increase in steel production, that is the reason why there is more imported coal going into the market, going into the China market.

Operator

The following question is from John Tumazos of John Tumazos Very Independent Research.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

My question involves your commitment to the oil sands where there is no CapEx adjustment. I realize the biggest portion of Fort Hills is a JV, where you're following your partner. We hear a lot of chatter, some accurate, not accurate. But there is the issue of the deal bit discount being large; no plan to build an upgrade or to save capital; the larger amount of U.S. output from the Bakken field to North Dakota, relatively close to Canada; all of the environmental objections to the Keystone pipeline; the terrible rail accident near the main border in Québec. And would you just give us some color as to whether Teck's commitment to the oil sands is as strong as it was 1 year, 1.5 years ago, when you bought out SilverBirch?

Donald R. Lindsay

Okay. I'll start, and then I'll turn it over to Ray Reipas. And I'll start by saying, we spent an awful lot of time on this in the last few weeks and months, in anticipation of making a sanction decision. And in anticipation of really whether it's an important event or catalyst, as the market likes to call, in terms of shining light on the value and resources in our energy division that we built up, we've actually got, in the next 20 months or so, 2 events, the sanctioning of Fort Hills and the permit for Frontier during which we'll also go and get a partner on that for a large piece of it. So the business is going to transform from just a large resource to something that's going into production and has a permit for not a very large property. There are a number of factors. I'm going to ask Ray to address some of them. But at the same time, to be relatively brief, because we're going to be talking a lot more about this once the sanction decision has been made and we can actually then disclose a lot of the details, so then you'll get a lot more information. But Ray?

Raymond A. Reipas

Thanks, Don. And thanks for the question, John. Your questions are really around the kind of the transportation differential that bitumen or heavy oil out of Canada has been seeing for the last couple of years. And I think what I'd point to is the rapid change in that differential over the last few months between the Brent pricing, seaborne pricing and WTI pricing has really narrowed that differential, and that's as a result of some transportation options coming online in the U.S. and moving that oil out of Cushing down to the Gulf Coast. And this is a cyclical business, and it will cycle as transportation gets built and comes on, and then capacity, we'll take that capacity up and some new options will come open. So we do expect it to cycle, but we do expect the differentials to stay in a low range compared to history, and that's favorable for Canadian production.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

We hear a lot of stuff in the press, and some of it's environmental propaganda. And we just enjoy your view as to what's a long-term effect.

Donald R. Lindsay

Thank you. Any other questions at this time?

Operator

The following question is from Gary Lampard of Canaccord.

Gary Lampard - Canaccord Genuity, Research Division

I have a question about the asset impairment reviews that you recently conducted. Did you change any of your long-term price forecast for those reviews? And while it's relevant to all of your commodities, it's particularly directed towards coking coal and the substantial cost savings that BHP has disclosed at their Australian operations.

Donald R. Lindsay

John Gingell, our Controller.

John F. Gingell

We have not changed substantially any of our long-term price used in the models. When we look at coal, we have a lot of room because they have a very low cost base, based on how we acquired these mines in the first place, and they test down to quite a low level in general. So when we take a very long-term view of the coal prices, those coal prices don't change a lot from quarter to quarter or from year to year.

Gary Lampard - Canaccord Genuity, Research Division

Okay. Just a second one, and I apologize if this is in your disclosure somewhere. But is your guidance for capitalized stripping for this year still $840 million?

Ronald A. Millos

Probably coming in a little bit lighter than that. I think the third and fourth quarter, the amounts are going to be similar to what we had in the second quarter, so that'll come in a little bit lower. But again, if mine plans change and actual mining areas differ from where we think we're going to go, that could have an impact.

Operator

The following question is from of Orest Wowkodaw of Scotiabank.

Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division

Don, just wanted to get a little bit more color on your appetite for M&A in the current environment. We've seen a lot of majors, especially on the gold side, over-lever. Do you have any appetite to add debt to the balance sheet? And do you think -- how much debt do you think could add before you jeopardize the investment grade rating and perhaps have to look at the dividend?

Donald R. Lindsay

Oh geez, we're not looking at the dividend. The question's very conceptual. And if we were looking at an acquisition and it had strong free cash flow that came with it, then you could then model and look at how you might want to finance it. But we have a very strong balance sheet now. We've worked hard to get it. We have a very strong cash balance. We only have, I think, $323 million of debt coming due in the next 3 -- to the end of 2016, and we've termed out a lot to 2040, 2041 and so on. So we have a very strong balance sheet, and we'd like to keep it that way. We do look at the opportunities in the market. And then once we've identified an opportunity, see if we can get it for value that we'd like, which we obviously haven't been able to do for some time. But if we did, then we'd look at how to finance it at that stage, but always with the key criteria that we are staying investment grade and -- we enjoy having a strong balance sheet, so we're going to keep it.

Orest Wowkodaw - Scotiabank Global Banking and Markets, Research Division

Okay. And given the majors are selling a number of assets, do you think that the environment is conducive to a transaction? Or do you think valuations -- or the asking price is still too high in general?

Donald R. Lindsay

Well, it's all case by case. Certainly, from our point of view so far, the asking prices have been too high because we haven't done anything. Generally, they're not selling their best assets. I made this as an overview comment of M&A in the mining industry. Assets in the lowest quartile in the cost curve rarely are sold, very rarely. Mostly, you're going to get things in the 50th to 75th percentile or higher. And when you look at them, you have to decide whether you can do something to that asset to improve it and move it down the cost curve, or you have some sort of synergy with customers and the like. So when we're looking at acquisition opportunities, we look at all the details and decide whether we can add value and make it better. At this point, we just haven't seen anything or we've seen some things that might have been of interest to us, but we haven't been able to get anywhere near the price that we are willing to pay, so we'll continue to look. But at the same time, we'll carry on with our current assets.

Operator

The following question is from Harp Sandhu [ph], a private investor.

Unknown Attendee

Just calling in regards to the Schaft Creek project that was recently invested in. And also just a two-part question. The first is that we've had a Phase I drilling announced. Is there a Phase 2 drilling planned for 2013? And what's the general exploration plan, or is it more of a plan to develop the mine?

Donald R. Lindsay

Dale Andres.

Dale E. Andres

Thanks. We currently just took ownership, if you want to call it that, of -- or operatorship of the JV. So we're just currently working through with our partner, Copper Fox, on that transition. We're also currently finalizing the budget and the work program for this year's program. And it will be one program and it will be in the range of 10,000 meters is what we're currently considering. So as we get up to speed with the project and we execute on our program for the summer, we'll make decisions on that project going forward. But for now, we're really focused on looking at the current resource and the potential for resource expansion, and we'll take it from there.

Operator

The following question is from Paretosh Misra of Morgan Stanley.

Paretosh Misra - Morgan Stanley, Research Division

Paretosh Misra from Morgan Stanley. Just one question on your metallurgical coal operations. At current prices, many of your competitors face very high costs, and on top of that, a very stretched balance sheet. So are you seeing that perhaps some of your customers are wanting to allocate a greater percentage of their purchase to you because you could be a more reliable longer-term, lower-cost supplier?

Donald R. Lindsay

I guess, Réal Foley, we'll ask to give you an answer, but obviously, it's not very scientific. We'd sure like them to allocate to us to just -- for all sorts of good relationship reasons, and we've been building relationships with a number of new customers over the past years. But Réal, what was your comment be on that?

Réal Foley

Yes. Thanks, Don. We do have long-term relationships with customers and contractual arrangements in place also for that. And when the market presents opportunities for -- to grow our business, of course, we take advantage of that.

Paretosh Misra - Morgan Stanley, Research Division

Great. What is your current capacity right now without Quintette?

Gregory A. Waller

Our current capacity is about 27 million. Sorry, Ian. Go ahead.

Ian C. Kilgour

Yes, Greg, you took the words out of my mouth.

Paretosh Misra - Morgan Stanley, Research Division

27 million?

Ian C. Kilgour

Yes, 27 million.

Operator

The following question is from Jorge Beristain of Deutsche Bank.

Jorge M. Beristain - Deutsche Bank AG, Research Division

I just wanted to follow up a little bit on what you're calling your maintenance CapEx? Because as Ron Millos quantified, you're saying that your capitalized stripping is running at about $500 million per year in the coal business. And I just wanted to kind of understand how to tie in the concept of capitalized stripping to maintenance CapEx, which you're recording for the entire company at $500 million, because there are some other enhancement capital projects ongoing at some of these other businesses. And I just kind of wanted to understand if I should be looking at that number and adding something for the copper and zinc businesses, or if I'm thinking about it incorrectly?

Ronald A. Millos

Well, the $500 million average is a go-forward number for the whole company, not just the coal, Jorge, on the deferred stripping.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Okay. So that's, sorry, $500 million. So we just don't look at it on the met coal volumes? That's firm volume?

Ronald A. Millos

That's right. And again, mine plans change, mining areas change, so those numbers can move rapidly. But those are the indications at this stage.

Jorge M. Beristain - Deutsche Bank AG, Research Division

And just a follow-up on the earlier question. I am quite surprised that the maintenance capital for coal has dropped so sharply, and that is really due to pit sequencing? Or is there some of that, that you're just holding back, and in an up cycle, we would expect the maintenance CapEx again of the coal business to recover?

Donald R. Lindsay

So I think you're using the term maintenance CapEx, and that's referring to what we call sustaining capital. And the comment that we made previously is that we have gone through a phase of pretty high levels of investment of sustaining capital. And as a result of that, we have our operations with new shovels, new trucks. And by the way, larger shovels, larger trucks, more productive. We finished the plant upgrade, and so you have a much newer operation and much more productive operation, and that's helped drive the cost down. And so there's a less of a need right now to keep the same level of sustaining capital. I should also say, we have the same in our copper business. If you look forward to the end of the year with the Highland Valley monetization program finished, obviously, the sustained capital we talked about earlier, maintenance costs and stuff will go down. Likewise, at Antamina, that we just finished the expansion last year. Andacollo is only a couple of years old, I think it's the third year since it was built. So at our core operations, things are much newer, if you like, than they were before, so that allows us to reduce the sustaining capital, at least for next year. Eventually, it will come back up to a higher level, but we have the opportunity to do so, so we're going to do it.

Operator

There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Waller.

Gregory A. Waller

Great. Well, thanks so much, operator, and thanks to everybody for attending today. And always happy to take follow-up questions subsequent to the call. If you want to call direct myself and Ron Millos will be available to talk. Other than that, we'll talk to you on our next conference call.

Donald R. Lindsay

Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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