© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to Teck Resources Q1 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. This conference call is being recorded on Tuesday, April 24, 2018.
I would now like to turn the conference call over to Fraser Phillips, Senior Vice President, Investor Relations and Strategic Analysis. Please go ahead sir.
Thanks very much, Radek. Good morning, everyone. And thank you for joining us for Teck's first quarter 2018 results conference call.
Before we begin, I'd like to draw your attention to the forward-looking information on slide two. 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.
With that, I'd like to turn the call over to Don Lindsay, our President and CEO.
Thank you, Fraser, and good morning everyone.
I will begin on Slide 3, with some highlights from our first quarter followed by Ron Millos, our CFO who will provide additional color on our financial results. We'll then conclude with a Q&A session, where Ron and I and various additional members of our senior management team will be happy to answer any questions.
But before we get into the highlights on the quarter, I would like to note that very sadly there was a strategic incident at our Fording River operation on April 9, resulting in the death of an employee of a contract company. We send our deepest sympathies to the employee's family and friends and colleagues and a full investigation into this incident is under way to ensure we learn everything we can in order to prevent a reoccurrence.
Turning out to our Q1 results, prices for our key commodities remain strong in Q1 resulting in another good quarter for us. Note that copper prices reached a four-year high in January at $3.27 per pound as zinc prices reached a 10-year high in February at $1.64 U.S. per pound.
Sales volumes for all of our principle products increased from a year ago particularly copper sales which reflected a higher than expected raise at Highland Valley. Overall, our operations performed well in Q1 and we are pleased that Four Hills achieved first oil on January 27 and is ramping up to full capacity as expected.
In fact, the plant start up has exceeded expectations with respect to both production volumes and product quality. Now, we also achieved first sales in Q1.
We continue to return cash to shareholders repurchasing $58 million of Class B shares to complete the remainder of our $230 million share buyback. We also paid our regular based quarterly dividend of $0.05 per share which totaled $29 million. Prefeasibility study for NuevaUnión was completed in Q1 and we have included a summary of the results in our press release and I will come back to this shortly.
In April, we acquired an additional 13.5% indirect interest in the QB2 project through the purchase of IMSA, our minority partner. This simplifies the ownership and the capital structure QB2 and gives us flexibility on financing options for the project. And we now have 90% equity interest and 100% funding interest in QB2.
The Board will decide on our ultimate ownership level in the QB2 project in due course. There is no fixed deadline for that decision and in principle we could commence construction before seeking a partner.
In the meantime, we are continuing to build cash on our balance sheet and to progress engineering and preparation for a sanction decision reducing both funding and execution risk.
Turning to our financial results for Q1 on Slide 4, revenues were $3.1 billion and gross profit before depreciation and amortization was $1.7 billion. After adjusting for unusual items, adjusted EBITDA was $1.6 billion.
Bottom-line adjustable -- adjusted profit attributable to shareholders was $753 million or $1.31 per share and that's a decent increase from $655 million or 1.13 per share in the same quarter last year.
Details of the quarter's earnings adjustments are on Slide 5 and as you can see they were minimal in Q1 2018.
We will move on to Slide 6, where we will run through the highlights of the steelmaking coal business unit. We continue to experience logistical issues at Westshore Terminals particularly the lack of reliability and consistency in vessel loading and the unloading of Teck trains. As a result sales volumes were lower than expected in Q1 importantly demand remains very strong. We had orders from customers in place to comfortably exceed our original sales guidance range of 6.3 million to 6.5 million tonnes.
Production volumes were also affected by the ongoing poor performance of Westshore as clean coal stockpiles at mines built up to levels that for some plants to idle due to a lack of storage capacity. In addition, operating costs were negatively impacted by an increase in rail fuel surcharges and additional demurrage costs, they were primarily attributable to the issues at Westshore. We are working closely with all of our logistics suppliers to address these issues.
We did return to a more typical product mix in Q1. However, our average realized price reflects what was a record spread between hard coking coal prices and lower grade products.
Looking forward to Q2, steelmaking coal sales are expected to be around 6.7 million tonnes subject to performance of our logistics chain.
We're accelerating planned upgrades to the Neptune bulk terminals facility and now expect 2018 spending of approximately $120 million. The upgrade program includes an additional approximately $220 million to be spent in 2019 and 2020. Final Board approval for the project is expected later in the second quarter. This investment aims to secure a long-term reliable and globally competitive supply chain solution for our steelmaking coal business.
Before moving on, I'd like to emphasize again as I did at our recent Investor and Analyst Day. The outperformance of steelmaking coal prices relative to expectations and the significant gap between what the equity market is assuming and the historical average steelmaking coal prices and the cash that we have actually received. Over the past 18 months steelmaking coal prices have exceeded market expectations and they continue to do so. The current spot price under pressure at the moment over the last ten years has averaged $197 per tonne on an inflation adjusted basis and this compares to long-term prices in the range of $120 to $140 that many market participants are still assuming.
Current spot prices we are actually receiving in Canadian dollars around CAD$230 per tonne in cash.
Two recent transactions involving steelmaking coal assets provide more evidence of a gap, the prices paid imply valuations that are materially above current public market valuations and report suggests that these transactions assume long-term prices of $150 U.S. to $175 U.S. per tonne which is approaching the average over the last 10 years.
On Slide 7, we summarized our zinc business unit results and as a remainder Antamina zinc related financial results are reported in our copper business unit. In Q1 containing zinc sales at Red Dog were slightly ahead of our guidance and are indicative of the ongoing tightness in the zinc concentrate market.
Red Dog production was negatively affected by severe winter weather in Q1 plans are in place to recover the shortfall in the remainder of the year. Red Dog's unit cash costs after byproduct credits were above our annual guidance consistent with that normal seasonality.
Overall, gross profit before depreciation and amortization was up 42% or up $87 million from Q1 2017. And looking forward to Q2, we expect Red Dog contains zinc sales could be around 80,000 tonnes.
Our copper business unit results are summarized on Slide 8. Overall in Q1 gross profit before depreciation amortization was up $220 million from the same quarter last year reflecting higher prices and volumes and lower cost. Our average realized price was up $0.49 U.S. per pound in the same period. Higher than expected grades at Highland Valley persisted through the first quarter contributed to higher production and higher sales and lower unit costs.
We continue to expect higher annual average grades and production in 2018 versus 2017. But we do not expect the high grades in Q1 to be repeated in the remainder of the year.
Net cash costs after byproducts were down $0.40 U.S. per pound from Q1 of last year helped by a strong cash credits for byproducts. And as I mentioned earlier, we acquired an additional 13.5% indirect interest in the QB2 project in April. We continue to expect EIA approval in the second quarter and a potential sanctioning decision in the second half of 2018 and in the meantime we are advancing execution and operational readiness on the project and detailed engineering is now over 60% complete.
Please note that we have updated our CapEx guidance for QB2 from approximately $100 million U.S. for the four months from January to April to approximately $250 million U.S. for the nine months from January to September.
Our energy business unit results are summarized on Slide 9. As I mentioned earlier, Fort Hills achieved first oil on January 27 and the plant startup has exceeded expectations with respect to both production volumes and product quality. The first of three trains from secondary extraction has achieved production rate significantly above the design production rate for a single train. The second train started out on March 23. By the end of March, Fort Hills was producing over 100,000 barrels per day of PFT bitumen.
Our share at Fort Hills first quarter production was 1.1 million barrels including froth used for commissioning. We also achieved first sales in Q1 and downstream logistics have performed as expected.
Looking forward, we expect to reach commercial production in Q2 and oil production by year end.
Before I turn it over to Ron, I would like to spend a couple of minutes on [the waiving] [ph] prefeasibility study which was completed with our 50% partner Goldcorp in Q1. The prefeasibility study incorporates key design changes to improve project economics and it responds to community in additions peoples input. The new design has reduced environmental footprint, infrastructure requirements in energy and water use. It plans for the use of desalinated water during operations to protect freshwater resources.
And we also plan to relocate the Tailings fills facility to the Relincho site in response to feedback from local communities. We've extended mine life from 32 to 36 years excluding -- that's excluding 205 million tonnes of deferred resources contained within the current pit designs. And it also has significant further resource expansion potential and project optimization opportunities.
Prefease contemplates a phased development approach that reduces initial capital investment and execution risk and in Phase 1, we will mine the higher grade portions of Relincho. This will allow the project to help fund the link to La Fortuna in Phase 2, which will also focus on higher grade areas providing significant cash flows in the early years of this phase.
And as a result, average annual production is estimated to be 224,000 tonnes of copper 269,000 ounces of gold and 1700 tonnes of molybdenum and concentrate for the first full five years of mine life. That's approximately 283,000 tonnes per year of copper equivalent production over the first full five years of mine life .
C1 cash costs are expected to be low in the first phases of development. Average C1 cash costs are estimated to be $0.71 per pound of payable copper for the first full five years of production helped by high initial gold and copper grades at La Fortuna. That the initial capital cost for Phase 1 is estimated to be U.S. 3.4 to 3.5 billion on a 100% basis excluding working capital and interest during construction. So overall, waiving NuevaUnión is a long life asset that can operate through multiple price cycles and should be a core part of our portfolio sometime in the future.
And with that, I'll pass it over to Ron for some comments on the financial side.
Thanks Don.
I'll start with liquidity on Slide 9 where we currently have approximately $5.1 billion in liquidity and that includes $1.3 billion in cash in our undrawn U.S. 3 billion committed credit facility.
We also expect to receive an additional 1.2 billion in cash proceeds from the Waneta transaction which is progressing and is expected to close in the third quarter of this year.
We also only have $220 million of debt maturities prior to 2022 and including the Waneta transaction, our strong credit metrics compare favorably to our diversified and North American peers on a pro forma basis. And you may have seen on April 18, Moody's upgraded our credit rating one notch to BA1 with a stable outlook. So all three of the major rating agencies now have us one notch below investment grade.
Moving forward to Slide 12 as we've outlined that Slide 12. We have a strong record of returns to shareholders with 4.1 billion in dividends and 1.2 billion in share buybacks since 2003. And approximately 35% of our free cash flow has returned to shareholders over the past 15 years to the dividends and buybacks. And in the first quarter, we spent 58 million completing the 230 million of share buybacks that was authorized by our Board in November last year.
And we also paid our regular quarterly dividend of $0.05 per share and on an annualized basis our regular basis dividend is $0.20 per share. And our Board is expected to consider supplemental dividend in the fourth quarter.
On Slide 13 have summarized the changes in cash during the quarter we generated $1.1 billion in cash flow from operations. We spent $460 million on capital projects including Fort Hills, capitalized stripping cost were $197 million and we paid $129 million in interest and finance charges. And as I just mentioned we repurchased 58 million in Class B shares and that completed the buyback that we announced in Q4 last year.
We also repaid U.S.22 million on our 2.5% notes that matured in February and in addition we paid out 29 million for the regular quarterly based dividend of $0.05 per share. And after these and other minor items we ended the quarter with cash and short-term investments of around 1.2 billion.
And with that, I'll turn it back to Don for his closing comments.
Thanks Ron. 2018 and 2019 promised to be exciting times for Teck. We have a number of panelists or evaluation milestones that are coming over the next 24 months and these are detailed on Slide 14. We have completed the prefeasibility study for NuevaUnión in Q1 and have now published a summary of those results.
The next key valuation milestones are as follows; first the startup of train 3 and secondary extraction at Fort Hills and hitting commercial production in Q2. We expect full production at Fort Hills by the end of the year if not before. We then anticipate receiving the QB2 permit in this quarter and sanctioning could occur in the second half of 2018.
We expect to close the Waneta dam sale and receive the initial $1.2 billion in cash in Q3. And in Q4, we aim to complete the feasibility study at Zafranal in Peru and submit the SEIA. So we have lots to look forward to for the balance of this year.
And finally to close, I would like to wrap up with our value proposition shown on Slide 5. Teck remains focused on strong execution, we have a premier operating assets a proven track record of execution. We are enhancing profitability in our operations. We have a solid financial position with significant liquidity and strong operating cash flow.
We are in the right commodities at the right time. Our approach to capital allocation balances returning capital to shareholders and capital spending with prudent balance sheet management. Overall, we are focused on generating shareholder value and we believe the Teck offers a compelling value proposition to investors.
And with that, we would be happy to answer your questions and please note that some of our management team members are calling in from different locations, so there may be a brief pause after you ask your question while we sort out who's where. Back to you operator.
Thank you, sir. [Operator Instructions] The first question is from Lucas Pipes of B. Riley FBR. Please proceed sir.
Hi, guys. Ted Beachley here for Lucas Pipes. My first question is, how do you guys expect coal production cost will progress over the course of 2018?
Okay. For that I will turn it to Robin Sheremeta.
Yes. While the cost and I discussed this at the ministers conference there is going to be roughly in line with our guidance, so little higher than last year, certainly with higher strip ratio slightly longer hold distance in some of the maintenance costs we had talked about. So pretty flat through the year though we're off maybe to a little slower Q1. So looking forward to roughly the same costs through the end of the year.
Okay, great. And can you give us any more detail on line cost realizations with $207 in the first quarter and what may have contributed to the realizations.
Over to Réal Foley.
Thanks Ted. And so as we mentioned at the Investors Day, the main reason is the record spreads that we've seen between the high quality hard coking coal and the other lower grade products. So for instance, if you look at hard coking coal versus semi-hard that spread was around $50 in Q1 compared to around $10 historical. And if you compare the high grade hard coking coal to the semi-soft, the spread was around $110 versus around $30 historical. So if the spreads would've been comparable to historical, we would have achieved similar realized price as our historical levels.
Okay, great. Thanks guys.
Thank you. The next question is from Curt Woodworth of Credit Suisse. Please proceed.
Good morning. I was wondering if you can discuss the -- I guess consistency of your volume for coking coal into China and how much of that would be baseload or sort of visible on a quarterly basis. I just ask because when you look at the import data it's fairly consistent quarter-to-quarter despite a fairly wide variance in the arb. Thank you.
Sorry. We just missed the last part of the question.
Question is consistency or visibility of your coking coal volume into China. And how effective I guess is the demand you see for that in relationship to the arbitrage?
Over to Réal Foley.
So Curt, if you look at our historical sales distribution we sold as much as around 30% of our sales to China going back to 2014. Currently in 2017, we sold about half of that. So around 15% or so of our sales have gone to China.
The demand in China continues to be strong. However, demand is also strong in other market areas. So what we've tried to do is allocate our available coal products to all the growth markets around the world. So that includes India where we've doubled our sales from around 5% in 2014 to 10% in 2017.
We've also increased sales to Eastern Europe as some Eastern European mines are getting depleted and producing at lower levels. So we've increased those sales from around 15% to 20% in 2017 and we've continued to support our long-term customers in the Asian market plus developing new customers in Southeast Asia.
So does that answer your question?
Yes. I mean I guess I'm trying to understand some of that the structural need for high quality met into China. And I guess the question would be is the China buy for you just sporadic based on some of the arb -- arbitrage level or is the volumes you're selling into China, is it a fairly consistent baseload supplier we are selling to the same mills over a period of time? And kind of the structural component of that business for you.
Yes. So to answer the first part of your question. Over two thirds of China's steelmaking is located on the coast. So those steel mills do rely on seaborne import and high quality hard coking coal. In terms of our business, we have a number of established customers to whom we supply to pretty over the years. So those sales have not changed. What has changed is some of the customers that we have developed and that were maybe more on a spot basis, we've developed new demand in other markets for instance India demand is growing very quickly. So we have increased our sales to the India market.
And as I said earlier, we've also increased sales to European steel mills and to Southeast Asian customers. So we're basically reallocating depending on where we see demand and long-term demand for coking coal.
Yes. I might just had an overview comment going back four, five years when our coal sales to China peaked as Réal said over 3%. I think we actually had 8 million tonnes in one year. We concluded that since anybody in the commodities business is always subject to Chinese price risk. Since China is the incremental buyer of almost everything and saying the price. We didn't also want to be exposed to too much Chinese commercial risk or volume risk and so we made a deliberate decision to cut our sales from that peak level in half and we're now even below that.
So we're in a much smaller level now. We're much more comfortable with it and even though sales are two core customers as Réal just described that we've had relationship quite some time now. So it's a much more kind of stable part of our sales book. And we've diversified even further, so we like having the risk spread amongst different countries different customers is just better diversification.
Thank you. Very helpful. Appreciate it.
Thank you. The next question is from Greg Barnes of TD Securities. Please proceed.
I just wanted to follow-up on the increasing CapEx in Q2 for the first nine months of the year U.S.$250 million. What is the spend going to be on the increase spend?
Dale Andres.
Thanks Greg. For the first nine months and leading up to potential sanction decision in the second half of 2018. We're really focused on advancing for one getting the permit. We still expect that to be in the second quarter in this current quarter, but still advancing detailed engineering as part of advancing that detail engineering. We do need to enter into contracts mainly for vendor information and there's some costs associated with that.
But primarily it's getting ready for execution both on construction and operational readiness basis. So got the teams working hard and it's progressing well.
You actually doing any physical work on the ground there?
There is a minor amount of work refurbishing some old camps up on site, but outside of that no we're waiting for the EIA approvals.
And Don I know you said you're going to provide more details on NuevaUnión economics when you come out with a feasibility study. But can you give us some ballpark numbers around. I know you hate it, IRR and other metrics like that?
I think we're going to leave that to the analysts and investment community who choose their own commodity prices and exchange rates. And we see a lot more to be done from this point of prefeasibility publications through the feasibility in terms of optimizing the project. And so numbers like that would soon become kind of academic. So we're leaving it to you guys to make those assumptions.
So other than high pressure grinding rolls, what other things can you do to optimize the project?
Are you guys see these conveyers, Dale or Alex are going to try, this is [indiscernible].
Yes. I guess Greg, there are two or three things that we're working on here. Certainly the high pressure grinding rolls make a substantial difference in terms of our operating costs. So that's certainly one thing and that's right now inside the [P invests] [ph] we're finding our engineering on that.
We have the hybrid conveyers that we are in phase two that are going to be moving the crest ore from La Fortuna to the Relincho site and those are the combination of both on the ground bears and suspended bears. And essentially we're there -- we're going to be positive in terms of energy consumption in that. So essentially we're going to be producing energy from those conveyors. So that's certainly something that's going to impact.
We're also working on several other engineering opportunities including things like some [indiscernible] assessments and certainly looking at some of our recovery and potential feature under block -- underground block at the La Fortuna. Quite a number of things on the opportunity list here that they work on both between PFS and the feasibility kick-off as well as within the feasibility study so.
So A20G's and the conveyors were not included in the prefeas or the -- you are optimizing in the feas?
They are included in the prefeas that will be optimizing in the feas.
Okay.
I should just remind people of the timeline in this that we now after a bit of a possible move to feasibility which takes about a year and we wouldn't be finding the SEIA until December I think is the target just looking to confirm that.
Sometime between preparation of the feasibility studies at the very earliest would be the end of this year and but sometime before we anticipate to finish the feasibility study which should be mid-2019.
That's when you'd apply for the EIA?
Exactly.
Okay.
So it's a good couple of years before there's any significant capital decisions.
Thank you.
The next question is from Chris Terry of Deutsche Bank. Please proceed. Your line is open.
Hi, Don and team. Yes, a couple of questions from me. On the CapEx just following up from Greg's question there. Can you talk a little bit about Neptune and the timing on decision and the CapEx there. I know you talked about it a little bit at the Investor Day. Just wanted to get your latest thoughts on that.
And then with QB2 as we head out to 2019, can you give some sort of indication on the ramp up of how CapEx might look, I don't want to jump to conclusions that you plan to go ahead with it. But just trying to get conceptually an idea of what the CapEx delta or above the sustaining model look like into the next year or so. That's my first question. I will ask the other one in a minute.
Okay. So, on the Neptune question, we will be accelerating the program there and will now spend approximately $120 million this year versus I think 85 we disclosed before. And we expect the Board to approve fairly soon. The balance of the capital should be an incremental $220 million from here to complete the project. So I think that's that.
Then on the QB2 who wants to take that one -- the ramp up of capital. This is past sanction is that the question like once it's sanctioned.
Yes. I mean given the updated guidance for this year, I guess on what you're going to spend on the pre-sanctioned numbers I assume. And then, if that was to be approved just what we could expect to get into late '18 and then into '19, this is a rough trajectory on how the spending model look into those years.
So we have those numbers, but we may not have them right here. We either come back to you at the end of this call or get back to you real quick.
Okay.
Yes. We did recent numbers -- couple of spend profile when we released the feasibility results in Q1 2017. And I just need to pull those direct numbers back and come back with a number on that.
They are in the public domain. But, I will find them and get back to you.
Okay. Sure. And then, the other one is on coal, you talked a bit about what happened in 1Q, but you are not quite away now through 2Q and the lag on the process. How do we think about the luckily realize the process that 2Q specifically?
Réal? He hates questions like that in the third week of April but...
So we're about -- we're a bit more than halfway through the quarter, Chris, so the lag index linked price for the quarter is still sitting above 205 today. It's a bit tough to say what will happen to the spot prices for the rest of the quarter. This morning it's been over 177 so it's corrected over $15 since the beginning of April.
In terms of demand, the demand is still strong across all market areas whether it's China or the rest of the world. So we see customers continuing to take coal on a ratable basis. And then, on the supply side there are still issues, whether it's logistics or production disruption. So overall, we still see the market as being tight. It's just difficult to say where exactly the spot prices may end up by the end of quarter.
Okay. Thanks Réal. And maybe just on the realized processes the next process just on I think it was 87 odd percent last quarter, do you think that that comes up for this quarter a bit more towards the historical average or where would you see that?
Yes. We're no longer going to give guidance on realized prices Chris because it's just been too volatile. If you look at our history from Q2 of 2010 until now our realized prices reached anywhere from 75% to 104% of the assessments and that's a function of price spreads as we've seen in this past quarter. But it's also timing of sales, it's the direction of the spot market which can change at any time during the quarter, it's timing a vessel arrivals, product mix, so there is a lot of different variables that come into play.
Okay. Appreciate the answer. Thanks Réal.
Yes. One other problems Chris was that if we gave out a percent then people would use that for the balance of the quarter when in fact it was only good for that hour. And now particularly as we've seen in other product qualities the spreads as Réal talked about can be quite volatile. So we're encouraging analysts on the street to follow the trade journals that published not just the index link sort of rolling three month average per hard coking coal, but also to look at the spreads for the semi-hard and semi-soft and PCI and come up with your own estimate for the quarter.
Thanks Don.
Thank you. The next question is from Orest Wowkodaw of Scotiabank. Please proceed.
Hi. Thanks. Just actually a follow on I guess from the previous question. Two things, one are you seeing I mean spot pricing falling for coal in the last couple of weeks. Are you seeing any of your spot customers pull back orders in anticipation of continuation in spot pricing? And I'm curious how that will impact your realizations for the quarter?
And then, secondly as well, can you give us an idea, is there a big difference in your coal quality mix say in the second quarter from what we saw in the first quarter. Or is this year pretty similar on a quarterly basis from a mix perspective?
Okay. So maybe starting with the second question Orest. And so, our product mix is back to normal since Q1, so in Q4 last year we had a higher proportion of thermal sales as we've indicated when we reported our Q4 results.
But now we're back to around 75% of our production as hard coking coal and the remaining 25% is semi-hard, semi-soft, PCI; thermal is typically a couple of percentage points. Now that can vary quarter-to-quarter as I answered on the previous question. I mean there are releases that can impact that. But overall for 2018, we're expecting around 75% of our production to be high grade hard coking coal.
To the first question on the spot price, as steel pricing and steel demand remain strong in the world we're seeing regular demand in the market. It's a little bit different from what we had seen in the past whereby there was a massive pull out from the market when there was a big price correction following Cyclone Debbie last year. So you'll recall that at that time prime spot prices had reached over $300. And they corrected to somewhere around the $140, $150 level. That was a massive pullback. This time the pullback is smaller and as steel demand is good and steel pricing is good, steel producers still require the hard coking coal to produce.
Okay. So it sounds like you're saying that from a realization perspective, we shouldn't see a repeat of what we saw last time coal pricing really declined our spot basis?
Yes. I guess you need to look at the spreads and it won't be impacted by the various other factors that I've mentioned earlier.
Okay. And just again on the quality because of the closure, I guess of Coal Mountain, which is supposed to increase the quality of your mix. Does that mean that the front-end of the year is actually a weaker mix of product?
So as we're mining into the recently permitted areas. Of course, the product mix can be a little bit different. So your expectation is probably appropriate. I mean when we look at 2018 overall [maybe around] [ph] 75% hard coking coal, it can vary quarter-to-quarter.
And just finally what was the actual mix in Q1 between premium hard coking coal and the rest?
The production was pretty close to the 75% level. The main issue was actually getting the coal to market as we've indicated with the logistics issues and mainly the impact of Westshore.
I see and your guidance for the second quarter is 6.7 million tonnes. Does that assume an improvement at Westshore, or is that just basically a status quo?
No. It assumes that Westshore will continue to improve. We have seen some improvements since the start of April. We've also seen improvements on the rail side. So subject to that continuing the 6.7 is based on that.
Great. Thank you very much.
Thank you. The next question is from Oscar Cabrera of CIBC World Markets. Please proceed.
Thank you, operator. Good morning everyone. With the increased expenditures in QB2 this year as -- in terms of thinking of your capital structure have you changed your priorities in terms of returning cash to shareholders i.e., the supplemental dividend be viewed as a priority in 2018 versus spending more capital at QB2 in the second half of this year?
Thanks Oscar. Nothing has changed in terms of our future and that the Board will consider the supplemental dividend and buybacks at the November Board meeting and it will be based on our outlook for the business. Based on first time how good the year was; second, the outlook for commodity prices and financial results in the coming year; and then, third, the capital needs of the business going forward including QB2. And this is April and that's in November lots could change between now and then that's why I can't predict what they're going to do. But, I suspect that if things carry on anywhere near where they are today that we have something similar in terms of discussion around it as we did last year.
Thanks Don. And then, back in 2013 or 2014, I forgot, when the price participation from coal was removed and you increased availability from CPSC and you provided a map of the flows of coal to the coast. It seems like with the additional expenditure next year and you're looking at going back to some of the figures. Can you remind me what the actual capacity of Neptune and Ridley can be? Would you consider moving more out of Westshore to prevent all of these things that we're seeing now?
So the current capacity at Neptune is 12.5 million tonnes. And as we've said the upgrades that we're investing and we'll take it formally to 18.5 but was upside certainly beyond 20 and then more. We do have volume contracts in place at Ridley and Neptune, see what the numbers there. Three million tonnes contracts at Ridley as well. So where everything ends up you'll have to wait probably until 2021 to see how that goes. But will certainly have more capacity.
Okay. Right. And then, just lastly a clarification on the figure that you provided for Neptune and this year now $220 million, if I remember correctly the original estimate that we had back in 2014 was like $250 million. Is that still the ballpark that we should be looking at?
Not quite so, we earlier said that we approved 85 million. We've now updated things saying we will spend 120 million this year and we are asking the Board for approval for an incremental 220 million to complete the project and we expect to get that approval shortly. So we're accelerating our work at Neptune. And those are numbers. So if you add up the total cost of the project from including what we have spent to-date would be 345.
Great. Thanks very much.
Thank you. The next question is from Alex Hacking of Citibank. Please proceed.
Hi. Good morning and thanks for the question. I have a quick clarification on the CapEx -- potential CapEx profile at NuevaUnión. The 3.6 to 3.7 major enhancement CapEx. How much of this would be required to bring La Fortuna online sort of phase 2 versus kind of much longer dated for Phase 3? Thanks.
Its Dale. I will take that. And consistent with what we put in the release. There's 2.6 to 2.7 billion tied to Phase 2 and approximately 1 billion tied to Phase 3, which under the current scenario would be '18, '19 so quite a bit down the road. And so leading up to Phase 2 production in year 4, would be that 2.6 to 2.7 billion which is the connection up to the La Fortuna site. And would include mining equipment and pre-stripping activities at La Fortuna.
Okay. Thanks for clarification.
Thank you. The next question is from Ralph Profiti of Eight Capital. Please proceed.
Thanks for taking my question. Hey Don. Is your view of these logistical challenges if I can come back to them more related to the performance or are these bringing to light some of the structural issues? And are you seeing potentially significant investment required by your logistics partners in order to get Teck to the desired movement of coal that to where it needs to be? I'm thinking larger vessels, longer train stuff like that?
No. The main answer to that question would be performance, of course, in any logistical change is going to be different bottlenecks or it might require a little bit of capital here and there. We know Westshore has been investing some capital things. And [indiscernible] clearly has some issues that we are working on, but overall I'd say that the answer to that question is it's about performance.
Okay, all right. Thanks. That's it for me.
Thank you. The next question is from [indiscernible] of Goldman Sachs. Please proceed.
Hi, guys. Thanks for taking the question. It sounds like you have a lot of different options with regard to capital allocation coming forward you had a lot of cash coming in the door operationally and from asset sales. So, yes, the question I have for you is, could you refresh us on how you came up with your target for debt, it's $5 billion number. You hit that now you're looking at coal market conditions that are staying tighter for longer and some people think that could continue. Does a tighter coal market or more earnings power in the form of QB2 change how much corporate debt you want and I'm thinking about this in terms of how you'd go ahead with financing strategy or a decision around QB2?
I'm going to turn that over to Ron Millos, but firstly I want to say less is better so…
Yes. We lost our investment grade credit rating a few years back and we would like to get that back. But we are at the mercy of the rating agencies. So one of the comments they've made over the years is, they cut back the ratios. We were at a sort of a 30% debt equity ratio and 2.5x leverage ratio. And the debt equity ratio is not an issue for us. The leverage ratio is the big problem for us in a low commodity price environment where we don't have the EBITDA to support that.
So the general view was that we needed to get our debt down. And we've done that to get below that $5 billion target level there. The agencies have also sort of reduced a little bit on the leverage ratio by half a turn as well for the indication. To get back to investment grade, the big outstanding item that they're looking for now is bit more clarity on what we're going to do with QB2 what the final costs are the ownership structure and how we intend to finance QB2.
We're in the process of looking at the financing options and we are considering -- we're kind of riding two horses right now looking at both the project financing option and whether we might go to the foreign market at some point down the road.
Our ratios are well into investment grade territory. Our CDS is well under investment territory and the bonds are trading at investment grade levels.
That's very helpful. Just a quick follow up on the project financing. Realize it's still early days but any complications any -- anything you've found as you've gone down that path there have been other project financing efforts in the market that haven't succeeded recently. Just any color you can share there would be helpful?
Sure. We are sort of at the front end of that and there's been nothing at this stage that's been playing. That's causing us any great grief.
Okay. Thanks a lot.
Thank you. The next question is from Mark Levin of Seaport Global. Please proceed.
Hey, great. Thanks very much. Two quick questions. When you think about your investment in Neptune going forward maybe could you give us some parameters or at least the way to think about what the potential cost savings opportunities might be if you were to shift more volume away from Westshore or away from westward toward Neptune? And then, my second question, then I'll just hang up and listen relates to Quintette. Have you had any further thoughts around Quintette, if you were to green light QB2 does that necessarily take Quintette off the table, would you be willing to do two major capital projects concurrently? Thanks.
Okay. On the first one, we have not disclosed the magnitude of the potential savings, but you can expect that they would be significant. On the Quintette, we continue to look at it. We know that there are customers that would be eager for us to bring it online, but it is not something that we see in the near term. And frankly QB2 is still our priority for the long-term building of the company so that's probably our last chance.
Okay. Last one actually, in this one more for Réal, has been any customers reaching out to you concerned about the Horizon rail situation in Australia. Do you see -- how do you see that situation if it kind of stays the way it is meaning the draft decision turns into the final decision. What might that mean for up for Teck from your perspective?
So Mark we're seeing -- I guess everybody is watching what may happen with Horizon. So far, Horizon have said that the impact could be up to 20 million tonnes and half of that impact could be on the [indiscernible] line, which is the line that carries mostly high grade hard coking coal. So it could definitely have an impact on the market from a supply point of view. We haven't seen major shifts from customers yet, but it is definitely a concern.
Great. Thanks very much.
Thank you. The last question is from Lucas Pipes of B. Riley FBR. Please proceed.
Hey, good morning everybody and thank you very much for taking my follow up question. I wanted to circle back to Neptune one more time and I wanted to ask specifically, is there a reasonable business case where it would not make sense to go ahead with capital at this late stage? Thank you.
Given the results of Q1, I would say no. But we're always open to consider options and we would always be balancing any other opportunities against the current investment. But we're pretty committed and we know that there are going to be significant cost savings. But beyond that and probably more than that is the reliability factor is so important being able to ship the coal particularly when prices are high. And when you build in that factor -- what I call a moderate investment in Neptune is pretty compelling. And it's really about having a long-term reliable supply chain for a very important business. So that's how we think about it.
That's very helpful. Thank you. And just maybe to pick up on what you said there with lost opportunity of business to opportunity cost during the first quarter. Réal, you may have mentioned it earlier, but is it possible to quantify the loss in revenue due to the logistic issues in Q1 or maybe to just boil it down to one number. What would your realized price have been if you had shipped all the tonnes that you had demand for? Thank you.
Yes. Lucas as I said earlier, if it would have been a normal quarter in terms of volume and also in terms of spreads keep in mind that the spreads between the high grade hard coking coal and the lower grade materials were at record levels. So if you factor all of that in, our realization would have been comparable to historical levels.
Okay. Great. Well, I'll leave it here. Thank you very much and best of luck.
Thank you. There are no further questions registered at this time. I would now like to return the meeting back over to Mr. Lindsay. Please proceed sir.
Well, thank you all for joining us this morning. We look forward to speaking to you again in July and looking forward to having some of these valuation milestones or catalysts as you like to call them to announce in the meantime. Thanks very much all.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.