London Aug 25, 2015 (Thomson StreetEvents) -- Edited Transcript of Antofagasta PLC earnings conference call or presentation Tuesday, August 25, 2015 at 8:30:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andrew Lindsay Antofagasta plc - Director, London Office * Diego Hernandez Antofagasta plc - CEO * Ivan Arriagada Antofagasta plc - CEO, Antofagasta Minerals * Alfredo Atucha Antofagasta plc - VP, Finance & Administration and CFO ================================================================================ Conference Call Participants ================================================================================ * Ian Rossouw Barclays - Analyst * Dan Major UBS - Analyst * Alain Gabriel Morgan Stanley - Analyst * Alon Olsha Macquarie Research - Analyst * James Bell BofA Merrill Lynch - Analyst * Fraser Jamieson JPMorgan - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Andrew Lindsay, Antofagasta plc - Director, London Office [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. I'm Andrew Lindsay; I run Antofagasta's office, here in London. I'd like to welcome you to our interim results; exciting time for the industry. You're going to hear from Diego Hernandez, our Chief Executive; Ivan Arriagada, Chief Executive of the minerals division; and Alfredo Atucha, our CFO. We'll run through the presentation, and we'll take questions at the end. We've got people video conferencing and teleconferencing; there are facilities for them to dial in. And we'll look to you for questions at the end, as well. With that, I'll hand over to Diego. And enjoy the presentation. -------------------------------------------------------------------------------- Diego Hernandez, Antofagasta plc - CEO [2] -------------------------------------------------------------------------------- Thank you for your introduction, Andrew. And may I add my welcome to all of you who are here today, as well as those attending via the webcast and conference call? I would like to start by introducing Ivan, who most of you have not met before. Ivan joined the Group as CEO of our mining division in February. He spent many years at Shell, and then eight years in BHP, where he held different positions at the base metals business area, including CFO for that area; and COO for some of the assets. Before joining us, he spent a couple of years in Codelco, as CFO. Now, moving on to the presentation, I will start with a brief overview of the half year, and our progress against our strategy; before handing over to Ivan, who will give you a more detailed update on our operational performance since the start of the year, and walk you through our growth opportunities, and will speak a bit about cost management. Following this, Alfredo will discuss the financials in more detail. Then, I will close with a few words on why we believe Antofagasta remains a solid investment. Then, I will open the floor for questions. I start, as always, with our safety report. Sadly, during the first half of the year one of our contractors was involved in a fatal accident at Michilla. He was killed in a fall of ground in the underground mine. Everyone at Antofagasta extends their heartfelt condolence to his family. A thorough investigation on this accident was conducted, and administrative actions have been taken to safeguard our employees and contractors. Also, the underground mine at Michilla has now been closed, in advance of the complete mine closure at the end of the year. The Group remains committed to achieving zero fatalities, and is continually working to strengthen and deepen the safety culture at all of the operations under the Group safety and health model, which was introduced last year. One area of achievement has been our steady improvement with respect to the lost time injury frequency rate; the benchmark of our industry. I'm pleased to present a 55% reduction in this measure over the last five years, which is comparable to the best in the industry. As you well know, it has been a difficult start to the year with commodity price declining and copper down 20% since the beginning of the year, and now at six years' low. However, our shareholders will be pleased to hear that the management team is positioning the Company to take advantage of this weakness in the copper side. With our world-class operations, our resilient balance sheet, and our long-term approach to development, we are not only able to weather the weakness in the sector, but are able to take advantage of the opportunities that become available. Even in a downturn, our operating cash flow and EBITDA margins remain strong. We continue to invest through the cycle, and are currently focused on delivering Antucoya. This project has encountered some commissioning issues, but our team has developed appropriate solutions. And we expect to produce 10,000 tonnes of copper cathode this year. The construction of the Encuentro Oxides project continues on track, and we expect it to be completed by the end of next year. We are also advancing the development of the second concentrator at Centinela, and submitted the environmental impact assessment to the authorities in May, and are proceeding with permitting process, and are currently completing a review of the feasibility study. We have optimized our portfolio of assets by divesting our water division, which we sold in June for nearly $970 million. The sale strengthened our balance sheet and will allow us to focus more closely on our core activities of mining and transport. In January, we completed the acquisition of the Twin Metals project in Minnesota. And, as told last month, we announced the purchase of a 50% stake in the Zaldivar copper mines from Barrick Gold. As we continue to position ourselves in these challenging times, we invest in our assets and optimize our portfolio. However, we must be cautious and maintain our discipline. This discipline allow us to deploy our resources in opportunities that we have carefully assessed and meet our return criteria. Moreover, we must do all we can to strip out additional costs and maintain control of our operating and capital expenditures. Earlier in the year, I share with you our plan to save $167 million this year. And I am pleased to report that, so far, we have saved over $70 million, with further savings planned for later in the year. In addition, we have cut our exploration and evaluation expenditure by nearly 40%; some $37.3 million. I will give you a brief overview of the headline financials we have achieved; and Alfredo will go through them in more detail with you a bit later. The low copper price and lower-than-anticipated production has impacted our revenue, which is down 31%, and now stands at $1,786 million. Our volume in the first half of the year has been affected by protests at Los Pelambres, and the freak weather experienced in the Atacama Desert earlier in the year. However, our performance returned to normal in the second quarter of the year. And throughput at Los Pelambres and Centinela is back to pre-incident levels. EBITDA for the current period was $561.6 million, a 48.6% decrease on the comparative period in 2014, primarily reflecting the lower revenues, partly offset by lower operating costs. Our margins have slipped to 31%, but they are still stronger than the sector's average. Net earnings for our continuing operations are down significantly, reflecting the weak market and lower sales. And the interim dividend has been declared at $0.031 per share, which represents a payout ratio of 35% of net earnings. Group cash costs before by-product credits in the first half of 2015, at $1.88 per pound, were flat compared with the same period last year. But lower gold production and by-product prices pushed net cash costs 4.8% higher to $1.53 per pound. Let's talk briefly about the copper market. Clearly, the market is depressed. And although expected surplus have not materialized, the copper price has, in any event, slipped down to lows we haven't seen since 2009. For the first half of the year, the copper price averaged approximately $2.69 per pound, some 14% lower than in 2014; and now, it is trading at around $2.27 per pound. Since the beginning of the year there has been a constant stream of news on the demand and the supply side, both positive and negative. The main focus, though, as always, has been China. And I will talk about that in a minute. But on the supply side, new mines have been encountering difficulties with starting up or with their ramp ups to full production capacity; and this is what is leading the reduced expectation of a significant supply surplus this year. Estimates vary, but there seem to have already been about 0.5 million tonnes of supply disruptions. Despite all the concerns being expressed about China, we expect the market to remain tight. China is a complicated country and defies accurate forecasting. But our confidence in the copper outlook comes not just from the supply slowdown, but also from the stimulus on the demand side of the equation. The Chinese Government has commenced a number of initiatives to boost trade in their economy, which are important to the future of the country, and will also be positive for copper. They have stated that they plan to move the growth in their economy away from being led by exports and fixed-asset investments and more to it being led by increased domestic consumption. However, we feel that if this does not occur at the rate they originally intended they will supplement any anticipated shortfall by further investment stimulus. They want sustainable growth, but they also want to avoid [hard lending]. In the medium to long term, sustainable growth should be supported by the One Belt, One Road investment initiative, whereby China wants to create a modern-day silk route across Europe and Central Asia, and complement this with a Maritime Silk route. In the short term, growth can come from a variety of stimulatory activity, including the RMB70 billion investment by the State Grid in power infrastructure. And one benefit of the [weather] renminbi is that it will stimulate exports. We are aware of the current risk to demand. But in the medium to longer term, we remain confident that steady demand growth from emerging markets, particularly China, even as it's slow, combined with the current lack of commitment to investment in new mine expansions, will lead to a shortfall in supply and support the recovery in price. Most of you are familiar with our strategy. It has not changed for several years, and reflects how we view our industry as a long-term undertaking, where making decisions based on short-term change can often be counterproductive. So, just to run through it quickly again, we focus firstly on our core business, ensuring that they perform at their maximum potential. Next, we look for organic growth opportunities at our core business to enhance our performance. And lastly, we look for opportunities further afield. Beyond our normal effort on our day-to-day operations, during the first six months of this year we have also been working to complete Antucoya and expansion at Centinela concentrate. And we have also made some progress in focusing and expanding our portfolio of assets. In January, we consolidated our ownership of the Twin Metals project by purchasing Duluth Metals. This project will be important in the long-term development of the Company. And we are currently optimizing the pre-feasibility study that was completed last year, and advancing the permitting process. In June of this year, we sold our water distribution business, ADASA, to Empresas Publicas de Medellin for $967 million. This was an excellent transaction for us as we achieved a good price, while focusing our interest into our core business. This helped strengthen our balance sheet. In August, we announced the acquisition of a 50% stake in Barrick's Zaldivar mine. Zaldivar is an open pit, heap-leach copper mine located in Northern Chile, approximately 100 kilometers south of Centinela. Despite the challenging environment, we have been able to position ourselves to take advantage of the current low price environment. We have been looking for suitable acquisition opportunities for some years now, but there have been very few of a quality that we have been interested in, so we have bided our time. In Zaldivar, we have now acquired an asset both of the quality we are looking for, and at a price that we are comfortable with. We expect production will grow over the coming five years, while costs will decline. And, in the longer term, there is exploration potential that we hope will extend the mine's life, well beyond the current 14 years. I will now like to pass over to Ivan, who will give you an update on our operational performance and growth pipeline, and will also tell you a bit more about Zaldivar. Ivan? -------------------------------------------------------------------------------- Ivan Arriagada, Antofagasta plc - CEO, Antofagasta Minerals [3] -------------------------------------------------------------------------------- Thank you, Diego. And good morning to everyone. Before I present the mining division's operations review, I would like to recap some of the key points mentioned earlier, and which make us stand out in the current environment. We have a robust balance sheet, which gives us the strength to withstand adverse market conditions and the flexibility to take advantage of unique opportunities, especially in a distressed environment. We hold a large and competitive copper resource base, which we continue to expand, in some of the largest mining districts in the world, Pelambres and Centinela; and I will provide more information on those, shortly. Our assets and growth options are located in low risk jurisdictions. Our portfolio, as you know, is focused on copper with the relevant by-product content providing an added cost advantage. We're disciplined, and remain focused on operating and project cost control, and in the optimization of our portfolio. Having said that, let me review now, briefly, the results of our operations in the first half of 2015. We have had a challenging start to the year. Antucoya, which was expected to commence contributing production a few months ago, and the disruptions due to external events, as mentioned by Diego, have impacted on our operations. However, we have continued to proactively look for opportunities to increase our efficiencies, and protect our margins. In the case of Los Pelambres, half-year results were affected by the disruptions from protestors early this year, with production now having returned to normal. Pelambres net cash cost, as shown in the slide, at $1.36 per pound, were higher, due to the impact of lower production and by-product credits. Lower by-product credits reflect the impact of lower prices for gold and moly during the period. These impacts were partly offset by lower consumable costs, and a weaker local currency. It is worth mentioning that we anticipate energy costs at Pelambres will continue to come down as we have started receiving power under new power purchase agreements, which have reduced our exposure to the spot market. This year, in Northern Chile we have experienced unusual weather conditions when the Atacama Desert saw its first rainfall for decades. This caused quite a few problems in the region as roads were washed away in the mudslides which followed. Impacted by this, next in the slide, production at Centinela was 118,400 tonnes of copper, at a net cash cost of $1.67 per pound. Higher grades and recoveries partly offset the production losses we faced earlier in the year from the heavy rains. On the cost side, we were able to hold net costs at the same level as 2014, despite the lower by-product prices. Moving on to Michilla, as you all know, this is the last year of operation at Michilla. We are still in discussions about its possible sale, but, in the meantime, we're implementing a stage-closure process. The underground mine ceased production in the second quarter, and the whole operation will close at the end of this year. In the first six months, we produce 16,000 tonnes of copper at a slightly lower cost than last year of $2.25 per pound, benefiting from higher grades. Lastly, on a consolidated basis then, and as a Group, we produced 303,400 tonnes of copper at the net cash cost of $1.53 per pound. We forecast improved operating conditions for the second half of the year, and have provided full-year guidance of 665,000 tonnes of copper at the cash cost of $1.47 per pound. I will like now to move and talk a bit about our growth pipeline. Why is this important to us, despite prevailing market conditions? As we know, the current price environment is very challenging as China transitions to a new sustainable growth rate. But we believe, in the medium to long term, demand from emerging markets will continue to grow at a lower rate, but from a larger base, as urbanization and economic development continues to be sought after for the benefit of vast segments of the population. We also believe that amongst the cyclical commodities copper has been, and will remain, supply constrained. There have not been any new major discoveries, and permitting and construction periods keep getting longer. In summary, and against this context, our approach is to preserve or advance our growth options, and to prudently invest through the cycle. We don't anticipate any major capital commitment decision under our current development pipeline until the end of 2016, or earlier 2017, which we properly consider at that time. We are focused on developing low-risk projects, many of which are Brownfield expansions; and steadily progressing Greenfield projects for future development. As you can see in our portfolio roadmap, we have a number of projects at various stages of development; and I would like to give you a brief update on these. In addition, we have Zaldivar acquisition, which we expect to complete by the end of this year. Let me talk then on a few of these, more specifically. Antucoya first production is expect in the third quarter of this year, and 10,000 tonnes of copper cathodes are expected to be produced in 2015. When operating at full capacity, we expect annual production to be approximately 85,000 tonnes of fine copper per annum. Earlier in the year, we have encountered a few commissioning issues in the crushing circuits; more specifically, in the secondary and tertiary crushers. We are upgrading the motor system used in some of the material handling equipment, and improving the dust suppression system to conform to the required design criteria. Rectification work is underway, the cost of which is not expected to be significant. By the end of June, we had approximately 725,000 tonnes of crushed material on the stacked heap. And since then, we have added a further 770,000 tonnes; well exceeding 1 million tonnes of material stacked, which is an important milestone in the commissioning phase. Zaldivar. On July 30, we announced we had entered into a definitive agreement to acquire a 50% interest in the Zaldivar copper mine, and become the operator of Zaldivar. Why is this important? Zaldivar is an open pit copper leaching operation, located in northern Chile. In 2014, Zaldivar produced approximately 100,000 tonnes of copper, with a potential for higher production over the next five years as the mine plan moves into higher grade areas. We are recycling capital from a non-core activity into our core copper production mainstream. We have divested from the water business at the higher multiple valuation, and are acquiring at a low point in the copper cycle. We have acquired 50% ownership, but will become operators at Zaldivar. Zaldivar is located in a jurisdiction we know very well. The landscape on the labor relations, contractor management, and regulations is known very well for us. In terms of capital intensity, the acquisition compares favorably with a new-build cost, especially considering the lack of construction risk and the immediate copper production. This transaction is consistent with our strategy to focus on our core copper mining business, and represents a rare opportunity to acquire a substantial interest in an established, cost-competitive mining operation that generates strong cash flow, and that will immediately be accretive to our earnings and cash flow. We are excited about this opportunity, and the synergies that exist at the mine. And we will update the market on our expectations for these later, once the acquisition has been completed, which is expect to happen by the end of this calendar year. Let me move on now Centinela. The Centinela mining district has a portfolio of projects and deposits for near- and long-term development, and this will be advanced over the coming years. The first of these will be the completion of the debottlenecking project to process 105,000 tonnes of ore per day in the concentrator plant; up from 2014's level of 86,000 tonnes. This project is progressing well, and, having been commissioned, is now in ramp-up phase. Although within budget, the project is a few months behind the original schedule, due to the interruptions experienced during the heavy rain storms which occur earlier in the year, and which I have mentioned before. At the same time, in Centinela the environmental impact assessment for the second concentrator has recently been submitted to the local authorities for approval, and is progressing well. In the district there are nearly 7 billion tonnes of mineral resources. And the concentrators and the oxide plant provide optionality for how these are developed over the coming years, and decades. More specifically in Centinela, the immediate next stage of development is the Encuentro oxide project, which was approved by our Board this year. Construction is currently underway with the pre-strip effectively having been completed. This project will provide feed for Centinela's SX-EW plant, allowing it to resume full production of 100,000 tonnes per annum of copper. First production is expected to be mid 2016, with a first full year of production expecting 50,000 tonnes of copper. Importantly, Encuentro oxides acts as a pre-strip for the much larger Encuentro sulphides deposit, which lies below it, and will feed the new second concentrator at Centinela. Let me now move on to Pelambres, very briefly. Given the size of the resource base at Los Pelambres, there is significant scope to increase the plant capacity. However, the Group's focus remains, in the nearer term, on the expansion to 205,000 tonnes of ore per day. Following the protests at the mine earlier this year, we agreed that the expansion will take place using desalinated sea water. We, therefore, committed to the construction of a desalination plant as part of the expansion. The required work to prepare for this has delayed the project while an EIA baseline study is completed, which will be ready for submission next year. The pre-feasibility study CapEx estimate of $1.2 billion remains valid. The addition of a desalination plant for this expansion project will add about $400 million to the capital cost of the project. And then, let me just briefly talk about other growth opportunities which you are aware of, and just to give you an update. We continue to develop our portfolio of growth prospects, both in Chile and abroad, although we have reduced our rate of expenditure and exploration and evaluation from $93 million in the first half of last year to $56 million this year. Twin Metals represents a long-dated option, and the Group's most advanced international opportunity with a significant resource base. Earlier this year, the Group completed the acquisition of Duluth Metals, our partner in the project, consolidating the Group's ownership to 100%. The Group is currently evaluating further optimization on the pre-feasibility study that was completed in 2014. That's with respect to our pipeline. And now, let me move on to costs, very briefly; Alfredo will expand more on this. This year, we are targeting savings of $160 million. And we are pleased to report that we have achieved $74 million of this target so far, and remain well on track to complete or exceed the balance during this year. We're focusing on four key pillars for productivity improvement and cost reductions; in the first place, standardizing and improving maintenance practices across all operations; secondly, improving the productivity of service contracts; third, improving the efficiency of the corporate office with actions such as consolidating supply management and contracting for projects and exploration activities; and fourthly, improving energy efficiency in terms of both cost of supply and consumption rates. The objective is to achieve cost reductions of $300 million by 2017. In summary then, we have had a challenging start to the year. Events beyond our control have had an impact on our operations; and the depressed commodity market has impacted our financial results, as would be expected. However, we have been proactively looking for opportunities to advance our business, protect our margins, and increase our efficiency. We have also had an eventful six months realigning our business portfolio with some strategic acquisitions and disposals, which reflect the confidence we have in the long-term prospect of copper. This year, we expect to produce 665,000 tonnes of copper at a net cash cost of $1.47 per pound, which, although lower production than last year, should reflect the lower point for the near future. With that, I will pass over now to Alfredo, who will give you an update on our financial performance. -------------------------------------------------------------------------------- Alfredo Atucha, Antofagasta plc - VP, Finance & Administration and CFO [4] -------------------------------------------------------------------------------- Good morning, everybody. Firstly, I would like to look at revenue. The largest impact on revenue was, of course, the fall in the copper price. Our realized price declined by 17.5% to $2.54 per pound; and this reduced revenue by $409 million, 50% of the overall decrease. Copper production was down as well. And the impact was exaggerated by shipments being delayed by bad weather conditions, so that says we are 13,000 tonnes less than production. The overall impact was $298 million. By-product price were also lower, reducing revenue by $94 million, although this was offset by [$90 million] by higher volumes. Now, turning to costs, the top graph shows the movement in our total operating cost, which reduced by $284 million. Two-thirds of this was due to a decrease in cash operating costs, which is analyzed in the graph below. And the balance is from a reduction in non-operating costs at our operations and lower corporate exploration and evaluation costs. In the bottom graph, we see that between the first-half 2014 and 2015 the total operating cost, including TC/RCs, on a unit-cost basis, increased by $0.01 to $1.88. The weaker peso reduced costs by some $0.10. And $122 million of combining savings and lower energy and diesel price lowered cost by a further $0.18. However, these reductions were almost completely outweighed by the impact of the 13% decrease in production between the two periods. Labor costs were also some [$40 million] lower, largely reflecting the sign-in bonus paid last year. And the general inflation increased costs by $0.04. EBITDA fell 48.6% to $562 million for the first six months of the year, with the fall in revenues accounting for a decrease of [$816 million], which was partially offset by lower mining costs of $242 million, and lower exploration and evaluation costs. Although these factors led to a $532 million fall in EBITDA, the Group still has a strong EBITDA margin, relative to the sector, at 31.4%. Net earnings from continued operations for the first half were $86 million, down 71.5% compared with the first half of 2014. The impact of the fall in EBITDA was partially offset by lower corporation tax and lower minorities as profitability [dropped]. However, the Group's effective tax rate did increase from 33.2% to 39.6%, principally due to an increase in the statutory tax rate from 20% to 22.5%, and deferred tax charges that arise as the rate of Chilean corporate tax increases in future years, as a consequence of the tax reform last year. Resilient operating cash flow. Despite a decrease in revenues, the Group's operations continued to generate significant cash, $803 million (sic - see slide 27, "$808 million"), during the first six months of the year; down from [$1,170 million] last year. The balance sheet was further strengthened by the sale of the water division. And net loans increased by $169 million with the drawdown on the Antucoya facility, and a small increase in net borrowings at Los Pelambres. Capital expenditure for the period was $662 million; $126 million lower than in 2014, reflects lower CapEx for Antucoya, partially offset by extending on the construction of Encuentro Oxides. This resulted in a closing gross cash position of $3.2 billion, compared with $2.4 billion at the beginning of 2015. After accounting for debt, the net cash position was $744 million; or, on an attributable basis, we are in a net cash position of just over $1 billion. This is, of course, before the purchase of Zaldivar. In terms of CapEx, total CapEx for this year is expected to come in at $1.3 billion, although some delays in the rate of expenditure may allow us to come in slightly lower than this. Otherwise, expenditures at Antucoya are substantially complete. And the current delays will have little impact on total costs, which are expected to come in on budget. We are making a committed effort to reducing our sustaining CapEx, and expected it to come in over $80 million lower than in 2014. This reduction requires significant effort and discipline. We are also expecting to have lower development CapEx next year, once Antucoya and the expansion at Centinela are completed. And we show here the guidance that we gave at the beginning of the year, that CapEx in 2016 will be between $800 million and $950 million. This figure does not include any expenditure at Zaldivar. Now, I would like to pass you back to Diego. Thank you very much. -------------------------------------------------------------------------------- Diego Hernandez, Antofagasta plc - CEO [5] -------------------------------------------------------------------------------- Thank you, Alfredo. So, to wrap up this presentation, and to remind you of what you already know, we have a portfolio of high quality long-life assets; we are focused on developing and expanding our two world-class mining districts; and we are well positioned on the cash cost curve. We continue to generate strong operating cash flow. We remain focused on cost control, and have implemented initiatives to target cost savings at both the operational and at project level. Our portfolio for organic growth projects is strong and has recently been enhanced by the acquisition of Zaldivar. And we are prioritizing Brownfield projects and reengineering other projects to ensure we get good results from our investment. We have a strong balance sheet. And even after the Zaldivar acquisition, we expect to be only modestly in net debt. And even at this copper price, we still have good margins. Lastly, we are executing our strategy, and continue to invest through the cycle. We are steadily advancing our portfolio of projects, and are well-placed to weather the current poor market conditions and to take advantage of the upturn, when it occurs. Well, thank you for your time. And now, we will be happy to take any questions you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). -------------------------------------------------------------------------------- Ian Rossouw, Barclays - Analyst [2] -------------------------------------------------------------------------------- Ian Rossouw, Barclays. Just had a couple of questions. In the results, you saw quite a strong working capital inflow; and that's despite you actually selling less volumes than you produced. I just wanted to maybe get a bit more detail on that from Alfredo. And then, just secondly, in this environment where you're seeing a significant fall in commodity prices, EPCM contractors are obviously not as busy as they used to, a weakening of currencies. Is the guidance that CapEx is broadly unchanged from the beginning of the year, or just being conservative? Or do you actually expect there is a chance that your guidance for your projects, as well as your overall CapEx for the Group, could actually be below what you're saying there? -------------------------------------------------------------------------------- Diego Hernandez, Antofagasta plc - CEO [3] -------------------------------------------------------------------------------- Okay, let's answer the second question, first. We have Encuentro Oxides in execution, the Moly plant, and Antucoya is complete. On those two projects, we don't expect major changes. If exchange rate change a little and a weaker peso, eventually, we could take some advantage of that, but it will be minor. And peso has devalued a lot anyway. In the future, well, we don't need to take any big investment decisions until not earlier than the end of next year. Then, we will have time to look after the CapEx on this new scenario. Alfredo? -------------------------------------------------------------------------------- Alfredo Atucha, Antofagasta plc - VP, Finance & Administration and CFO [4] -------------------------------------------------------------------------------- Yes, in spite of the lower production, the cash flow and the cash inflow during this first half-year was very robust, basically, due to three factors; of course, a better position in terms of working capital, $250 million. And this combination of a couple of factors; the most important was a decrease in the debt, as consequence of the lower copper price. But also, the other is because we are starting to materialize some benefits coming from the working capital management program we have implemented in order to reduce the warehouse and [stair], and improve our account payables. So we have this benefit from the working capital side. The other, of course, is the cash inflow coming from the ADASA sale, if we have received this money. Finally, in spite of the fact that the production was lower, we have been able to reduce in $290 million the total cash cost, so also affecting positively our cash flow. -------------------------------------------------------------------------------- Ian Rossouw, Barclays - Analyst [5] -------------------------------------------------------------------------------- Sorry, just to follow up on the working capital, the improvement you've seen, obviously, now that in the second half you expect to sell more than what you produce, do you expect a further inflow in working capital in the second half? Do you feel that the inflows you've seen in the first half is sustainable? -------------------------------------------------------------------------------- Alfredo Atucha, Antofagasta plc - VP, Finance & Administration and CFO [6] -------------------------------------------------------------------------------- Yes, well, leaving out the copper price effect, we will continue with our program in order to apply more discipline in terms of the spares and other stocks. So we are not expecting to have a significant improvement during the second half. Probably, we will continue with the same program we are now implementing, but in a similar range. -------------------------------------------------------------------------------- Ian Rossouw, Barclays - Analyst [7] -------------------------------------------------------------------------------- Okay. All right, thanks. -------------------------------------------------------------------------------- Dan Major, UBS - Analyst [8] -------------------------------------------------------------------------------- Dan Major, UBS. Two questions. Firstly, on your cost guidance for full-year 2015, can you remind us on the assumptions you're using for by-product prices and the peso; and whether, if you ran spot prices for both, there would be a difference in the guidance? Second, on the market, obviously, looking at the copper price it appears that no one in China is buying any copper at the moment. Could you give us any color on what you're seeing from your customers? It seems that inventory levels and bonded warehouses have come down a little bit, premia has come up a little bit in China; whether you've got any color on what you're seeing on the ground in terms of the demand outlook for copper in the short term. Thanks -------------------------------------------------------------------------------- Diego Hernandez, Antofagasta plc - CEO [9] -------------------------------------------------------------------------------- Ivan, if you want to answer the first question. -------------------------------------------------------------------------------- Ivan Arriagada, Antofagasta plc - CEO, Antofagasta Minerals [10] -------------------------------------------------------------------------------- Yes. I think, on the cost assumptions, or the cost projections, we are -- our projections on the by-product credits is largely unchanged to what we had projected initially. So we're talking of moly and gold prices, which are close to the spot prices that we're seeing today. For the exchange rate, we are also factoring in the fact there is an expected -- or has been an expected movement in the exchange rate since the beginning of the year. So the exchange rate that we're assuming is similar to the levels that we were looking at, the end of June. I think the most important factors in the cost have to do with the input prices. So things like energy will be quite crucial in terms of being able to achieve the number that we've guided for. I think in terms of our savings, we are well on track to achieve them, both in terms of consumption rates and some of the prices that we've locked in. All in all, I think we are comfortable with the figure being something that we should be able to hit by the end of the year. -------------------------------------------------------------------------------- Diego Hernandez, Antofagasta plc - CEO [11] -------------------------------------------------------------------------------- On the market, we have not seen any change to our plan, and the commitments from our Chinese clients; it has been as planned, and no change there. Premiums has been good in China for cathodes. This year's [indices] are quite low also, so in spot indices are lower than long-term indices for this year. We expect Chinese to continue to purchase on the spot concentrates. But usually, on the last quarter of the year they stop purchasing on the spot and then we could see an increase in this year's indices on the spot. But not signs of a drop on sales. -------------------------------------------------------------------------------- Dan Major, UBS - Analyst [12] -------------------------------------------------------------------------------- Great. Thanks. Can I just quickly follow up on the costs side? Would it be fair to say that the weakness in the by-product price have been offset by the currency, in terms of your estimates versus the start of the year. And what is your expectation for gross cash cost guidance this year? -------------------------------------------------------------------------------- Ivan Arriagada, Antofagasta plc - CEO, Antofagasta Minerals [13] -------------------------------------------------------------------------------- As I mentioned before, I think we have factored into our guidance the prices for by-product credits and exchange rates that we are seeing towards the end of June are prevailing today. The offset is not exact, but, obviously, those factors do compensate one another to a certain extent. So that's in terms of our estimates for cost. -------------------------------------------------------------------------------- Dan Major, UBS - Analyst [14] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Alain Gabriel, Morgan Stanley - Analyst [15] -------------------------------------------------------------------------------- Alain Gabriel, Morgan Stanley. Two questions, if I may. One for Ivan, it's on Zaldivar. So you are expecting cash costs to come down quite a bit, going forward. What is driving the cash cost reduction? Is it only a grade improvement? Or do you factor in any cost savings? And the second question is for Alfredo, is on the balance sheet. The acquisition on Zaldivar implies that your appetite for debt, for taking on debt and pushing balance sheet has increased. How should we think about how far you're willing to push the balance sheet? And what metrics to utilize to set your strategic capital allocation? Do you look at net debt-to-EBITDA or net debt-to-equity? How should we think about that? Thanks. -------------------------------------------------------------------------------- Ivan Arriagada, Antofagasta plc - CEO, Antofagasta Minerals [16] -------------------------------------------------------------------------------- Okay, on Zaldivar, it's still a bit early days. Obviously, we will expect to complete the acquisition by the end of this calendar year. In terms of potential synergies, I think we have, and seeing, some areas that we want to fully explore. On the administrative side there are, especially on the G&A, areas where we think we can probably consolidate and, therefore, achieve some savings. I think there's also the benefit of the fact that we are well-established operators in Chile and, therefore, we know the contracting landscape. We know and have good labor relations. And, therefore, we think all of that should yield some benefit in terms of costs improvements, or cost savings. But I think we will be more explicit about those later, once we are more advanced in terms of completing that transaction. -------------------------------------------------------------------------------- Alain Gabriel, Morgan Stanley - Analyst [17] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Alfredo Atucha, Antofagasta plc - VP, Finance & Administration and CFO [18] -------------------------------------------------------------------------------- Well, first of all, I would like to highlight clearly what is our strategy in terms of our cash position. We are maintaining always, at any condition, a $1.7 billion as a cash buffer. And this is key. And we are now in a moderate debt position. Virtually here, in the half-year, we're in a net cash position as consequence of the ADASA sale. But our strategy is to maintain the Company in a prudent and moderate net debt position in order to maintain 0.5 times net debt-to-EBITDA. In terms of the Zaldivar and the future cash management and cash study, Zaldivar will be funded with our own cash. We are not, at the moment, analyzing any other possibility. We have enough cash to do it. And we would like to maintain intact our debt capacity for our growth pipeline, further growth, and other opportunities that can appear in the near future. -------------------------------------------------------------------------------- Alain Gabriel, Morgan Stanley - Analyst [19] -------------------------------------------------------------------------------- Thank you. Should we think about net debt-to-EBITDA limit of 0.5 times? Is that what you're implying? -------------------------------------------------------------------------------- Alfredo Atucha, Antofagasta plc - VP, Finance & Administration and CFO [20] -------------------------------------------------------------------------------- Sorry? -------------------------------------------------------------------------------- Alain Gabriel, Morgan Stanley - Analyst [21] -------------------------------------------------------------------------------- Should we think about the net debt-to-EBITDA limit of 0.5 times? -------------------------------------------------------------------------------- Alfredo Atucha, Antofagasta plc - VP, Finance & Administration and CFO [22] -------------------------------------------------------------------------------- If we need to, yes. -------------------------------------------------------------------------------- Alain Gabriel, Morgan Stanley - Analyst [23] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Alon Olsha, Macquarie Research - Analyst [24] -------------------------------------------------------------------------------- Alon Olsha, Macquarie. Just a couple of questions; firstly, again on Zaldivar. You've given a bit of a guidance range for the next few years, but I realize it's early days. But in terms of the project that Barrick has been looking at, specifically around improving recoveries, is that something you've looked at in much detail? And are those projects which you would now pursue as the operator? And then just a second part to that question, sustaining CapEx for Zaldivar has been pretty high in the last couple of years. Do you see any room to reduce that under your operating model? And then, just finally, across the Group grades have been declining fairly steadily since the beginning of last year, some of that is due to one-off factors, but others not so much. Going forward, could you provide a bit of an outlook on the grade profile at your two biggest assets, Pelambres and Centinela Concentrates? And have there been any changes in the mine plans, given some of the disruptions you've seen? Thanks. -------------------------------------------------------------------------------- Diego Hernandez, Antofagasta plc - CEO [25] -------------------------------------------------------------------------------- Well, first, the disruptions, no, it's small disruptions and doesn't change our mine plans. Grades are -- the trend of grades is to fall, like all the industry. We are not worse than the average industry related to the grades' decrease. And the grades on the next five years are not too different to what we have now, going down slowly. In Zaldivar, they have a small project to treat the finds, and that should go ahead. It's advanced, and we don't intend to stop that. And they have been working on recoveries, but we don't have enough information there to see how we can improve the recovery. Certainly, it's something that we will be looking as soon as possible, when we really take over. -------------------------------------------------------------------------------- Alon Olsha, Macquarie Research - Analyst [26] -------------------------------------------------------------------------------- And then, just on the sustaining CapEx number at Zaldivar? -------------------------------------------------------------------------------- Ivan Arriagada, Antofagasta plc - CEO, Antofagasta Minerals [27] -------------------------------------------------------------------------------- Yes, I think what we've -- in looking at Zaldivar, I think one of the positive features has been that the -- I would say, especially the plant is actually in quite good maintenance condition. Therefore, sustaining CapEx is something that we will be looking into, because we believe there might be some opportunities there. -------------------------------------------------------------------------------- James Bell, BofA Merrill Lynch - Analyst [28] -------------------------------------------------------------------------------- James Bell, Bank of America Merrill Lynch. Just on the development CapEx budget for next year, the $500 million to $650 million, do you see that as being at this copper price? Or would you have to see a recovery in copper price to go ahead with that budget? And then, I just wondered if you'd comment around provisional pricing. Because, obviously, we saw a large increase with the decrease in copper prices this half, and what your view is on the second half in terms of that. -------------------------------------------------------------------------------- Diego Hernandez, Antofagasta plc - CEO [29] -------------------------------------------------------------------------------- Provisional pricing, I think that the price has been going down, but slowly. Then, every month we change the -- we include the effect of the provisional pricing, and we don't expect major changes month by month. Of course, if we will compare December 2014 with December 2015, we will have an effect on provisional pricing. What was the other question? -------------------------------------------------------------------------------- James Bell, BofA Merrill Lynch - Analyst [30] -------------------------------------------------------------------------------- It was just on your development CapEx budget for next year. So you've got $500 million to $650 million, would that be -- if copper prices stayed flat, would that remain at that level? Or do you think there'd be a chance for some savings there in terms of development CapEx? -------------------------------------------------------------------------------- Alfredo Atucha, Antofagasta plc - VP, Finance & Administration and CFO [31] -------------------------------------------------------------------------------- Basically, the CapEx involved for the next year is related to finalize and complete the Encuentro Oxides project, currently in execution; and the construction of the Moly plant. Of course, given the circumstances, we are usually and continuously reviewing these figures. However, we need to complete this project; Encuentro Oxides is key for getting our production schemes. Perhaps, we can review the execution of the Moly plant. But this is a matter to be discussed, depending on the evolution of the market conditions. -------------------------------------------------------------------------------- Diego Hernandez, Antofagasta plc - CEO [32] -------------------------------------------------------------------------------- But we don't expect major change on those projects, unless really the exchange rates affect. And we don't expect a further exchange rate change in Chile now. It's at around -- it reached CLP700 per $1, and we don't see that going further. -------------------------------------------------------------------------------- James Bell, BofA Merrill Lynch - Analyst [33] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Diego Hernandez, Antofagasta plc - CEO [34] -------------------------------------------------------------------------------- Do we have questions on the webcast? -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan. -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [36] -------------------------------------------------------------------------------- A couple of questions; one for Alfredo, on the balance sheet. It doesn't look like you've paid any dividends to the minority partners at any of the operating companies, and I think that's the first time that's happened since early 2009. Just wondering if you could explain the rationale for that. And is that a timing issue, i.e., something we should expect to reverse in the second half, or is that a permanent difference? And then, Zaldivar, I know there's been lots of questions about it. You seem to imply, beyond the extension options around the sulfide, there are expansion options over the next 10 to 15 years in the oxides. Is that the correct interpretation? And, if it is, to what extent do you see those opportunities there? I believe that Zaldivar has been operating below its plant throughput capacity, for example. Thanks. -------------------------------------------------------------------------------- Alfredo Atucha, Antofagasta plc - VP, Finance & Administration and CFO [37] -------------------------------------------------------------------------------- On the dividend, we didn't distribute dividends because of the uncertainty on copper price. And you know, companies like Pelambres, when price dropped then -- and we need to correct the finalization of sales, that could [hit] a lot. Then, we were conservative there. And, of course, we will be distributing dividend to minorities, depending on how the current situation evolves. On the Zaldivar [side], we cannot answer those questions because we don't have enough information. The sulfides underneath, the oxides and the leachable sulfides on the body need to be drilled. We need more information. We know that there is -- the [body] continues below, but we need to check that. There is not enough information really to give an answer. This process will be finalized by the end of the year, and it's then when we will take over and we will start running that operation. Then, it's early days, and whatever we will say now it's just speculative. -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [38] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Alfredo Atucha, Antofagasta plc - VP, Finance & Administration and CFO [39] -------------------------------------------------------------------------------- And, by the way, we haven't include that on -- the price that we have paid considers the current mine plan; we haven't included any blue sky on that. -------------------------------------------------------------------------------- Fraser Jamieson, JPMorgan - Analyst [40] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- We have no further questions on the phone lines. -------------------------------------------------------------------------------- Diego Hernandez, Antofagasta plc - CEO [42] -------------------------------------------------------------------------------- Okay, that's it. Then, thank you for your time. And now, we will just be looking after the market, what happens. Thank you. Thank you for coming. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
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