VANCOUVER Jul 31, 2015 (Thomson StreetEvents) -- Edited Transcript of First Quantum Minerals Ltd earnings conference call or presentation Thursday, July 30, 2015 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Clive Newall First Quantum Minerals Ltd. - President * Juliet Wall First Quantum Minerals Ltd. - General Manager, Finance * Philip Pascall First Quantum Minerals Ltd. - Chairman, CEO * John Gregory First Quantum Minerals Ltd. - Group Consulting Mining Engineer ================================================================================ Conference Call Participants ================================================================================ * Alain Gabriel Morgan Stanley - Analyst * Matt Murphy UBS - Analyst * Ralph Profiti Credit Suisse - Analyst * Ian Rossouw Barclays Capital - Analyst * Michael Flitton Citigroup - Analyst * Alex Terentiew Raymond James Financial Services - Analyst * Jean-Baptiste Devevey Exane - Analyst * Oscar Cabrera BofA Merrill Lynch - Analyst * Greg Barnes TD Securities - Analyst * Frazier Phillips RBC Capital Markets - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, thank you very much for standing by and welcome to the First Quantum Minerals Second-Quarter 2015 Results Conference Call. During this presentation, all participants are in a listen-only mode. And afterwards, we will conduct a question and answer session. (Operator Instructions). As a reminder, today's conference is being recorded on Thursday, July 30, 2015. I would now like to turn the call over to Mr. Clive Newall, President. Please go ahead, Mr. Newall. -------------------------------------------------------------------------------- Clive Newall, First Quantum Minerals Ltd. - President [2] -------------------------------------------------------------------------------- Thank you, operator and thanks everyone for joining us today. Let me first introduce our team. With us today we have our Chairman and CEO, Philip Pascall; Director of Projects, Zenon Wozniak; and John Gregory, Group Consulting Mining Engineer. From Finance we have Hannes Meyer, CFO; Juliet Wall, General Manager Finance; and Lee Gutcher, Acting Group Reporting Controller. As usual, following a few housekeeping items and some opening comments, Juliet will go through the financial results which were published yesterday after the close of market. After that, we will open the lines to take your questions. A reminder that the presentation which accompanies this conference call is available on our website, www.first-quantum.com, and can be accessed either on the Events section or on the Q2 2015 Results Conference Call button under the News section on the homepage. Before we begin, I must note that over the course of this conference call we'll be making several forward-looking statements and as such I encourage you to note the risk factors particular to our company which are detailed in our annual information form and available on our website and on SEDAR at www.SEDAR.com. Now onto a brief review of the quarter and the past few weeks in July. As you recall, we took the opportunity in mid-May to strengthen the Company's financial position with an equity issue. Our decision to do so was based on the belief that the copper market will improve in the midterm, but not before we go through more periods of weak crisis, much like we're experiencing now. So, we wanted to be in a position where we can constantly do what we do best, that is develop projects efficiently, so the Company will be well-positioned to benefit fully when the market conditions improve. Upon receipt, $1 billion of the proceeds was used to pay down senior debt facility. We're very pleased with the outcome. There was good support from several long-term shareholders and we gained some new ones as well. In addition, we've reached an agreement for early settlement of the ENRC promissory note for a consideration of $300 million, of which $215 million was received in July. The remaining $85 million, in either cash or assets, will be settled in October. So, that was the good news. But recently we've had some less positive news flow, starting with the filing of the three technical reports that caused quite a bit of consternation. It's important that we explain the course of events that led to this. The filing of the technical reports was a requirement imposed by the British Columbia Securities Commission in relation to our equity issue. Our team's put in a tremendous amount of work under tight deadlines to update these documents from the [AIS] that was issued in March of this year to comply with the requirements. On the disclosure issue, we were of the view that the documents contained no new material information, as they were just a restatement of reserves and resources less depletion. And since putting out a news release is a signal of materiality to the market, one was not necessary. However, not uncommon under these kinds of demanding situations, some typos and unintended inconsistencies were made which alarmed the market. So, we made sure we issued as complete as possible a clarification, a full review and verification of the documents conducted by several team members worldwide. While this took some time for us to formally address the issues, we felt it was the proper course of action. We hope that the subsequent release has answered your questions, but if not, as I mentioned at the start of the call, John Gregory, our Group Consulting Mining Engineer, is on this call and available to address any remaining ones. Earlier in the week, we reported on the reduction in power supplies at Kansanshi and Sentinel on account of low water levels in the hydro reservoirs in Zambia. It is a disappointing development, not only for the mines, but also for the country. As a result, Kansanshi is operating at reducing capacity, while Sentinel's process plant has been closed since July 27, 2015. Various options to alleviate the effects on production are being evaluated. Yesterday, an agreement was reached with Zesco to redirect the majority of Sentinel's power allocation to enable Kansanshi to operate at close to full capacity, while delaying the ramp-up at Sentinel. The duration of this supply reduction and its impact on production is not currently known. The situation has brought into focus the need to expedite the completion of some of Zesco's new power generation projects, which are currently scheduled to come into production in the first half of 2016. Turning to the First Quantum projects, as we reported in the release, the excellent performance at the smelter continued through the quarter to the point where commercial production was declared on July 1st. During Q2, it's operated at brief periods of over 100% (inaudible) capacity and is typically running around 85% throughput. We have included a number of photos of the smelter and anode stockpile on the website. What you should be aware of is that the stockpile was all sold in July. Fair to say that this project has truly been successful. At Sentinel, Train One has achieved steady state operation and Train Two is almost fully tested. The production ramp-up has been impacted by [soft options], transitional material containing higher proportionate [vines], including carbon, which is deleterious to flotation. Until a more permanent solution is decided on, we'll be using existing [cyclones] to discard some of this finer material. This has improved performance. As I mentioned earlier though, we are now looking at swapping power from Sentinel to Kansanshi, which could slow Sentinel's ramp-up. We will take the opportunity to accelerate mine development, the installation of the second primary crusher and completion and commissioning of Train Two. At the nearby Enterprise project, process plant construction is approximately 55% complete and a Q4 completion [initiative] is planned. Cobre Panama continues to move ahead strongly and under good control with the workforce now increased to around 3,700 people. The detailed design of the process plant is approximately 70% complete and all of the designs are essentially 100% complete. We continue to improve our in-country knowledge and organization which has resulted in our construction progress accelerating over the last quarter. To summarize the progress in various areas, at the port, the material off-loading facility is complete and the export (inaudible) for concentrated export and coal import are commencing. The power station structural [steeler] action is in progress and mechanical installation has commenced. At the tailing dam, we're working in [power levels] on constructing both the eastern and northern tailings dam embankments, which are now approximately 30% complete. At the process plant, the earthworks at the milling and stockpile areas are complete and we're busy in the areas of floatation, reagents, (inaudible) and secondary crushing. Overall, the process plant at earthworks are approximately 80% complete. Concrete works, [statewide], at 32% complete, with 75,000 cubic meters of concrete poured to date. Structural steel erection is advancing with 2,500 tonnes erected, representing 7% of the project total. We also have been updating our capital cost estimates for the project. The designs are completed and we're pleased to say the budget for the Cobre Panama project remains intact. As we mentioned in our Q1 disclosure and conference call, we have made workforce and salary reductions across all operations and offices. I can assure you that the focus on cash conservation and cost improvement remains top priority for the entire company. In the event of continued and protracted weakened price environment, we do have options available to us to protect the balance sheet further. Already we have identified how we can defer a significant amount out of next year's Cobre Panama budget without affecting its construction schedule. As you know, the project is now the largest expenditure in our capital program. So, that would reduce our cash outlay quite considerably. Also, if necessary, we can defer the expansion of the sulfide circuit at Kansanshi, that's the S2.5 expansion, for a year or so without impacting on that mine's long-term production profile. So, with that I'll now ask Juliet to take us through the financial review. -------------------------------------------------------------------------------- Juliet Wall, First Quantum Minerals Ltd. - General Manager, Finance [3] -------------------------------------------------------------------------------- Thanks, Clive. Good day everyone. Turning to the first slide, Q2 2015 highlights which is Slide 18 of the presentation. So, again Q1 2015 copper production of 104,000 tonnes, increased 8,000 tonnes driven by higher Kansanshi and pre-commercial Sentinel production. Compared to Q2 [2015], copper production decreased by 4,000 tonnes over Q2 2014, reflecting planned reductions at Kansanshi in order to match acid consumption with the current smelter production. Production at Guelb Moghrein increased by 3,000 tonnes over the same quarter last year, as a result of the new SAG mills commissioned in the second half of 2014 and Sentinel contributed 6,000 tonnes pre-commercial production in the quarter. Similarly, nickel production was below Q2 2014, but significantly above Q1 2015, as the ramp-up continues to progress well at Ravensthorpe. In line with this trend, nickel production at Ravensthorpe is expected to increase throughout the second half of 2015. With the exception of Sentinel, group production guidance for all major metals remains unchanged. Copper C1 costs of $1.22 per pound was $0.23 lower than Q2 2014, as focus on cost reduction and efficiencies across the group, together with favorable exchange rates, resulted in reduced mining and processing costs. Accordingly, guidance for copper C1 costs has been reduced to between $1.25 and $1.40 a pound. Nickel C1 costs of $4.68 a pound, although higher than Q2 2014, [in back] of lower production, was lower than planned. So, consequently, nickel C1 cost guidance has been reduced to between $4.75 and $5.00 per pound. Comparative EBITDA of $161 million for the quarter was $241 million below the corresponding quarter last year, reflecting lower realized metal prices, lower sales volumes at Kansanshi and Ravensthorpe, and the $49 million impact from the increased Zambian mineral royalty rate of 20% during this quarter. This was partly offset by group-wide cost saving initiatives along with the benefit of favorable exchange rates. Net debt is $720 million lower than Q1 2015, following the equity issuance in the quarter. So, moving onto the next slide, production, Slide 19. As shown, you'll see by the graph at the side, copper production was 8% higher than Q1 2015, but increased production at Kansanshi is [active] available through a smelter increase, as well as the larger contribution of pre-commercial production from Sentinel. Against Q2 2014, production was 4% lower, reflecting planned reductions at Kansanshi to match added consumption with the current smelter production. And as previously noted, production at Guelb Moghrein was 38% higher than Q2 2014, with increased throughput following the SAG mill commissioning in July 2014. The smelter produced almost 190,000 tonnes of low cost acid as a byproduct in the quarter, which replaced higher cost external acid in Kansanshi's [offsite mix] circuit. Nickel production for Q2 2015 of 9,000 tonnes was below Q2 2014, due to reduced capacity at Ravensthorpe following the atmospheric leach tank failure in mid-December. However, nickel production was significantly above Q1 [2015] as the ramp-up continues to progress well in the quarter. Ravensthorpe atmospheric leach circuit recommissioning was announced on the 22nd of July and production is already demonstrating higher levels, which is expected to continue throughout the second half of the year. Gold production was higher than Q1 2015 due to higher throughput at Kansanshi and higher throughput and recoveries at Guelb Moghrein. So, moving onto the next slide which is on C1 costs, Slide 20. Overall, group copper C1 costs of $1.22 per pound was $0.23 below Q2 2014 with a focus on cost reduction and efficiencies as well as favorable exchange rates, more than compensating for the impact of lower copper production. Specifically, Kansanshi copper C1 costs reduced $0.33 against Q2 2014, due to the benefits of low-cost acid produced by the Kansanshi smelter, along with lower fuel costs and cost-saving initiatives. Guelb Moghrein achieved lower C1 costs against Q2 2014 reflecting fuel savings and ongoing cost reductions and optimization initiatives. So, now looking at nickel C1 costs. Group nickel C1 cost of $4.68 per pound was above Q2 2014. The Ravensthorpe nickel C1 costs were $0.44 higher than Q2 2014, largely due to the impact of lower production on a fixed cost base. Cash costs are expected to normalize once the atmospheric leach circuit is recommissioned. Kevitsa nickel C1 cost was $0.59 higher than Q2 2014, due to the impact of lower production, partially offset by reduced mining and energy costs and lower TCRCs from updated contract terms. Going onto the next slide which is Slide [21], financial overview. Gross profit of $54 million for the quarter was $238 million lower than Q2 2014, namely due to lower revenue from lower metal prices and sales volumes, as well as the impact of the higher Zambian royalty. With the increase in the royalty rates at 20% for the first half of 2015, royalty payments were $49 million higher than this would have been having used last year's rates. So, the planned reduction of royalty rates to 9%, with effect from July 1, gross profits would have been $38 million higher from this quarter. Excluding royalties, cash costs were lower than Q2 2014 reflecting reduced fuel prices and cost reduction initiatives across the group. [Against] Q1 2015, gross profits were $28 million higher despite lower revenues and sales volumes, due to the benefit of cost reduction initiatives throughout the group. Moving onto the next slide, the waterfall slide on Slide 22, gross profits. The waterfall chart sets up the group's gross profits for Q2 2015 compared to the previous quarter, Q1. Gross profit was higher than the previous quarter, due to lower cash costs across operations and a higher realized copper price during that quarter. Lower cash costs included lower acid costs at Kansanshi, processing efficiencies at Guelb Moghrein, as well as the benefits of other initiatives throughout the group. Moving onto Slide 23 on Zambian developments. As previously communicated, the Zambian government is in the process of passing into Parliament changes for the royalty and tax rates, which is to be effective from July 1, 2015. The royalty rates will reduce to 9% and corporate tax reinstated to 30%, with variable profits tax of up to 15%. Had the 9% royalty been in effect for the quarter, mineral royalties would have been $38 million lower, gross profit and EBITDA $38 million higher. The reintroduction of corporate tax will require a re-evaluation of the Company's deferred tax [balances] in Zambia, which will result in the reversal of an income tax credit through the statement of earnings which arose in Q4 2014 as a consequence of the reduction in corporate tax to 0%. In (inaudible) of the back balance related to Kansanshi is $247 million at the end of the quarter, all of which has been recoverable. As previously announced, the Zambian power company, Zesco, has imposed power reductions from July 25th across all mining operations in the northwestern province. As a result, Kansanshi has been operating at reduced capacity and the Sentinel process plant has been closed because the power limits applied to Sentinel is not sufficient to produce a suitable quality of concentrate. An agreement has been reached to redirect the majority of Sentinel's power allocation to Kansanshi to allow it to operate [at acceptable] capacity. Going on to Slide 24, on net debt. The group ended the quarter in a net debt position of just under $5.2 billion, a reduction of $720 million from the beginning of the quarter following the equity issue proceeds of $1.1 billion in the quarter, of which $1 billion is used to pay down senior debt facility. Capital expenditure of $393 million in the quarter included $145 million at Cobre Panama; $104 million at Trident, including pre-commercial spend and stripping; and $103 million at Kansanshi, including $24 million capitalized stripping and $28 million smelter. At the end of the quarter, the Company had just over $1.5 billion committed undrawn facilities and $364 million of cash and cash equivalent, including $75 million of restricted cash. Moving onto the last slide on market guidance. As previously mentioned, full-year production guidance, excluding Sentinel, is unchanged for all major metals. As Clive has noted, production ramp-up at Sentinel has been impacted by softer transitional material. And part of the recent Zambian power reduction was expected to produce between 80,000 to 100,000 tonnes of copper for the year. In respect to the current power reductions in Zambia, and with Sentinel's processing plant shut down, as power allocation is transferred to Kansanshi, guidance for Sentinel's production will be under review. We are currently unable to provide estimates of the length of the supply reduction or its full impact. Full-year guidance for C1 cost has been reduced to between $1.25 and $1.40 per pound for copper and between $4.75 and $5.00 per pound for nickel. CapEx spend guidance for 2015 is unchanged at approximately $1.4 billion, excluding capitalized interest and any pre-commercial production costs at Sentinel and Kansanshi smelter. The CapEx guidance includes approximately $600 million for Cobre Panama and $210 million for Trident, including Enterprise. Other projects spend include approximately $100 million on smelter and $40 million on [power lines]. In addition, guidance includes approximately $260 million capitalized stripping for the group. Thank you. Now I'll hand it back over to Clive. -------------------------------------------------------------------------------- Clive Newall, First Quantum Minerals Ltd. - President [4] -------------------------------------------------------------------------------- Thank you, Juliet. Operator, could you please now open the lines for questions? Could I ask everybody to limit their questions to two per person, so we can get as many questions in as possible? Thanks very much. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you, sir. (Operator instructions) Alain Gabriel, Morgan Stanley. -------------------------------------------------------------------------------- Alain Gabriel, Morgan Stanley - Analyst [2] -------------------------------------------------------------------------------- Just two questions, I'll take the full allowance. The first question is on Sentinel, how should we think about the ramp-up going forward? So, basically your guidance (inaudible) between 80,000 and 100,000 tonnes this year is I assume will be close to single digits thousand tonnes for 2015? And [give us an idea of] how should we think into volumes for 2016? A second question is on the (inaudible) mix. Now that you have decided to shut down the plant at Sentinel, and as I understand you had to have a certain mix between Kansanshi concentrate and Sentinel concentrate. How are you able to operate the smelter with only one type of concentrate? -------------------------------------------------------------------------------- Clive Newall, First Quantum Minerals Ltd. - President [3] -------------------------------------------------------------------------------- I don't think we're in a position to give any new guidance for Sentinel at this point, Alain. This has all happened in a very short space of time. In fact, it's a moving target at the moment. There are events happening all the time, right up until last night. We can't give you guidance just yet. Philip, did you want to talk about the smelter and the concentrate? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [4] -------------------------------------------------------------------------------- So, I didn't get the name. -------------------------------------------------------------------------------- Alain Gabriel, Morgan Stanley - Analyst [5] -------------------------------------------------------------------------------- This is Alain Gabrial from Morgan Stanley. -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [6] -------------------------------------------------------------------------------- Alain, we've been running with about 10% feed to the smelter. It's very evident that we can run with feed that's totally that of Kansanshi. And some of the modifications in the front end to clean out carbon on Sentinel, [was referred to] by Clive, is actually aimed at insuring that we can run it with a larger proportion of Sentinel feed. And that work is underway now and will take place over the next month or so. But in the meantime, they're actually quite happy to have less feed and indeed no feed from Sentinel. So, that mix is not a problem. I think perhaps the greater question is the availability of a sufficient amount in total of concentrate going forward and we are very aware that if we don't bring Sentinel, we don't supply material from Sentinel to a certain degree for the smelter then it will have to run at somewhat less than its full throughput, which is what we're keen to do. And I think when Clive says that's an unknown, we can, we believe, juggle back and forth between Kansanshi and Sentinel in terms of the use of power. And we are expecting to get the power lines installed in August, September so that we can run both trains. And we'll seek a concession from the government then to have, power will be a reduced amount of what we would have had to have so that we can run Sentinel. Whether that's going to be possible or not we're not sure. So, the answer to your question is we can run with only Kansanshi, but we would like, not now but by September, to have more in total of concentrate available. And as for time that you asked, we don't know. It relates to water reservoirs. The rainfall starts in December. There is unlikely to be any significant impact I would think for a month or two after that. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Matt Murphy, UBS. -------------------------------------------------------------------------------- Matt Murphy, UBS - Analyst [8] -------------------------------------------------------------------------------- Wondering if you can provide some more details as well on Sentinel regarding the [vines] that you mentioned in the transitional ore. I'm wondering what your confidence is that this is just a transitional ore problem or is if it could be more extensive? And how confident you are that you can treat ore with vines, [is that] a higher cost? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [9] -------------------------------------------------------------------------------- We've always known that there would be carbon in the ore. And that it would produce some vines in the concentrate. And there is a facility in the plant to remove that, which it does successfully. This transition ore runs at a considerably higher level of vines. And what we will do is remove it at the front end. The first part of that work will be completed in about two weeks and the rest of it in about six or seven week's time. We had [trialed that] because it was possible to operate the plant with a feed which effectively you're taking it out because we were taking the overflow from the [segment] out of the system. And it achieved the performance that we were looking for. At the [retrofit], the capacity to be able to do that at the front end is when we have to move with. So, I think in answer to your question, we are confident that we can take it out because we have trialed it to do that and in the longer term, with the harder ores where we know the carbon content, it lies on the top of the ore body, is considerably less in proportion. We're quite confident that the concentrate [decline] circuit at the end will be all that we need to run. And we probably stand down the content (inaudible) at that stage. -------------------------------------------------------------------------------- Matt Murphy, UBS - Analyst [10] -------------------------------------------------------------------------------- And just secondly, if I may, on power. I'm just wondering if you can give any thoughts on whether there's any potential quick fixes in this situation in terms of Zambia maybe being able to import power or supply coming on quicker than expected? Or is this more likely to be something that drags on and maybe uncertainty remains in 2016 depending on how the rainy season goes? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [11] -------------------------------------------------------------------------------- Zambia has tended to export power. And it's real hydroelectric really. But there are other sources of power coming on stream in Zambia over the next six months or so. And certainly Zesco and the government are pushing to have that extra power available. We have been negotiating with them on the capacity to import power, particularly during the off peak periods in most of the southern African grid. Because Zambia's power source is hydroelectric it has that unique capability of storing power, effectively. Because you can use power when it's available and leave stored the water in the reservoir, which are the lakes. But that discussion and those negotiations really only commenced in the last couple of days. And we know that they conduct it in a sort of a government to government utility basis. And we don't really get any very clear answers at the moment. But we have actually been lobbying through a quite different source which we think will probably result in us being able to acquire some power. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Ralph Profiti, Credit Suisse. -------------------------------------------------------------------------------- Ralph Profiti, Credit Suisse - Analyst [13] -------------------------------------------------------------------------------- My question is with respect to smelter outperformance and power management and how that's impacting the acid balance. By my estimates, First Quantum is long in sulfuric acid as early as next quarter. Is there a market for this material, either in-country or for export as a potential source of funds? Or is First Quantum going to find themselves in an acid balance situation for the foreseeable future regardless of power management? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [14] -------------------------------------------------------------------------------- Actually, at the moment we produce about 2,500 tonnes of acid a day. That compares with historical situation where we used manufacture from sulfur and [by power], acid, in a quantity of about 1,500 tonnes a day. It's by virtue of having more acid that we can treat material that was really previously designated as mixed. And what we've been able to do is reclassify ore types so that we can get better recoveries from different material. And that's an ongoing program. And indeed it was actually, we'd be very happy to have a greater amount and any amount would be useful up to about 3,500 to 4,000 tonnes a day. There has been an increasing stock of acid at other smelters because we haven't been taking any off them in the last couple of months. But we do envisage that that prospect exists, and in fact, we're encouraging [our guys] at Kansanshi to find a way to assist them because we could use it, but also if they don't get rid of it, then they have to curtail the throughputs of those smelters. So, we'll work with that. -------------------------------------------------------------------------------- Ralph Profiti, Credit Suisse - Analyst [15] -------------------------------------------------------------------------------- And Clive, if I could ask a follow up? How close are you to finalizing this deal with Franco Nevada? The MD&E talks about revised terms and the catch up payment actually came down quarter-over-quarter. Perhaps you can help me reconcile that. -------------------------------------------------------------------------------- Clive Newall, First Quantum Minerals Ltd. - President [16] -------------------------------------------------------------------------------- Do you want to answer that, Phil? I think you had the most recent discussion with (multiple speakers). -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [17] -------------------------------------------------------------------------------- The clear answer there is its essentially in negotiation, to do with the flexibility that we can have in the operation of Cobre Panama and its financial instruments. Which isn't usual, I think, in Franco Nevada's arrangements because they're often dealing with a start-up goal project as opposed to a large funded [proper] project. But they have always been keen to protect themselves over the longer term because that's the nature of the relationship they have with those that they fund. And it does go on for a long term. So, they seek to cover all bases. As I understand at the moment, and I'm not involved day-to-day in the discussions, but there is a single cause where there is a fair amount of cooperation on it to find a practical way. It just relates to how you can enact or go through transactions in Panama with its slightly different procedures when you get into certain situations. And there is now currently a solution proposed and we just have to resolve that. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Ian Rossouw, Barclays. -------------------------------------------------------------------------------- Ian Rossouw, Barclays Capital - Analyst [19] -------------------------------------------------------------------------------- Just a couple of questions from me. Just within the statement you were saying that you produced 47,000 tonnes of anodes from smelting 158,000 tonnes of concentrate. Even assuming 100% recovery and a generous 25% [congrate], it seems that the anodes are a lot more than what you calculate. Were these anodes [offset] or was it just additional anodes produced? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [20] -------------------------------------------------------------------------------- I don't know that answer, Clive. -------------------------------------------------------------------------------- Clive Newall, First Quantum Minerals Ltd. - President [21] -------------------------------------------------------------------------------- (multiple speakers) We'll have to find out for you, Ian, I'm afraid. -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [22] -------------------------------------------------------------------------------- (multiple speakers) been able develop smelters that could produce extra copper from what was in the concentrate. -------------------------------------------------------------------------------- Ian Rossouw, Barclays Capital - Analyst [23] -------------------------------------------------------------------------------- And then just on Cobre Panama, you've mentioned just in the segment earlier that you're sort of looking at rates to optimize the CapEx [bill]. Would it be possible to sort of quantify how much reduction you can do on what the sort of indications you've given previously for next year in terms of CapEx? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [24] -------------------------------------------------------------------------------- Both for the year and the total value of the project. (inaudible) I think, I'll just start by saying we've been tracking very well. And if I gave you some idea of its flavors to why, we acquired equipment, for example, [that Juliet worked] and indeed the pre-stripping. In time we will buy mining equipment, but, that'll do our mining. In the original estimates and the way that the project was established you'll recall, there were a whole series of contracts that would undertake that work. If one buys the capital equipment, then clearly the cost of operating it, it isn't quite the same as it would be if you had to go and get someone separately to do it. And effectively, because they would then bring equipment to the place, there's a duplication of equipment that's involved. In this instance, we're actually acquiring equipment and doing the work. And the [effect] that one sees in the reduction in, a slight reduction in the cost per cubic meter or whatever it is. And quite often that's clearly a [consion] of productivity, which has been pretty good. It also means that as we go through the project, we actually have quite a lot of the equipment and mining capability for the pre-strip, without our own large mining trucks. And indeed, the original schedule had large mining trucks coming in quite a lot earlier. And that's neither necessary nor prudent because when we've got to do quite a lot of preparatory work for which you already have the equipment. It is also not really feasible because the first sources of power to operate our electric shovels will have to come from the power line that will be running in from the grid. Ultimately as a source of exporting power. And that's not likely to be available until very late 2016, if then. I don't know if you've got a date or not. So clearly, what we didn't want to have is the equipment that makes demands of large power shovels until around then, otherwise we can't use it. And we'll bring it on in smaller quantities. We also have to buy less of it because we will have, we already have, purchased a lot of that mining piece. So, it's an example of some areas of savings, a combination of productivity and equipment that gets deferred because we don't need it and less of it. But there's also, I think, an element at the moment that we see slightly better prices in what we [look forward] to purchase. So, it's not just that we'll spend less next year, but that the total capital costs will be less. -------------------------------------------------------------------------------- Ian Rossouw, Barclays Capital - Analyst [25] -------------------------------------------------------------------------------- Any indication of what that might be, at what level? I think Juliet had previously said it at $1.2 billion. -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [26] -------------------------------------------------------------------------------- There are two different figures. The capital expenditure for next year actually we think will be less than $1 billion, and probably more in the region of $800 million to $900 million. And a lot of that has to do with that fleet and a couple of other [native] items being purchased. Other than starting up with (inaudible) flat out finishing up the power station, most of which we own and installing native parts or pieces of equipment like mills and the like which, again, we already own. So, they're paid for. So, the rate of progress is sort of rapid as it's possible to be, but we just have to finesse that. One of the areas that we found out of Sentinel that is of interest is that building and commissioning the secondary crusher after the rest of the plant is actually quite practical and sensible because it really is impossible in the early stages (inaudible). And there's simply no point in having it all sitting there. So, there'll be items of that sort too. -------------------------------------------------------------------------------- Clive Newall, First Quantum Minerals Ltd. - President [27] -------------------------------------------------------------------------------- On that quickly, with the figure that Philip mentioned that was less than $1 billion, I think that's probably about a $400 million reduction over the forecast in 2016. But the thorough explanation that Philip gave, we continue to look at those savings because there are numerous opportunities as we go forward. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Michael Flitton, Citigroup. -------------------------------------------------------------------------------- Michael Flitton, Citigroup - Analyst [29] -------------------------------------------------------------------------------- Just had a couple, the first one being around the cash cost guidance. You decreased that to $1.25 to $1.40. But you have mentioned that that does assume some post-commercial production at Sentinel. I was wondering if you could just give a bit more detail on if we don't see anything come through at Sentinel or we see some very minimal numbers come out of there, what does that do to the range in those cash costs or are you just lucky to be at the top end as opposed to the low end? Secondly, around just Kevitsa, obviously performance is a little bit weak there in terms of [grades] and recoveries. Just to get a sense of how (inaudible) these problems are or whether it was just a problem for the quarter. -------------------------------------------------------------------------------- Juliet Wall, First Quantum Minerals Ltd. - General Manager, Finance [30] -------------------------------------------------------------------------------- Just on the c-cost guidance, I think we put a little footnote at the bottom of the last slide that it doesn't materially impact guidance if you exclude Sentinel commercial production. It probably would bring it down about $0.04 or so, possibly. But it doesn't have a significant impact. -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [31] -------------------------------------------------------------------------------- One question earlier on Kevitsa, I don't think we gave you it, did we? John could probably mention it. The original mining there had a first phase pit that was small and in [grave] material. And then there was a large cutback for the second phase. We only started to get into ore in the recent past and John will have the figure. And it was lower grade and that, we anticipate it will start coming up. But John can give you the mining. -------------------------------------------------------------------------------- John Gregory, First Quantum Minerals Ltd. - Group Consulting Mining Engineer [32] -------------------------------------------------------------------------------- In essence, Kevitsa, the cutback commenced in earnest earlier on in this year. We're bringing the cutbacks to down as very sustainable, but it's a reasonably fast rate. We have intersected these zones that we knew would be lower grade. We have enhanced our grade control and geo-metallurgical sampling techniques and we're looking forward to this quarter and for the foreseeable as having areas that we have identified of more consistent grade and then hence with the geo-metallurgical data we can then link that with an [uplifting] metallurgical recoveries. So, looking forward, it certainly is an improved situation compared with Quarter Two. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Alex Terentiew, Raymond James. -------------------------------------------------------------------------------- Alex Terentiew, Raymond James Financial Services - Analyst [34] -------------------------------------------------------------------------------- Two questions, first you used more of the proceeds from the equity offering to repay debt than you previously guided to on your last conference call. Just wondered, is it fair to say that you're slowing down your S2.5 expansion efforts a little bit, and development or community relocation plans at Haquira and focusing on the balance sheet? And my second question relates to Ravensthorpe, cash costs there around $4.70 a pound and nickel's obviously around $5.00, so not much or any cash flow being generated at that mine. Is there scope to reduce costs there much? Or is there a price of nickel or a point in time when you decide to either scale back production or temporarily close the mine to preserve cash flow? -------------------------------------------------------------------------------- Clive Newall, First Quantum Minerals Ltd. - President [35] -------------------------------------------------------------------------------- On the question on the use of proceeds, given the time of the [raising of the debt], the proceeds we'll use initially to repay debt. And when we decide to go ahead with the projects, then we'll utilize those funds for those projects. And that's exactly what we've done. We've repaid debt and, (inaudible) was available. Philip, do you want to comment on Ravensthorpe? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [36] -------------------------------------------------------------------------------- There were two questions there, one was on S2.5. And the answer is certainly in this commodity market, and with other areas of uncertainty, we've wanted to look at its timing and the impact it has. And I think it's safe to say, if we defer it a year or two, it doesn't do a lot that's of great concern. We wouldn't want to go much past about a year and a half because then sustainability does get quite hard on the levels of production at Kansanshi. And there are capital costs associated with that which also, of course, we want to make sure we are cautious with and harbor our funds to insure that Cobre Panama doesn't [sell up]. As far as Ravensthorpe goes, they put back the atmospheric leach. That's given a slight benefit. What we've asked them to do is go back and revisit it to see if indeed in this sort of, I think, very depressed nickel market, they mightn't seek to produce at a lower cost and produce less. It doesn't, it comes to mind that there's not a lot of point producing nickel, as you say, very marginal value. Particularly because we're encouraged by the idea that nickel, the sources of nickel and nickel supply are quite constrained. And the marginality of it would apply elsewhere. So, the effective of that in the quite near term, in the next year or two, would put some pressure on the nickel price and nickel supply. And then the market will come back. And during this period, what we didn't want to do was chase production in order to get operating costs down. There's a risk in that. So, we'll look at the other way. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Jean-Baptiste Devevey, Exane. -------------------------------------------------------------------------------- Jean-Baptiste Devevey, Exane - Analyst [38] -------------------------------------------------------------------------------- A question on the power supply and certainly you had said that already, are there any sensible reasons to expect the power curtailments to get lower by year end or is that really a matter of rain coming back and water reservoirs being restored? And how much of the current, I think, 24% to 25% curtailments we're talking now, how much of that would you expect to be offset through say alternative supply? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [39] -------------------------------------------------------------------------------- I wasn't quite clear on the actual question. I don't want to answer the wrong one. Can you say that again? We have a very bad line here. -------------------------------------------------------------------------------- Jean-Baptiste Devevey, Exane - Analyst [40] -------------------------------------------------------------------------------- I just wanted to understand whether there are any reasons why we should expect the power supply to improve by the end of this year, or is that only a matter of the rainy season starting and the reservoirs levels to be restored? And how much of the current 24% to 25% curtailments you mentioned in your release can we expect to be offset through let's say alternative supply, that you mentioned the fact that you could potentially source power from the African grid? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [41] -------------------------------------------------------------------------------- I don't think we really know now. It's a little difficult when someone is trying to solve problems that are associated with what the weather might be like. (multiple speakers) Panama here. But certainly it rains every rainy season and it doesn't rain in any fashion that one could depend on in the dry. And so, apart from the odd storm and the like in October, November, it's not going to provide water into the catchment. And the nature of the catchment for those very large lakes is that it takes quite a while for that to run through and really build up. So, that's why I said it would be at least a couple of months before that would be stabilized and they were happy with it. I think it's quite possible that this position will persist through into January and February. (inaudible) the grid is a different question and we're not quite sure other than there is off peak power. And we are encouraging them, the government, to acquire some of that. And I know that they are expediting the projects that have been underway for quite a while. And in fact, should have been complete by now. -------------------------------------------------------------------------------- Jean-Baptiste Devevey, Exane - Analyst [42] -------------------------------------------------------------------------------- And the second question I had was on the copper sales volumes at Kansanshi. I just would like to understand a bit better why they're so low (inaudible) when compared to the prediction. I think they're even lower than the prediction. -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [43] -------------------------------------------------------------------------------- I think that we didn't anticipate the performance of the smelter. And so the logistics for handling it and the [uptake] arrangements and so on have taken a while over the last six or eight weeks to come up to speed and all that's happening. But I think, in fact, we did actually go out and [set it] forwards and closed them out in July at prices that were better. So, we didn't lose out for sitting with that production. But we just have to move it. And I think we're still having to move it. It's going to take us a few months to get over that backlog. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Oscar Cabrera, BofA Merrill Lynch. -------------------------------------------------------------------------------- Oscar Cabrera, BofA Merrill Lynch - Analyst [45] -------------------------------------------------------------------------------- Was wondering if you can remind me what the power requirements are for Kansanshi in its current state for the Kansanshi smelter for Sentinel? And then for S2.5. -------------------------------------------------------------------------------- Clive Newall, First Quantum Minerals Ltd. - President [46] -------------------------------------------------------------------------------- I've got a figure on the smelter, Philip. It's drawing about 45 megawatts of late. That was the smelter power draw. -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [47] -------------------------------------------------------------------------------- What we aim to do and they're restructuring it, is to take, is to have enough power at Kansanshi that we can operate at full throughput with the pressure leach off. And that's an arrangement that we're quite happy with, but we will transfer the allocation of power that Sentinel had. And we will now spend the next two to three months installing the crusher number two and then ultimately crusher number three and opening up the line, which will make life easier particularly going through the rainy season. And so that, the commercial production which was waiting for the availability of the second train will be available to come on stream. The question on our minds then is with it all ready, how long we'll be delayed before we can actually run it because we didn't have enough power? And that's the question that's going to be on our minds for about mid to end September going forward. And I think I've given you an idea of flavor of time for that. So in other words, Kansanshi will then run at full throughput, with Sentinel getting itself prepared. We do [relive] the situation from time to time because it actually worked out where we would draw some of the power from Kansanshi and run Sentinel on both veins, for the purposes of understanding how that operates. But also to be able to generate a large quantity of feed for the smelter. -------------------------------------------------------------------------------- Oscar Cabrera, BofA Merrill Lynch - Analyst [48] -------------------------------------------------------------------------------- Just based on your press release, is that you have available to you about 150 megawatts. If I remember correctly, Sentinel was another 100. And so, based on the information you've given us today, and sort of establish when Sentinel can run [top] next year. The other question there is the additional, or the joint venture that you were planning with this company that has the [coal car] power plant in Botswana will give the push forward in your mind, or is it something that can wait (inaudible) or on the question of what the power is required for both sides (inaudible)? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [49] -------------------------------------------------------------------------------- The idea of what we might have done in Botswana would certainly never come in time to cope with this situation. I think it probably, the currently situation is an illustration of the kind of concern we had about power availability in the longer term and the grid generally. Because even when Zambia has power, and it's typical in the rest of the southern African grid, there is a certain amount that they will export to help their neighbors. And it's in circumstances like that when we obviously need extra sources. It was really a, because there's another commercial opportunity in other than Botswana and [southwest] power and would connect to power station [off their] contract, but would give us quite a lot of flexibility. But that timeframe is quite extensive. I mean, it'll take years before we get to see the outputs of that. -------------------------------------------------------------------------------- Clive Newall, First Quantum Minerals Ltd. - President [50] -------------------------------------------------------------------------------- Oscar, you also mentioned 100 megawatts of power at Sentinel, but what we have also found is that the [ore near the] surface is very soft. So our power draw has been significantly less than what was forecast, probably about half, simply because the ore is so soft. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Greg Barnes, TD Securities. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [52] -------------------------------------------------------------------------------- That's a pretty high profile forecast for copper prices to be in the very low $2.00 a pound range for the next three to four years. I know you're taking steps to reduce CapEx, but if we were in that environment, do you believe there's a chance that Cobre Panama might have to be put on hold? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [53] -------------------------------------------------------------------------------- Greg, no, we won't stop Cobre Panama. It is something we'll look at to whether some of the, there might be some delay reason. What I said earlier about S2.5 was really where we started looking at the exercise because clearly in these kind of circumstances and the fact that not having S2.5 [present] inhibit Kansanshi significantly for a couple of years is obviously the most practical way to respond to that. And then we would nurture our funding and go into Cobre Panama. One of the things I'll just mention about Cobre Panama that I think is important to get a perspective of. We have purchased the power station, largely. I mean, we own, (inaudible) who can tell us, but most of the bits that cover most of Panama. And constructed it is a source of power that we will need and that is of value in the grid. So, there's every reason to get on and do that quickly. But there are elements of the main plant which we could defer a certain amount, I'm talking about secondary crushing, [quite] aspects of it certainly from a point of view that you'd ramp up production a bit slower. We haven't looked at those in detail, because in fact as Zenon has been saying, the most significant one was actually that we could simply, that we will reduce the cost. And we will come back in the near future with the actual envisaged capital cost and the timing associated with that. But we wouldn't stop it. And as far as we could see, on the very worst scenarios, we wouldn't need to. -------------------------------------------------------------------------------- Greg Barnes, TD Securities - Analyst [54] -------------------------------------------------------------------------------- And the S2.5, if you do stop that, is that about $400 million in CapEx? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [55] -------------------------------------------------------------------------------- At least. I want to say at least, there's an element of stripping that goes with it, depending on the rate at which it has to ramp up, that stripping is either very a little or quite a lot. So that would, yes, that would just kind of ?- or be deferred. In fact what we're looking at is just deferral. We'll wait a year or two. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Frazier Phillips, RBC Capital Markets. -------------------------------------------------------------------------------- Frazier Phillips, RBC Capital Markets - Analyst [57] -------------------------------------------------------------------------------- I'm sorry gentlemen, at the risk of beating a dead horse, just on the power situation, I was curious why is it in the northwest province only? Is it grid related as well as capacity in reservoirs or low water levels? And does the second power line help in any way in terms of being able to deliver power from elsewhere in the country? -------------------------------------------------------------------------------- Philip Pascall, First Quantum Minerals Ltd. - Chairman, CEO [58] -------------------------------------------------------------------------------- It isn't actually only the northwest. They still have a procedure where they notify you and we know that has gone (inaudible) at other mines. The other mines are not fed directly by this because they're fed through [CEC] and no doubt that some bureaucracy probably took some, an extra few days. It was always intended with the second power line that that was what's enabled Sentinel to grow more power. In other words, the cutback on, that's been imposed on Sentinel was imposed on the single line history of power draw. At 42 megawatts instead of about 55, (inaudible). What we don't know is to what extent we can argue that once we have the second line that we should be seeing a proportionate reduction on a bigger amount. And we will take that question forward. But I think to be quite candid, we've not seen the details. And this (inaudible) really, revealing the details of what it is they're trying to achieve and how they've gone through that allocation. So, what we've mostly done is we've persisted with an encouragement to them to buy off peak power, particularly for the [other part], off peak power (inaudible) in grid. And only very recently, in the last day or so, we've had any traction on that. And it's possible we may have to underwrite it, which obviously we'll do because it comes off our power [tariffs]. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- And Mr. Newall, I'll now turn the conference back to you for your concluding remarks. Thank you. -------------------------------------------------------------------------------- Clive Newall, First Quantum Minerals Ltd. - President [60] -------------------------------------------------------------------------------- Thanks very much, operator. And thanks everybody for participating today. If there are any follow up questions, as usual, please contact myself or Sharon Loung and we'll do the best to get back to you. Thanks again. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- Thank you, sir. Ladies and gentlemen, that does conclude the call. You may now disconnect.
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