Nyrstar Nv (OTC:NYRSF) Q1 2013 Earnings Call April 24, 2013 3:00 AM ET
Jaideep Thatai – Manager, IR
Greg McMillan – COO
Heinz Eigner – CFO
Filip De Pauw – ING
Andy Mohinta – Goldman Sachs
Luc Pez – Exane BNP Paribas
Philip Ngotho – ABN Amro
Alon Olsha – Macquarie
Wouter Vanderhaeghen – KBC Securities
Thanks. Good morning everyone, welcome to the call. Presenting today will be Greg McMillan, Chief Operating Officer; and Heinz Eigner, Chief Financial Officer. The presentation will also be available on our website. Following the presentation, we will take questions from investors and analysts only. And the call will have a hard close at 10:00 A.M. this morning Central European Time. With that, I’ll hand the call over to Greg.
Okay, thank you, Jaideep, and good morning to everybody and thank you for joining us on the call. Turning first to the highlights and our zinc in concentrate production from our own mines for the quarter was down 8%, predominantly driven by the outage or the suspension of operations in Campo Morado during February and March. We saw lower deliveries from Talvivaara. However in terms of our plans for the balance of the year, we still expect to hit our production guidance for all metals.
In terms of the smelting business, we saw a solid performance there in Q1, and we also maintained our metals guidance between 1.0 million and 1.1 million tonnes of zinc metal for 2013. In terms of zinc treatment charges, some positive news there in terms of talking about terms where we are, about 10% in 2012 and in terms of lead concentrate negotiations and I’ll talk a bit more about that in subsequent slides, there is still some more work to do in terms of negotiations with the mines.
Turning now to our chart on the zinc price and volatility in our markets still continues with significant decline in the zinc price both in U.S. and Euro terms over the first quarter peaking just under $2,200 and dropping to almost $1,800 by the end of the quarter. It’s important to notice that our business in terms of base metals and precious metals particularly zinc, gold and silver is very sensitive, or earnings are very sensitive to these movements in prices.
Looking at the quarterly production of both zinc and other metals, and you’ll see there on the chart on slide five, we’ve got the last five quarters of production in terms of our own mines, due in totality to the outage at Campo Morado, our production for zinc in concentrate for the quarter dropped to 68,000 tonnes.
In terms of deliveries from Talvivaara, we received 2,000 tonnes which again is down on the fourth quarter and I think we’re all aware of the production issues that Talvivaara is struggling with at the moment. And what that means in terms of our overall zinc concentrates is down for the quarter at 15%.
In terms of the rest of the metals, particularly silver, lead and copper, the drops there are predominantly related to the outage at Campo Morado. In terms of gold, there is a two side effect there, obviously Campo was not – didn’t produce any gold during February and March, but also in terms of El Toqui and I’ll talk more about that in a subsequent slide, we don’t have the ability at El Toqui to produce zinc and gold at the same time. So we also like between those circuits and we’re actually in the process of installing a doré facility and we’re stockpiling gold concentrate at the moment or intermediate stocks at the moment and processing lead. And again reiterate that we maintain our full-year production guidance on all metals for 2013.
In terms of Campo Morado and what happened in February and March was disappointing but we thought pertinent to show you in the next two slides, our progress from the Mining for Value review which took place during the third quarter of 2012, and we started to see some real progress in terms of the implementation of the recommendations from that review in the fourth quarter, and the early parts of first quarter of 2013 and now, that we have started backup the operation at the beginning of April, we’re seeing those improvements continue.
Now that’s the first slide there is slide six, shows the impact on zinc production and the driver there really is around throughput, so how much ore are you bringing out of the mine itself. That really hasn’t been an issue in terms of the mine planning and the execution of the plan at Campo Morado. The real issue in Campo Morado has been the grade of the material that the mine is extracting and then what we do is that through the metallurgical plant in terms of recovery of the metal.
So as you can see there, there has been some significant progress around the transition to long haul mining particularly in ore production mining, the reason we’re doing that is because it’s more efficient, it’s lower cost and it will extract per operating hour more tonnes. In terms of our mine planning, we’re also being more selective in terms of the areas of the zones that we’re mining in the mine and we’ve also begun a high grade pillar reduction.
And even more importantly is the dilution control. We want to make sure that our miners actually understand in terms of the mining of ore, what is waste or what doesn’t make cutoff grade and therefore we’re only holing to the surface that which is economic and we’ve done a lot of work in terms of educating and training our miners in that process. So dilution control is very important and then when we get the ore to the surface, we want to make sure that we recover the metal content and there has been a lot of work done in the metallurgical plant, particularly around the consistently of grind size and its effect on improving recovery.
And as you can see from those charts there on the slide, there is a definite trend in terms of throughput per day, the grade of the zinc and the recovery which is ultimately resulting in an improvement in the amount of zinc in concentrate that we’re producing on a daily basis, very pleasing results but unfortunately in February and March, we had to seize production.
In terms of reactivating production in April, and you’ve seen from those charts and I’m just turning now to slide seven. That has continued the progress that we made in November, December and January, it has continued into April, which is very pleasing, and I’ll talk a little bit about copper in a minute. It’s probably pertinent just to comment on what happened in terms of the loss of the explosives permit. And the real issue was during 2012, we changed the tax domicile and we also changed the name of the company. And for various reasons, SEDENA which is the authority, it’s part of the Mexican Army thought that there was actually a change in company therefore we needed a new permit – needed to apply for a new permit.
It was an unfortunate administrative issue and we just had to work through that process with the authorities which took two months, in the early part of April we received a new permit. In terms of the recovery of copper, another example of the improvement in – the importance in the polymetallic mine of the byproducts and obviously this is predominantly a zinc mine but copper to a lesser extent with the streaming agreement is over waiting and gold, a very important contributors to the EBITDA of that mine and you can see as with zinc the improving grade and copper recovery and thus the daily copper in concentrate production improvement from where we were in the middle of last year to where we are – in December and January in particular, and now in April since we restarted the operations.
The other important thing to remember is that the outages had an impact on our production of all metals in the first quarter, and it will have an impact in terms of the financial, the mining financial result for the first half but given our recovery plan for the full-year, we don’t see any material impact for the full-year, we believe that we can catch up most of what we’ve lost by the end of 2013.
Turning now to a quick summary on all the sites, starting first with the Latin American site; Contonga, we saw a slight drop in terms of concentrate production. The issue there is we have and we’ve talked about this in previous announcements, we increased the daily license limit in terms of tonnes through the metallurgical plant from 660 to 990. We did that in the early part of 2012. Now in terms of the legislation in Peru, it’s 990 times 365 days, so obviously we could run the plant a lot harder in 2012 given that we only received that approval in the second quarter.
Now in 2013, as we had to abide by the 990, we need to make sure that we only run at 990, therefore we can’t run the plant as hard in the first – in 2013 as we did in the third and fourth quarters of 2012.
In terms of Coricancha as we announced for the full-year, we will during 2013 reprocess the historic tailings. We believe from historic records there is somewhere around 20,000 to 30,000 ounces of gold that we can recover in the historic tailings facilities on site and we’ve begun that process and that’s why we flagged in our – that was one of the contributors in our guidance for 2013 in terms of reducing the gold guidance from where it was in 2012 to what our guidance is for 2013.
We’re also doing quite a bit of development, exploration drilling in the lower levels of the mine. This is a very labor intensive mine, it’s narrow vein mine and we believe the lower levels of the mine with veins open up are more conducive to mechanized mining, but we need to put a business case together and that’s why we’re doing that exploration drilling there at the moment and at the same time recovery of the historic tailings.
Turning to El Mochito, very solid performance there in terms of the first quarter, ore milled volumes up 2%. We did see some lower grades particularly in terms of silver, that’s just a nature of where we are in terms of mining through that resource, we just happen to be in the lower grade mantos areas, and we’ve got less of the higher grade chimney ore coming through in our blend on a daily basis.
El Toqui, as I mentioned in the start of the presentation, we also like between gold and zinc campaigns. We don’t have the ability to run both circuits at the same time. In terms of one of commercial excellence initiatives in terms of enhancing our gross profit in all operations in El Toqui instead of selling high grade gold concentrate product predominantly into China. We can make – we can create a lot more value by taking the process one step further and converting that gold concentrate into doré.
We don’t have the facilities and so we’re in the middle of constructing them and we will commission those hopefully in the third quarter and we will see production of gold particularly from El Toqui jump up in second half.
Turning to Langlois in slide nine, as we mentioned at the full-year announcement in February, the ramp up of that mine is now complete, just as we saw nine months prior in terms of the ramp up of the Tennessee mining operations. And we’re at a point now where it is ramped up, but we need to optimize the mining process, in other words, close that gap by another 10% to 20% production, which is where about where we sit at the moment.
We’re about 10% to 20% behind where we hope to be. So we’ve done the same thing in Langlois as we’ve done previously in the Tennessee Mines and in Campo Morado. We’ve sent a team in there, they did had a look at exactly what we were doing and where are the gaps and what do we need to do to close those gaps and therefore optimize the operation.
So we completed that review at the end of Q1 and we have begun the implementation of those recommendations, and so far the results are very encouraging. It’s probably worthwhile just touching on where are those gaps, and I think the issue particularly with the ramped up site is the amount of development that’s in place. And as you can appreciate, you need the development drips in place, so you can move men and machinery to those operating faces so you can extract the ore.
Now where we are at the moment and it’s a bit like chasing your tail, what happens is they have two – a number of crews in place, some working on development, some working on production ore for the mill. Now when they get behind on production ore for the mill, they naturally take their equipment off the development which is more for the medium term, they take their crews off development to catch up on production. And the problem with that is you actually never get ahead of the game and you’re always short in terms of the number of all faces that you’re working on.
So that’s what we’re doing now. We’ve ruled the line in the same, and we’ve actually toned back out our targets for the next three months somewhat to get ahead in terms of development. In other words, we’re taking one step back to take two steps forward over the second and third and fourth quarters.
However, we had seen through one of the operational excellence teams that we have working in Langlois, particularly good results in terms of the grade control and the improvement of grade both in zinc but in particular copper and silver.
Myra Falls had a solid quarter. Their operating performance was in line with what we saw in Q4. Although, they are a little bit behind, not behind but their zinc production is a little bit less than Q4, but in terms of their byproducts particularly gold and silver and copper, they are up on what we saw in Q4 and from a value perspective, that’s very encouraging in deed.
Turn to Tennessee, the optimized plan there is continuing to bear fruits and very pleasing results in the fourth quarter of the last year and the first quarter of this year. In terms of East Tennessee, the initiatives we have about around improving grade came to fruition and combined with the reduction in ore mill, we produced pretty much the same concentrate that we saw in the fourth quarter. In terms of Middle Tennessee, consistent with the mine plan, they are at the moment in a lower grade area but we compensated that by pulling more ore up the shaft and we also had some success in terms of improving recoveries.
In terms of Talvivaara, we’ve talked about the production issues that they’ve encountered over the last 12 months or so and that would obviously reflected in their deliveries to us in first quarter of 2013.
Turning now to the zinc metal production from the smelters of 263,000 tonnes for the quarter, you can see there the last five months quarter and we are pretty much solid performance, pretty much in line with where we’ve been in previous quarters. We did flagged in full-year results announcement in February that we had a number of planned shutdowns, one in Auby and one in Clarksville, and that’s why their production is less than what it was in the fourth quarter. We also had an unplanned outage in terms of the blast furnace in Port Pirie and I’ll talk a little bit about that in a minute.
So looking at the highlights of the all the smelters, Auby production down in line with the planned maintenance shut. Indium again which is a commercial excellence initiative in terms of enhancing the gross profit of that smelter, we ramped that Indium production up in the second half of 2012 and it’s now operating in line with our expectations.
In terms of Balen, good result for the first quarter, production up 3%. In terms of Budel, their production is down. It’s in line with our expectations and very strong performance all around in terms of the European smelting operations. In terms of Clarksville, again we announced that we had a maintenance shut on the roaster and on the acid plant, which was completed during the quarter. And in terms of zinc production; zinc production for the quarter is down, one, because of the shutdown but also two, because when we processed the Middle Tennessee concentrate to extract the germanium, which is a very profitable byproduct. For forecast where we actually had to have turn roaster performance down, the Tennessee Mines concentrate is a much coarser grind concentrate and in terms of its – the ability for the roaster to process that material, we actually have to turn the roaster back and in turn, turn zinc production down.
We do now have an improvement project which we’re working on at the moment to improve the grind size in terms of the product coming from Middle Tennessee, so we only see that issue is short-term. In terms of Hobart, production a little bit lower than what we saw in the first quarter, mainly because of high regional temperatures through the summer, some of you may well have seen the horrific bushfires that Hobart saw just after Christmas.
In terms of Port Pirie, lead production down, I mentioned earlier than they had an unplanned outage. What we did there is we put a new four half [ph] in place, unfortunately the refractory in that four half [ph] filed, we’ve only seen this once before in the last 20 years and unfortunately that meant we had to dig out the furnace, but positive on top of that, is you see zinc metal pretty much in line with where we were in the last quarter and copper cathode and gold production were up for the quarter and they’re particularly important drivers of profitability for the period.
Turning now to the zinc and lead treatment charges, and some of you would know that the Asian-based – it is being reported that the Asian-based smelters have concluded negotiations and TC reported of around about $210.50 per dry metric tonne, base is US$2,000 zinc price. The escalator is split somewhat in the second bullet point there between 6%, 5% and 2% depending on the zinc price at the time with a de-escalator of 3%.
That’s good news. Good news in terms of 10% improvement in the share of the zinc price for the smelting segment. And I think that what we’ve talked about particularly during 2013 – 2011, and 2012 in terms of the supply demand balance between mines and smelters has been vindicated. I think people understand now that there is shortage of concentrates and therefore it’s time for TCs to move back up in line with that supply demand dynamic between mines and smelters.
In terms of our negotiations, I’m pleased to say that in terms of those benchmarks that have been reported, we’ve been able to negotiate a higher, somewhat higher TC in an improved de-escalator. However we’re not commenting on the exact nature of that as yet because there is still further negotiations with supplies.
In terms of lead concentrates, those negotiations are less advanced. Again there is some difference of opinion between lead miners and lead smelters as to the availability of concentrates. There is a number of lead smelters that are supposed to be starting up, for example, Portovesme and Moruya [ph] but that hasn’t happened. We’re on the belief that there isn’t the tightness that the miners advocating and it was negotiations are continuing but we have to resolve that in the next few months.
And that concludes my part of the presentation and I’m now happy to hand over to Heinz to talk about strategic hedges and the Port Pirie transformation.
Thank you very much, Greg, and good morning also from my side. As Greg mentioned, just one slide for me, giving you an update on strategic hedging and also on the Port Pirie transformation funding package. Relative to strategic hedging, basically what we have done in the first quarter when we had to really very strong start in terms of metal prices into the year, we used what we expected as volatility of the price in order to improve the profitability of the entire group.
It’s important to note that we ended only in short – into short-term arrangements and we are still convinced on the medium and long-term strong fundamentals relative to zinc. Before we entered into any sort of strategic hedge, we also established within the company a very solid governance structure to prevent that anything goes wrong when placing these hedges.
And effectively what we have done for the second quarter, we put in place an option structure for a total of 60,000 tonnes of free or payable metal and is securing the zinc price between US$2,100 and US$2,200 per tonne. For the second half then, we basically did the same securing the price between US$2,100 and US$2,200 but given our firm belief in the medium and long-term price potential for zinc, we also didn’t wanted to exclude the upside if you really would have a substantially improved price environment. And therefore we entered also into an option structure that gives us again the full upside for any price in the metal above US$2,400 per tonne and the full volume is again 20,000 tonnes per month which then equates to a 120,000 tonnes for the second half of this year.
The other part is the Port Pirie funding package. You probably remember the funding package has in total three different components, and one of the components is contemplated forward sale of the incremental silver that redeveloped Port Pirie would produce. And naturally the silver price is moving up and down, there was an exposure for us that could have meant to deliver more or less of silver under such prepaid arrangement.
And to make sure this component of the funding package remains attractive, we sold forward in the middle of February five million ounces of silver at silver price of $28 and secured by that, we had a financial attractiveness of this option available to us. Once we reach February 2014 until we – or until when we have sold forward the silver volumes, we then intend to roll that position into the funding package but that decision has not been made, it is dependent on our comfort with the bankable feasibility study that is expected to be ready at that time.
That already covers that one slide where I wanted to give you an update on. And that said, Greg and myself are available for questions you may have.
Thank you very much sir. (Operator Instructions) Today’s first question is coming from Mr. Filip De Pauw of ING. Please go ahead.
Filip De Pauw – ING
Yes, gentlemen, Filip De Pauw from ING. Thank you for taking my questions. I have three of them. The first question is on the C1 cash costs for 2013. You haven’t reiterated the guidance in the update now and I appreciate this is difficult given the changes and uncertainty in precious metal prices, but I wonder if you could give us – talk a bit on your thoughts on the C1 cash costs for 2013? The second question is you said that on the lead TCs, you were still discussing them and I wonder if you could give us a range on the delta, minimum, maximum change year-on-year versus 2012. And the final question is, could you give us an idea on how zinc premiums are evolving in 2013? Those are my questions.
Okay. Filip, it’s Heinz. It’s probably appropriate that I talk about the first question, the C1 cash costs and then Greg takes the other two. Relative to the C1 cash costs, what you clearly should expect is that we will further work on the improvement of the C1 cash costs in terms of managing costs, and that is from two angles, there is operational excellence and the other piece, don’t forget about our cost improvement initiatives what we call internally Project Lean. Project Lean is still – we are being pursued and Project Lean is largely in the implementation phase for the mining assets, and in this half year results we will give an update on where we stand relative to Project Lean.
So on the pure cost element of C1, clearly what we expect and what we are working on is on improvement. The other sector into the C1 cash costs is obviously gold, silver and other byproduct prices, and that we couldn’t predict naturally that there has been, this is the reason for metal price evolution, especially relative to precious metal price downward trend, but no one and also not we can predict what the prices are going to do for the remainder of the year.
So in summary on the true costs that we can control, we will clearly focus on them and we hope to make progress there, on the byproduct credits, that’s up to world market prices how they evolve.
And just if I could add to what Heinz said, obviously the volume is important too in terms of the calculation in terms of our recovery plan, particularly in Campo Morado. We are not changing our guidance, so we still expect to produce the same volume that we anticipated when we put the full-year results announcement together and gave that guidance in terms of C1 and production output.
In terms of the second question you asked on lead TCs, I mean it’s difficult for me to answer that given that we’re in commercial negotiations. But having said that, the framework that we’re working in is we do not believe the market in 2013 is any different than the market in 2012. So our position is we’re watching the TC change. So I think that probably gives you an indication.
I think the other area too is and it’s important to understand that there is two types of lead concentrates, it is complex concentrates which we use a lot of in Port Pirie and they are complex because just lead – that didn’t just come with lead, they come with silver, gold and copper in particular. And then there is the lead concentrates, that don’t have those byproducts in them. So there is essentially two different TCs if you like, and there is two different sectors in the marketplace that needs those types of concentrates.
So the less complex normally go to China and the more complex go to more western smelters, those in Europe and in Asia particularly Korea Zinc [ph] and ourselves, but the complex ones remember come with significant working capital implications and that’s something that we are working with the miners owners on as well.
In terms of the zinc premium, I don’t – the market in the U.S. is upward trending I have to say, in terms of the bounce in the U.S. economy, we’ve seen in the first quarter. In China or Asia in general it is pretty flat, and in Europe, even though production was upward is under a lot of pressure, premiums are still pretty stable, the market in terms of supply and demand is pretty well management. So we don’t see any threat there at least at the moment in terms of premiums.
Filip De Pauw – ING
Okay, thank you very much.
Thank you sir. We’ll now go to Andy Mohinta of Goldman Sachs. Please go ahead, your line is open.
Andy Mohinta – Goldman Sachs
Thank you. I just had a couple of questions, I guess the first question was on the contract with Glencore which I guess that’s just have been resolved, what would be the working capital implications of you bringing that in-house, is that even an option. I am just trying to get a sense of the magnitude of working capital increase and would you be able to fund that if you were to bring that in-house? And secondly just to I guess going back to the question that was asked earlier, you are maintaining your full-year guidance but I guess in terms of the path of achieving that, is it fair to assume that you will just be running much higher above reserve grade or high grading through the balance of the year to make up the numbers or are there any other avenues by which you can hit those targets? Thank you.
Yes, thanks for the two questions. Let me touch to try to give a bit of color on the option to take in the volumes that are currently still sold and are going to be sold until the end of this year under the off-take agreement to Glencore relative to European production. Obviously it might sound a little bit as a stupid reply but it’s obviously dependent on the metal price that we have and also what type of terms can be realized, payment terms predominantly for our customers, obviously our customers.
And I wouldn’t rule out that option we have – you might remember one way of looking it is that the way we started was that we served directly our customers, so from that it is not an option that I would rule out. It’s clearly one alternative. And from a funding point of view, we were prepared to fund that at a substantially higher price environment taken 2007 and 2008 and therefore it is possible for us, also we can then provide the refined metal as a collateral and any funding arrangements, so from that I wouldn’t rule that option out.
And we might perhaps even see some combination where we sell certain – into certain segments while off-take takes in other segments. So I think all of the options are on the table and that taking it in-house is clearly one of them.
Thank you, Heinz. I’ll just talk now about production guidance. I am assuming you were talking about the mines, but I’ll just cover off firstly quickly on the smelters. In terms of the smelters, I mean you can see 263 for the first quarter, so in terms of the guidance we’ve given 1.0 million to 1.1 million, there is no issues there unless there is unforeseen outage, but we don’t see that at this point, so we’re pretty confident in terms of the smelters in production.
In terms of the mines, if we go down through the mine, the only issue we have is in Campo Morado and that outage for two months. So can we make up the two months? In terms of the performance – in terms of the last year’s performance where we produced about 40,000 or about 40,000 tonnes of zinc in concentrate, compared to the performance we saw in particularly in January and what we’re seeing now in April, we believe that over the balance of the year, the balance of those nine months, we believe that we can make up that shortfall.
In zinc, in copper and in silver although silver is less important out of Campo Morado for us because 75% of that is streamed to Silver Wheaton. The only caveat I’d put on the mining production is gold. I think the gold is probably going to be tight. Tight for two reasons, one, because we changed the nature of the business in Coricancha where we’re covering legacy tailings.
Now there is some risk in terms of the recovery of legacy tailings because we’re relying on survey data from previous owners when they put that material into the tailings facility. Now we believe that there is three grams per tonne of gold there that we can recover from the tailings. As we move through that, there is some risk that it won’t be, it won’t be there. But we’ll just have to see as the months unfold. So that’s one risk.
The other risk is the stockpiling of the gold concentrate or the gold intermediate at the moment in El Toqui and in the commissioning, successful commission of the doré plan. I think the issue there is because its due for commissioning to the later part of the third quarter, I think the only risk there is that commission is in accordance with our plans. So there is a couple of caveats there and due to that we will probably see gold at the lower end of our range.
Andy Mohinta – Goldman Sachs
Thank you very much sir. We’ll go now to Mr. Luc Pez of Exane BNP Paribas. Please go ahead.
Luc Pez – Exane BNP Paribas
Hi gentlemen, two questions if I may, first of all on Campo Morado, you’re referring to the fact that the outage will have an impact on the average zinc mining, C1 cash costs for H1, could you perhaps be a bit more specific as to what implications it might have, first question. Second question with regards to CapEx, can you confirm the full-year guidance for CapEx and whether this was including the El Toqui development or not? Thank you.
I think in terms of C1, and I think Heinz gave a pretty thorough explanation. We’re very confident that we will get the volumes, the volumes out of all our mining operations and the recovery program particularly given the demonstrated performance in December, January and April at Campo Morado, we are fairly confident that we will get the volumes.
So the question then in terms of the C1 is what are base and precious metals prices? And obviously that has a huge impact on what the C1 is. And or eventually is calculated at, and that’s something we can’t determine. So at this stage, what we’re saying is in terms of the range of the 1,000 to 1,100 we’re confident on the production side but we’ll just have to wait and see what happens on the pricing side.
In terms of CapEx and we gave some guidance at the full-year 2012 announcement for 2013, we don’t see that guidance change, other than we do review it on a monthly basis. And if things should deteriorate, particularly from a pricing perspective, then we’re in a position to act if need to be, one way or the other in terms of what opportunities that might present.
Luc Pez – Exane BNP Paribas
Perhaps if I may be a bit more specific with regards to the Campo Morado impact on cash costs, and not after formal guidance C1 cash costs on your mining operation but rather trying to quantify what is going to be the underlying impact of the outage you’ve been facing. Is it on the volume loss and that’s pretty it, or is it also going along with some extra costs at your operations?
Extra costs Luc, no, because we simply had a continuation of certain fixed costs while savings variable costs obviously during the periods of the outage. And as Greg outlined, we are having now since the restart and since the requesting [ph] of the license really a good one in terms of production and recovery and from that we see an opportunity to catch up the loss in terms of volume by the end of the year.
For the half year, that probably will mean, we will not be all the way (inaudible) that’s basically impossible to catch two months loss up in a total period of six months. So therefore by the half year, you probably will see a negative impact from the lack of production and therefore a negative impact on the C1 cash costs which we however believe all other things being equal and metal prices obviously byproduct metal prices being significant influence by the end of the year, we would be expecting also to be back in terms of C1 cash costs.
Luc Pez – Exane BNP Paribas
Thank you, much clear.
Thanks Mr. Pez. We will now go to Mr. Philip Ngotho of ABN Amro. Please go ahead.
Philip Ngotho – ABN Amro
Yes, good morning. Thanks for taking my questions. I will start with two questions, first of all on the Langlois mine. The second half of the last year the cash cost was around $2,100 which is higher than the zinc price, and if you then take into consideration the recent slump in precious metal prices, I expect that the cash costs has actually increased even further. I am wondering if the metal prices stay at current levels, could that be a reason for you to maybe actually limit the losses to put the mine in an idle state or yes, I mean what’s your view on that? And then I have a question also on the goodwill for the mines. At year end, you did an impairment testing that showed that you had a little cushion left to incur further metal price decreases or in case if you would have to calculate with a higher discount rate from the 6.5% you use, that would also possibly lead to impairment charges. If the metal prices stay at these levels, could this mean that you also look – that you’d be looking at the goodwill assumptions again at the half year figures because normally you’ll only do it at the end of the year? Thanks a lot.
Well maybe Heinz will lead you with the goodwill, I’ll talk about Langlois. I think it’s important to put Langlois in a context to ramp up and I think we finished the year in terms of that ramp up with just under 40,000 tonnes of zinc in concentrate and it has the capacity of over 50,000 tonnes per annum. So as I mentioned in my presentation, we’ve got a 10% to 20% gap to close there in terms of the metal production and that’s what the Mining for Value or the optimization program is all about.
And we’ve got a demonstrated track record in that in terms of what we do with Tennessee and what we’re currently in the process of doing at Campo Morado. So in terms of impact on – in terms of the C1, I would hope that as we move through the optimization program that we see the site on a month by month basis push closer to that maximum capacity of annualized 50,000 tonnes of zinc in concentrate and that will obviously have an impact on the C1 costs to bring it down to less than it was in 2012.
On top of that, and you see that with the grades in terms of copper, silver, and gold, and you see that with zinc as well. We’ve had reasonable success in the first quarter in terms of managing the grades up in all those metals, and obviously the more we produce of those both byproducts particularly copper, silver and gold, the greater impact that has on the C1 in terms of those credits being applied to the cost per tonne of zinc. So we would say that trend continuing through the second, third and four quarters to lower that C1 cost down.
Hi Philip, relative to your question on impairments and goodwill and those types of topics, I think first of all it’s important to note that 2012 was for Langlois ramp up year and therefore naturally not the ultimate composition of output and operating costs. And also what we will be working on is similar to Campo Morado and all the other mines predominantly Tennessee so far, and then as the second one Campo Morado, applying our toolkit of Mining for Value and improving the operations, that’s still something where we need to see the benefit of those actions at Langlois.
Relative to your – to the core of your question, I think that it’s important to remember impairment is not done on the basis of spot prices or really short-term price movements. We hedged two months ago, the price environment I think was at $2,200 and now we are in a quite different world. You see every time we have such movement would run impairment recording or reversals of impairments I think no one would understand financials any more.
Therefore for impairment testing what is applied is long-term consensus type of use on how the base metals and also the precious metals evolve. And that type of what we definitely will engage into that later this year, but I wouldn’t expect that long-term price expectations has so materially changed between when we last did the testing and now that we certainly are in a different world.
Philip Ngotho – ABN Amro
Okay, clear. Then one more question on the current or the grades that you are actually managed to achieve at the Campo Morado mine, there is sort of quite improvement. In your presentation you also mentioned that you’re targeting 8% in the medium term, however if I look at the reserve and resource statement, normally you would have worked for your reserves well within 1.5 years from now, and if I then look at the resource grade, it’s currently at 4.6%, how is it possible that you have such a target that’s so much higher than what you actually currently have in your resource statement?
Yes, I think the resource and reserve statement calculations are done in the various categories against the standard. And I think the issue is in terms of when you’re mining and you get down to infill drilling and really working out what’s in front of you in those stopes and what cutoff grade and how do you manage dilution in terms of the ore coming to the surface. I think that’s where you manage grade particularly with particular mining practices.
Also in terms of the business itself, I mean there is five different deposits in terms of the – next 15 to 20 years life of Campo Morado. And as we move through the G9 that’s one particular geological, defined geological deposit, and I think as we move through the others the composition of the business itself and the metals outputs will change. And in fact when we first looked at Campo Morado and we told to the marketplace about the acquisition, we clearly articulated that this mine over its life moves more away from being a base metals operation to a precious metals operation particularly a gold operation and we’ll see that evolution as we move to the most farthest away deposit from the G9, which is El Rey and we’ll see that progress over the next five to 10 years.
Philip Ngotho – ABN Amro
Okay, but the 8% ore grade that you mentioned in your presentation, I mean is it really sustainable going forward if you – given the knowledge that you have on the mine?
Yes, it’s sustainable in the sense that as we – there is a number of pockets around the G9 which as we progress through the deposit itself with defined delineating drilling, we actually pick up additional reserve which is currently not either in the resource or in the reserve statement. So we’ve got a demonstrated track record over the last couple of years of doing that.
And then on top of that you then manage through cutoff grades what you bring out to surface and put through your metallurgical plant. Having said that, the G9 resource itself since the mining began there under Farallon a couple of – a few years ago, started with a grade of between 8% and 10% and in terms of the view, the geological view on that resource as it’s mined out, the grade will reduce, there is no doubt about that and it will move down to somewhere between 6% and 8% instead of 8% and 10%. But we are confident that over the next couple of years, a grade of 8% as long as it’s managed appropriately, the grade control perspective is achievable.
Philip Ngotho – ABN Amro
Okay, thank you very much.
Thank you sir. We’ll now go to Alon Olsha of Macquarie. Please go ahead.
Alon Olsha – Macquarie
Hi, good morning gentlemen. I just had two questions, firstly, just on the hedge that’s been put in place. It seems to be a very attractive hedge program. You’ve indicated that you have no intension of entering into medium or long-term hedges, but I’m just wondering kind of going forward into next year, will you seek to put on similar hedge on a quarter-by-quarter basis because what you’ve put in place now represents more than almost 60% I think what most people’s estimates for year, it is at a significantly higher price than spot at the moment, so it is an attractive program against the context of what is a very weak zinc price environment. So that’s just the first question on the zinc. And then just on gold and silver, has there been any hedges put in place there and are you considering that, and then specifically at El Toqui with the gold that you stockpiled, have you hedged that ahead of the doré production at the end of the year? And then finally on the treasury stock that you now have as part of the unwinding of the Glencore relationship, what are your intensions in terms of placing that equity with investors over the near or medium term? Thanks.
Hi Alon, good morning, it’s Heinz speaking. Relative to the hedges that we’ve put in place, yes, they look attractive from today’s perspective because we decided to enter into them when we felt there was a period where – there was lots of optimism about economic recovery at the start of the year and into February. We limited the program until the end of this year, however if we would see another opportunity where we could also protect some of 2014, if we see a rebound in the current metal price that would be that opportune moment, then we definitely would consider it.
I think it is maybe instead of the number of times we continue to see quite a substantial volatility in the metal price, on the base metal price and especially also on zinc, and therefore then they feel now markets are overreacting to some news flow and we do not see that short-term metal price environment will continue to prevail than we would act.
So during the second half of this year, if there is an opportunity, I clearly wouldn’t rule out that we also do something for 2014, but what is always important especially to me is an equity investor is interested in the upside from the metal price and we have done this also for the second half of this year, I would never really support the hedging arrangement that looks out from what we expect to happen medium and long-term substantially elevated metal price or zinc price environment than where we are today.
Relative to the gold production at El Toqui, so far that gold production has not been hedged to the extent that already material has been stockpiled that is currently exposed metal, so it is subject to price volatility, gold price volatility at the moment.
And relative to your question on the treasury stock, I think we do not have any rush to act on that. We have had in the past and we continue to have dialog with larger potential investors and we are looking to place the shares with an investor over the medium to long-term. So not something that is likely to happen this in the next quarter obviously.
Alon Olsha – Macquarie
Great, thank you.
Thank you Mr. Olsha. We’ll now take question from Wouter Vanderhaeghen of KBC. Please go ahead.
Wouter Vanderhaeghen – KBC Securities
Hi gentlemen, good morning Wouter Vanderhaeghen from KBC Securities. Most of my questions have been raised, some left, first on El Toqui. With regards to production planning do you expect to continue for the rest of the year working on the zinc campaign? Secondly, similar question for Coricancha, when do you expect that you will stop there processing the tailings? Third question on the TCs, how much of your volumes now has been negotiated for 2013, and can you give us some indication on difference versus benchmark terms, are we talking here about a couple of dollars? And then finally a bit of a follow-up question of course on zinc price hedging. Is it now fully – well, is this an indication on your market view early 2013 or in the future, do you expect to more systematically go for three to nine months forward hedging? Thank you.
Well I might answer the first – Wouter, it’s Greg here, I might answer the first couple of questions and then I’ll ask Heinz to do the hedging one. And just to the audience I think we’ve got – this is probably the last question. You got the last set of questions Wouter, because we’ve got a hard place here at 10:00 unfortunately, but anyone else has got any more questions obviously Jaideep is available on the phone, so we apologize that this is the last set of questions.
In terms of El Toqui, there is a plan in place for 2013 for zinc and gold campaigns, but the predominant is zinc simply because we don’t have the ability until we’ve got the doré plant in place to process the gold. So in the interim and at the moment, we are processing – we’re doing zinc campaigns. Within the zinc campaign there, obviously is an element of gold because coming from the similar area of the mine. So there is gold being produced which is being stockpiled, but we only have a certain capacity, a certain defined capacity to stockpile that over the first three quarters prior to implementation and commissioning of the doré plant.
In terms of Coricancha tailings, the budget plan for 2013 is to process all the tailings or as much of those tailings as we possibly can, and there is in the order of 400,000 to 450,000 tonnes of tailings which we believe from historical records, as I said earlier contains about 20,000 to 30,000 ounces of gold. So the plan for 2013 was to just process the tailings. Whether we can process them all in 2013 is yet to be determined and we are working through that at the moment, but at the same time to do an exploration program in the lower levels of the mine and hopefully come up with the business case sometime in the third or fourth quarter in terms of opening up that operation into more mechanized mining as we’ve explained before, it’s narrow vein mining and very labor intensive.
In terms of TCs, I wouldn’t like to say how much we’ve tied up at the higher level, it is in the order of a few dollars per tonne, whether that be in terms of higher TC or a difference in the de-escalator, and we’ll talk more about that in the half year announcement in July wherein the sensitivities of what we’re negotiating at the moment are over.
And in terms of hedging, Heinz.
Yes, thanks Greg. Good morning, Wouter. Relative to your question on, will we see a further short-term hedging arrangements at the company enters into, clearly the answer to that is that maybe possible. It very much will depend on how we view the metal price going forward, do we assess the metal price going forward as more stable or do we expect going forward similar type of volatility that we have seen again in the first quarter of this year.
And if you would looking forward say okay, the markets have perhaps overdone now the evolution, the recovery has been too much then actually justified by market dynamics then it is very likely that we again would enter into similar type of arrangement like what we have done for 2013.
Also you need to see that in the context where we have overtime diversified the earnings of the group into away from the just smelting, into smelting and mining and this hedging arrangement you need to see in the context of opening up the opportunities that are available what is typically called the soft margins, and income from expressing a view the metal price evolution. And we have had in the past healthy debates internally on that and I’m sure going forward we will continue to have those fixed rates [ph].
Wouter Vanderhaeghen – KBC Securities
Okay, thank you.
Okay. And as previously indicated with that, we’ll be closing the call, so thanks everyone for dialing in and I wish you a good day.
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