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Executives

Paul Conibear - President & Chief Executive Officer

Marie Inkster - Senior Vice President & Chief Financial Officer

Steve Gatley - Vice President of Technical Services

Analysts

David Charles - Dundee Capital Markets

Julian Beer - SEB

Gustav Sandström - Erik Penser Bank

Oscar Stjerngren - Danske Bank

Gary Lampard - Canaccord Genuity

Steve Bonnyman - BMO Capital Market

Lundin Mining Corporation (OTC:LUNCF) Q1 2013 Earnings Conference Call April 25, 2013 8:00 AM ET

Operator

Good morning ladies and gentlemen. Welcome to the Lundin Mining Q1, 2013 conference call and webcast.

I would now like to turn the meeting over to Mr. Paul Conibear, President and Chief Executive Officer. Please go ahead.

Paul Conibear

Thank you very much operator and thank you ladies and gentlemen for joining Lundin Mining as we give our first quarter 2013 earnings call.

Joining me today to help answer questions at the end of the presentation are Marie Inkster, our Senior Vice President and Chief Financial Officer for the company, and Steve Gatley, who is Vice President of Technical Services.

Operational highlights for the first quarter of 2013: Operations remain on track in aggregate to meet annual production guidance for Lundin Mining. Copper production was inline with expectations with Neves-Corvo coming bang on target for grades and excellent time for coverage. We achieved a new copper production record at the Tenke Fungurume mine and the small circuit that we have there for copper production.

Both zinc and lead production were below expectations for the quarter. We had issues with the backfill system at Zinkgruvan, which started in Q4 and extended a little bit into Q1, which required us to change the mine sequencing and that change in mine sequencing led to lower than expected throughput and lower expected grades for zinc and lead. Those problems have since been corrected.

Neves-Corvo achieved record zinc production as expected, as we’re ramping up tonnes and grades and use of the zinc circuit in Southern Portugal.

Overall in aggregate our cash operating costs were in line at Neves-Corvo and Aguablanca. Higher than expected at Zinkgruvan, but in aggregate we maintain our guidance for costs for 2013.

Tenke achieved record mining, milling and copper production in the quarter. They had excellent copper grades of better than 4% copper, oxides going into the plant and very, very good recoveries in the neighborhood of 94%; recovery that produces capital.

Financial highlights for the quarter, we had revenues of $188 million compared to the first quarter of 2012, $215 million. Net income was $50 million, which was about $0.09 per share compared to $0.58 for the similar quarter in 2012. Operating cash flow from our own mines, not including the contributions from Tenke were $46 million for the quarter compared to $51 million for the previous quarter in 2012.

We had a new milestone, an excellent milestone at Tenke with cash returns of $45 million in Q1. We would expect those cash returns to be quite significant month-by-month and quarter-by-quarter. Cash distributions back to the funding partners as 2013 progresses.

At the end of the quarter Lundin Minings net cash was $199 million, that’s versus $242 million at the end of the first quarter of 2012. We ended with $199 million at the end of the quarter after servicing the capital investment that we made along with Freeport in the Kokkola cobalt refinery which we paid for in Q1. As of yesterday April 24, current net cash position is $214 million for Lundin Mining.

Just looking at the water haul of production statistics here on copper. In aggregate it’s comparing the first quarter of 2012 compared to the last quarter here. If you see we’re down a little bit on throughput, but significantly down on grade. In Q1, 2012 Neves-Corvo ran into some particularly high grade massive sulphide spokes, but that volume spokes are now history and you can see the contribution to copper production that Aguablanca is now starting to bring back to the company.

In regards to zinc and similarly for lead, we were down a bit on throughput and down a bit on grade overall at Zinkgruvan. You can see nickel production is back up now from Aguablanca and we’ll continue strongly quarter-by-quarter for the next year or more at Aguablanca.

Looking at the waterfall of operating earnings, you can see they are down on volume, but significantly down on price, metal prices achieved year-to-year. You can see that basically our operations perform quite well on a unit cost per tonne mine and we basically kept our cost profile file study and in some cases improved that and you can see the contribution that Aguablanca is now starting to bring back into our earnings.

Taking a look at normalized earnings, we had recorded net income as I mentioned of $50 million and the one significant adjustment to that on adjusted net income was the $15 million that we recorded in the first quarter that came from insurance proceeds on the Aguablanca province that we had [previously in the pit] (ph). So adjusted earnings per share $0.07.

Looking at the cash operating cost, as I mentioned we are maintaining our guidance from our own operations. Neves-Corvo we achieved $1.83 and despite particularly low and below budget zinc prices which was the credit there. So pretty good performance there on operating cost overall in aggregate of Neves-Corvo, $1.83, compared to last year $1.63, because we had those high grade spokes coming through, but basically we come in as guided at $1.80 at Neves-Corvo and we continue to carry that guidance for the balance of the year.

Zinkgruvan as you’ve noted, we came in higher at $0.42 per pound of zinc produced. We had a much lower lead by-product. That was also affected by throughput and the recoveries. We do maintain our guidance of $0.20 for Zinkgruvan. Aguablanca had excellent performance overall in aggregate for this first quarter as they are ramping back up at $4.66 compared to guidance for the year on average at $5.

For those who may have listened to the pre quarter earnings call last week, you’ll note that we achieved $1.23 as the cash operating cost for copper production with cobalt. Credits were lower than expected. Freeport had been guiding the year in a more optimistic, a metal environment, sort of a month ago forecasting $1.03. They now increased the cash operating cost guidance to $1.18, but that’s still a fifth quartile, very profitable copper producer.

Operations: An outlook here on overall physical production of metal from Lundin Mining and our investment in Tenke here. We’re heading to 50,000 tonnes, 55,000 tonnes of copper production from Neves-Corvo and some good contributions from Zinkgruvan and Aguablanca.

So in aggregate you should probably expect the new mining to produce in the neighborhood of 60,000 tonnes of copper-zinc concentrate from our own operations and I think they are performing very well, so Freeport have upped the copper cap load guidance. So our attributable share of this improved guidance now was 47,300 tonnes of cap load.

So in aggregate Lundin Mining has a copper exposure of 105,000 to 100,000 tonnes of copper for this year and in aggregate balancing all the outlets, we still have exposure to above $1.50 of the capital operating cost in aggregate to our operations, so very good margins in aggregate from that.

And on a zinc focus here, Neves-Corvo continuing to ramp up towards 50,000 tonnes of zinc in concentrate for this year. Zinkgruvan in the sort of the 75 to high 70’s range for the year to give us 125,000 tonnes in concentrative zinc. And big contributions too from lead there, probably 35,000 tonnes of lead, and nickel is contributing profitably to our operations with 5,000, 5,500 tonnes of nickel for the year in concentrate.

I’ve got some slides on each of the operations to provide a few highlights; 14,300 tonnes of copper production. We were bang on grades there at 2.7%, which is the average grade that we have forecast for the year. We are budgeting 88% recoveries, so you can see that in the first quarter we improved on that at average of 91, so very, very good performance for the mill as we developed some good changes we’ve made there for taking circuit.

Zinc production achieved a quarterly record, which we did, in fact as we ramped up with more tonnes. Recoveries continue to show consistent improvements. Zinc recoveries of the Siberian Pirate Gulf type mineral you know are challenging and take a lot of expertise, so we started the quarter in the low 70’s and by the end of the quarter we were in the high 70’s. So we are now, our targets there on that continue to be consistent and improved and we maintain our annual production and cost guidance for copper and zinc production for Neves-Corvo for the year.

Just two comments on outlook of I guess a few things we’re focusing on. We’ve been successful in reorganizing our mine timing to bring on some higher grade in zinc production. Obviously zinc price is under pressure, so we are looking to bring in some higher grades and get some better margins for the last half of the year here and we expect to start mining significantly with higher grade zinc in Q3 of this year.

We made some significant changes to the underground shift rosters back in September that came officially into play at September of last year. Previously we were working with a very inefficient underground mine roster system, which was somewhat affected by legacy issues and also the labor law aspects in Portugal.

With the austerity measures that Portugal has brought in very successfully in the country, it did change some of the overtime premium requirements and gave more flexibility to shift rosters, which we’ve been able to take advantage of and we have a much better roster system underground, which is improving not only equipment availability and delegation of people to different caps over different shifts, but also its improved lifestyle here. They work a more normal schedule.

We’ve also been focusing very much on the hoisting capacity, which is ultimately the bottleneck. At Neves-Corvo we’ve made some improvements already in cycle times and have some expert consultants in taking a look at if there’s something dramatic we can do to improve hoisting capacity over the next couple of years. So making some good progress there and we’ll report milestones when we hit conformation of them as the year progresses there.

Turning to Zinkgruvan, we produced 15,700 tonnes of zinc, 6,600 tonnes of lead, pretty good copper. The zinc and lead production was just equating for the quarter. Compared to the past as I mentioned we had some pretty still delivery problems that we were experiencing in Q4 that carried on in the depth into Q1, until we had a new backfill line. So we’re back on track there and we’re catching up pretty good on that. So we maintain our cost guidance and production guidance for zinc production and lead at Zinkgruvan.

Consistent with Neves-Corvo, I think we have some great initiatives underway at Zinkgruvan. The management there continues to make progress on the front end of the plant, which is a pretty old plant. We’ve been able to lead a bunch of conveyors and screen systems there and keep the plant availability up and improved.

We’ve reduced our dust and noise emissions there. We’re still getting great recoveries and we continue on with the feasibility study to potentially replacing the whole front end of that plant to get our tonnage up and get to the liability of Zinkgruvan front end improved and we’ll come out with results prior to the end of Q2 for that study work.

Aguablanca, [Louis Marino] (ph) and his team have done a great job in bringing this mine back into production here under pretty difficult stability conditions that we’ve experienced in the south end of the pit here. So they’ve had excellent nickel recoveries that remain on grades, tonnages as expected. So they are contributing nicely to our bottom line.

Once again we had the slope failure in Q4, 2010 that caused the shut down of the mine for a good portion of the year. We brought it back up in August of last year successfully. We had some more slope stability problems. We had an insurance claim there. Last year we got close to $8 million from that claim and the balance of that claim, $15 million contributed to our bottom line, which was recorded in Q1 earlier in this month. We maintain our annual production and cost guidance for Aguablanca.

Tenke Fungurume: Outstanding performance once again in Q1 with record steps in mining, milling and copper production and fantastic grades in recovery. They had a total production on a 100% basis of more than 54,000 tonnes of copper cap load and 25,000 tonnes of cobalt coming out of the operation, with an aggregate cash operating cost of $1.23 on copper basis. So a tier one asset and it continues to really generate in a lot of cash to its partners.

The nameplate capacity of Phase II with 14,000 tonnes per day of ore through the mill were running significantly higher than that on an average basis overall in the quarter and the big milestone was cash distributions. We received cash distribution at February of about $13 million and another one in March of $32 million. So the partners that have funded significantly over many years here are now getting a cash back to repay those loans and we would continue to expect that cash to be quite significant coming back to Lundin Mine this year.

We have been able to benefit from Freeport, upping the guidance on capital production to just under 200,000 tonnes for this year and they did increase their cost guidance to $1.18 from $1.03, primarily as a result of lower expected cobalt credits in the operation.

Just looking at I guess some milestones ahead, some significant things for Tenke, the cash distribution is really there. It’s the big story on Tenke there to the partners as it start to repay the investments that we’ve made over time here. At 350 copper we are estimating about $130 million coming back to Lundin Mining for this year. Obviously we’ve got softer copper prices, but we were suppose to be down and not too long.

There’s significant effort continuing to go on, on looking at heap leaching of significant low grade oxides which actually grade better than 1% oxide, with are currently being mined with stockpile, so there’s a demonstration scale. The heap leach project which is going on now and we hope to see results towards the end of this year on that and there’s extensive drilling and test work and they are a great effort going on permitting and community concentration etcetera for Phase III and Phase IV expansions, which get into more oxides of our capacity and ultimately sulphides from Tenke Fungurume.

You can see the history of production. We’ve improved the guidance for 2013 now to just under 200,000 tonnes a cap load and we expect Phase III will ultimately come on, possibly within a couple of years here to 270,000 tonnes of cap load production, which would use that installed over capacity that we have and trading at the back end of the plant now from Phase II and ultimately we’re targeting 400,000, 500,000 tonnes of production from Tenke Fungurume in sort of the five to seven year horizon, all depending on a bunch of circumstances that would be onsite.

We are pleased to close the acquisition of the Kokkola cobalt refinery in the first quarter. Lundin Mining paid $116 million of their cash contribution, which is about $95 million normally for acquisition price plus a contribution to working capital as cash came along with the business.

This is an excellent world-class cobalt refinery. It’s the largest of its kind in the world they say. A global market leader in cobalt derivative products, which penetrate half dozen or so special value added products in the cobalt industry between metals and super alloys and battery business and that sort of thing.

It has the capacity to refine 100% of Tenke’s cobalt production. It comes with a staff of more than 400 people; very skilled and the technologies and experienced management team and a great market penetration. So we’re quite pleased to be involved in this with the Freeport and Gecamines.

That’s really the end of my presentation for today. Lundin Mining continues to be very comfortable with our existing operating assets and our exposure to Tenke, high quality long life mines that are performing well. Each of those assets, including Aguablanca at this moment combined that we have, have opportunities to optimize the existing operations and exploration potential.

We have no high risk, major capital projects which I think is being rewarded in the markets right now, which are very volatile. We have been looking at growth initiatives over the last year and half and from those who know us well, we’ve been very disciplined in those. We will continue to be opportunistic, but not ready to do anything. We have strong cash flows and an excellent balance sheet.

Operator I would turn the call over to questions. Thanks very much.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions). Our first question is from David Charles from Dundee Capital Markets. Please go ahead.

David Charles - Dundee Capital Markets

Yes, good morning Paul. I have two questions. I suppose the first one is fairly straightforward. If the price environment continues to deteriorate and I suppose we have to wait and see if that’s what the final outcome is going to be, and you’ve highlighted today a number of initiatives that you are looking into at the various projects.

I’m just wondering, do you have any possibility to look at order cost cutting at the different operations. I mean, we they are running pretty well now. As you said even in Portugal you got used to the roster changes, etcetera, and I’m just wondering if there’s any capacity in the system to lower cost a little bit.

Paul Conibear

Yes, for sure Dave, and we’ve candid and constructive discussions with our GM’s in our quarterly operations endeavor that we just had a couple of weeks ago when I ran around all the mines in the quarterly tour here.

I mean fundamentally we expect metal prices to rebound here. However, it’s prudent to have plans in place. I can give you some examples of where we have quite a bit of discretion that we could react to pretty quickly.

We got a exploration budget of $40 million to $50 million for this year and that’s a kind of thing you can react to pretty quickly and kind of if things get in dire, to a certain extent, lets say on zinc where the margins of Neves-Corvo are pretty thin right now and we got sort of high 80’s cost environment, we have some discretion there to back off on zinc. That could give us a bit of plan to bring up more lower grade copper, to come up with some contingency plans there, so we can continue to use the shaft and for the most still get decent margins, so those plans are in place.

We don’t have a big capital spend this year, but certainly again on some of the plants we have at Neves-Corvo and Zinkgruvan on projects, we’ll probably have an aggregate $10 million to $20 million that are discretionary, it couldn’t be differed.

I guess the areas that would be the absolute last thing to address would be sustaining capital in the underground mines and take a certain amount of investment. You can take short-term measures to protect the balance sheet if you really have to, but those inevitably affect your production a year and a half down the road.

So we are always looking medium term or long term with that sustained capital investment. That would be the last thing to go, but yes, in a really tough environment, we have all sorts of room to move and a good balance sheet, essentially a strong net cash position.

David Charles - Dundee Capital Markets

That’s a very good answer. I think it’s a very frank answer. May be just a second question then; you talked about potential to maybe make an acquisition. You say that you are opportunistic. As we see a week or so ago, we see that in order to get the grand core deals, the ones they’ve offered to maybe sell something like (inaudible).

So I’m just wondering, given the number of potential projects that could be out there, I mean how are you approaching that and what do you think is going to ultimately – do you have any idea as to what the valuation is like for Neves, given the number of projects that are available for acquisition.

Paul Conibear

Yes, I mean we are not ready to anything new Dave. We’ll be opportunistic and for those like yourself who knows quite well, we looked at a couple of things significant in last year and everything and we walked away because the margins weren’t there.

This is a tougher market, so obviously the thresholds are increased when we go to look at decisions like acquisition and we are a little more cautious, although we are still positive. We are still focused on copper if you can find some good things.

I would say it’s for quality assets that are in production. There are almost all these fully priced at all times, so I don’t expect any raging bargains to come out in the copper business for operating assets. Although the majors have announced a number of them, that they are going to be divesting, three or four of the majors have new CEOs.

I think over the next six month maybe there will be some decisions on divestment to see what happened with people like (inaudible), although its looking like its way too big for us at our current stage of life. I won’t comment on the other types of assets, but we are looking opportunistically within Neves.

David Charles - Dundee Capital Markets

Excellent. Thank you very much.

Paul Conibear

Thanks Dave.

Operator

Thank you. The following question is from Julian Beer from SEB. Please go ahead.

Julian Beer – SEB

Thank you very much operator. Good morning to you. Paul can I just start off and ask two questions on the cobalt side of things. Firstly, with regards to copper, what sort of earnings impact would you expect from that business on a quarterly pre-tax basis net to you. Would you expect that to start contributing in Q2? From what sort of excess value amortization do you think you can have.

Paul Conibear

Yes Julian, I wish I could give you the kind of the data that you would like with that question, but three quarter operator and we haven’t given any earnings guidance or any specific guidance of Kokkola. That will be for us recorded as equity pick-up in our balance sheet and we’ll start to see quarter-by-quarter, the impact that that is going to have and we expect that to be positive.

We are going to have to really wait for three fourth to start to come out with guidance on Kokkola. The acquisition has only really been freshly closed over the last, just a bit more than a month, so I can’t really give you data there to help, expect that we are very pleased to be involved in that acquisition that was discretionary we didn’t mean to be -- we think it adds value to Tenke.

Julian Beer – SEB

But do you expect to report that separately from Tenke.

Marie Inkster

Julian, well currently there is nothing right now and you’ll see a change in our segmentation that need to probably take down volume. We will have to look for a report on how they are going to disclose it as a part of the Tenke business separately.

Julian Beer – SEB

And we’ll wait for that. Just carrying on the cobalt business, what’s your take on how the companies, authorities will deal with cobalt hydroxide for about half of Tenke in the new integration export instructions.

Paul Conibear

Well we don’t expect any impact on just with Tenke at all. We have not had any disruptions historically or currently and not expecting any to our cobalt hydroxide production. Cobalt hydroxide is not a concentrate per say. It’s a significantly processed Cobalt product, which is directly used in certain wide patent technologies and batteries and everything. So we don’t expect to back you up on that.

Julian Beer – SEB

Okay, so but the main thinking here is that the charts are being anyway protected.

Paul Conibear

Certainly.

Julian Beer – SEB

Right. And finally for me, back in May of last year there was some type of some results coming out by the end of 2012. I think the indication was in 2013. Is there any key reason for the progress?

Paul Conibear

Nothing specific. Over the three quarter one of the worlds best is copper heap bleaching and there are a lot of different ore types and a lot of different ore zones there. So they are proceeding very thoroughly and progressively larger scales of testing on copper heap bleaching.

So we have to be patient with their test, study process, notation price demonstration, which has been permitted and which is being build and it takes quite a few months to run a bunch of different ore types through this larger scale. So I’m untimely very, very optimistic on the addition on heap bleaching. It’s just the timing I can’t predict.

Julian Beer – SEB

Okay, but on the same product now, on site is the first testing fracking the space.

Paul Conibear

Yes absolutely, yes.

Julian Beer – SEB

Great. Thanks a lot.

Paul Conibear

Okay, thanks Julian.

Operator

Thank you. The following question is from Gustav Sandström from Erik Penser. Please go ahead.

Gustav Sandström - Erik Penser Bank

Thank you operator. Good morning everyone. My first question regards Neves-Corvo and did you mine any other sort of material for this quarter?

Paul Conibear

Yes. Historically lets say over the last half a dozen years or so there is a kind of statistic of this outer reserve material and for some certain instances you don’t know what that is. We have complex ore bodies there.

We do a certain amount of drilling in areas to produce the proven probably reserve, we base our mine plan on that. We go into the area and historically we’ve been finding between 15% and 25% additional mineralized material, which is economically viable in those areas, because they are quite irregularly shaped in the (inaudible).

Over the last couple of years, as we get into newer areas the percentage of the outer reserves has been increasing. Last year we mined more than 40% of the material that went though the mill. Copper was what we called out of reserve. So its beneficial, its economic, it added to the life of mine, it helps slow the mill, some of it is lower grade than the proven provable reported grades.

And first quarter we got rough numbers, but we do sort of a mid year reconciliation and detail. But order of magnitude, probably 35% to 40% of the copper that we put to the mill on a tonnage basis in Q1 this year was at a reserve. If you go to the metal content in there, its probably 25% to 30%. So beneficial adds to the bottom line; it’s profitable. So yes, we continue to enjoy the reserve material.

Gustav Sandström - Erik Penser Bank

Great thanks. And if I recall correctly, you previously mentioned that the cut off grade for those material that you have been using up had been somewhere around 1.6% and I’m just wondering, given the price haul of copper recently, at what price levels will you discontinue mine cutters or material.

Paul Conibear

It would have to be much, much lower copper prices than we are talking right now and we are still enjoying significantly better than $3 copper and I suppose that I have to run numbers. If you are in the low twos or something, we would take some action there on cut of rates, but certainly not in any pricing environment for copper that I could envision.

Gustav Sandström - Erik Penser Bank

Great thanks. And also regarding the M&A strategy, obviously you are getting a lot of questions about this, but if you could just put some color, are you primarily looking at producing smaller assets, are would you also consider a bigger project that you’d have to spend quite a lot of traffic on for the next two, three, four year before any production come out of it.

Paul Conibear

Yes, we’ve been I guess pretty consistent on the traffic for more than a year now. But what I think would be ideal for Lundin Mining is bolting on some reasonable sale copper, pulling with other corporation that are already producing, already know entities or things that ready to build, that are not too big in scale.

Our overall aggregate annual metal production between the range of lets say 30,000 and 80,000 tonnes of metal, relatively low risk environments, no process technology risk, hoping that our underground we’re comfortable with both. Those are kind of the profiles. But our priorities are our own operations and we’ll be opportunistic if something comes up over the next six months or the year.

Gustav Sandström - Erik Penser Bank

Great. And also just a question, I guess will come to mind given your current cash flow generation. At what point if you can find a suitable acquisition target will you consider share buybacks or even dividends to shareholders?

Paul Conibear

We brought the topic of dividends first to the board in June of last year. We didn’t think that we had a point to able to do that and we readdressed it at our year-end meeting with the board and again if you take a look at the companies in our states that are paying dividends and what their cash position is and the amount of dividends they are paying, we don’t think we are quite their yet. So I committed to come back to the board with opinions and when we do our 2Q results, which will be the third week of July.

Gustav Sandström - Erik Penser Bank

Great. And finally for me, I’ll add on to Julian’s question regarding heap bleaching. You mentioned that you were hopefully about some results or some use regarding the matter towards the end of the year. Just a rough estimation, given we get some sort of results by the end of this year. How long would you expect lead-times to be in a hypothetical environment, before we can get actually production from heap bleaching. Thank you.

Paul Conibear

Yes, I think if you take a look at any project, and I used to be a project guy. You take the longest piece of equipment and add on about four or five months and that’s your project schedule. So the backend of the plating capacity is already installed. So I would imagine sort of 12 to 16, 18 months period from the time that the operator says go on a heap bleach project, we’d have it up and running.

Gustav Sandström - Erik Penser Bank

Great, all right, that’s all from me. Thank you so much.

Operator

Thank you. The following question is from Oscar Stjerngren from Danske Bank. Please go ahead.

Oscar Stjerngren - Danske Bank

Yes, good morning. You mentioned at the end of your presentation that you have no major CapEx projects and strong cash flow and the strength of the company. I mean do you feel that the recent metal prices falls, especially from copper have made sort of CapEx expansion less effective and perhaps acquisition proven expansion more attractive to say how it was lets say three month ago.

Paul Conibear

I don’t really think that’s changed. You have to take a look at each circumstance on its own. Certain CapEx expansions have great incremental value to add and others have low margins with the lower copper prices that we have now, especially lower zinc price you would be a little tougher on your decisions, whether you did that incremental expansion.

I think there will be opportunities coming up from the majors of the deductive non-core assets. Obviously when they come we’ll be interested.

We don’t have any large capital investment opportunities at our own mines, expect to put in a new shaft at Neves-Corvo and we studied that very thoroughly over the last couple of years. And I think it would take a much longer zinc environment to warrant that. So that’s an example or that’s something where we have differed decisions on a big capital investment or their own operations because of falling metal price.

Oscar Stjerngren - Danske Bank

All right. Thank you very much.

Operator

Thank you. The following question is from Gary Lampard from Canaccord Genuity. Please go ahead.

Gary Lampard - Canaccord Genuity

Yes, good morning everyone. I had a couple of questions related to the cash distribution from 10K. Looking at the results, $45 million seems a touch high compared to the operating performance of the asset during the quarter and I’m wondering if the joint venture is actually releasing some surface cash off the its balance sheet and if that’s the case, whether or not that will continue.

And a related question is, can you give us some color as to the potential schedule for a decision on Phase III, so we can from a view as to when the joint venture may desire at lease to start to build up its cash balance in advance of capital commitments.

Paul Conibear

So Gary yes, a protective comment there of the cash distribution. I don’t know the exact number, but there was a bit of surplus cash that has been sitting in the entities, that they were keeping for a rainy day on the final Phase II project cost which was needed. The Phase II has come in under budget and on schedule, so there was a bit of that, but I don’t know how much was surplus built up there.

As far as the timing of Phase III, there is still a lot of study work to go that three quarter are working with a high priority on. So whether it’s the end of this year or early 2014, I feel that its possible that they’ll come out with some guidance on when Phase III is going to happened and what it consists of, but there’s nothing that we can telegraph at this point in time on that.

So certainly any modeling that we’ve done, on a lot of different scenarios of expansion showed that any reasonable copper price environment, that the surplus cash flow from Tenke should pay for those scratches.

Gary Lampard - Canaccord Genuity

Okay, thanks very much for that Paul.

Paul Conibear

Okay, thank you.

Operator

Thank you. The following question is from George Topping from Stifel Nicolaus. Please go ahead.

George Topping - Stifel Nicolaus

Great, thank you. Paul on the $40 million of exploration for this year, could you break it up? How much of that is on the existing operations and how much is on grassroots exploration.

Paul Conibear

Yes, first if I remember on here, I think we’ve given a bit guidance on that before, but I think we got, lets see, $10 million maybe for Neves-Corvo and then in aggregate between the Zinkgruvan and Spain and Ireland, I don’t know if there’s maybe another 10 or something like that. We might have five dedicated 5 or 7 or something dedicated to Chili and then the balance would be either unallocated or in Easter Europe; that’s close to $40 million.

George Topping - Stifel Nicolaus

Yes, it’s pretty close. It looks like looking from the Q1. Of the grassroots, would you rank them as Chili your top pick there?

Paul Conibear

Well, I think probably from the disclosure we’ve given, we are keen on the Southern Hemisphere investments with the owing property where its a low risk environment and modest in size, excellent infrastructure in three properties, one which is gold rich, which is a southern hemisphere drilling and I think we have excellent earning returns there. I think 75% for $35 million ages over multiple years. So that’s when we get a pretty high priority.

George Topping - Stifel Nicolaus

Right, and just the second question is on sensitivity. This too might test from memory or if it’s been done yet. For Kokkola with the Kokkola being hard hit, how does that change your sensitivities to cash flow with changes to the euro.

Paul Conibear

Haven’t run those kinds of sensitivities to be honest. I think we’ve budgeted 1.3 euros to the U.S. dollar for our own operations. Honestly we don’t know what three quarter is aiming for, you have a denomination there, but certainly its operation that its costs are in euros. Don’t know the sensitivity.

I think from our own experience over the last couple of years, in our own operations, our own operations have been far more sensitive to exchange rates than they have actually to increased operating cost structures like power consumables or something like that or labor.

George Topping - Stifel Nicolaus

Yes. Well its quite tropical just now that the European easing, that’s a rumor. Well, thank you.

Paul Conibear

Okay, thanks Greg.

Operator

Thank you. (Operator Instructions). The following question is from Steve Bonnyman from BMO Capital Market. Please go ahead.

Steve Bonnyman - BMO Capital Market

Hi, good morning. Just a little bit on the Neves side. When you take about higher grade zincs that you are hoping to access in Neves-Corvo later in the year, is that going to be grades and recovery similar to what we saw in the Lombador fleasibility studies which was I think like 7.8%, 7.9% zinc and about a 80% recovery.

Paul Conibear

Yes, those numbers are pretty – they are in order I’d say, yes.

Steve Bonnyman - BMO Capital Market

In terms of the tonnage as you start mining into that, that sequence, should we look at a similar distribution in coppers in course as we saw in this quarter or your trying to move it around a bit.

Paul Conibear

I honestly don’t know Steve. I’d have to get back to you on that, because I haven’t looked at the details for this sort of evolving mine time that we have for the backend of the year. I mean copper is always first priority, and I think that generally speaking we’ll probably try to keep to similar tones of zinc ore that we had originally planned just to start the phase.

Steve Bonnyman - BMO Capital Market

Thanks so much. All my other questions have been answered.

Paul Conibear

Yes and then Steve, we maintain our guidance. Steve Gatley, can you help with that answer at all.

Steve Gatley

As far as I’m aware we will maintain our originally planned tonnage for those copper and zinc and it would be very much as we produced in the first quarter. We’re just looking to optimize the zinc performance by pushing the head weight up.

Steve Bonnyman - BMO Capital Market

Okay, thanks. And given you talked about the higher grades in sort in Q3 and Q4, but obviously this is going to have some extension into next year as well.

Paul Conibear

Yes, I would expect. Like we published a 43-101 update, which gave a 10 year plan, I think we put that into public filing in January or something. That’s probably your best guide of where we are going with zinc over the next five-year horizon until we’ve got more drill results and you will see defiantly, I’m sure you’ll see higher grades and that’s along with our contributing and more tonnage.

Steve Bonnyman - BMO Capital Market

Perfect. Thanks very much.

Paul Conibear

Thank you.

Operator

(Operator Instructions). There are no further questions registered at this time. I would like to return the meeting to Mr. Conibear.

Paul Conibear

Well, I’d like to thank everybody for joining in on our first quarter earrings call and look forward to presenting again in late July. Thank you very much.

Operator

Thank you. That concludes today’s conference call. Please disconnect your lines at this time and we thank you for your participation.

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