Antofagasta's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.18.14 | About: Antofagasta plc (ANFGF)

Antofagasta, Plc (OTC:ANFGF) Q4 2013 Earnings Conference Call March 18, 2014 5:30 AM ET

Executives

Andrew Lindsay – Director

Diego Hernandez – CEO, Antofagasta Minerals

Alfredo Atucha – CFO

Alejandro Rivera – VP, Corporate Development

Analysts

Jason Fairclough – Bank of America Merrill Lynch

Fraser Jamieson – JPMorgan

Alain Gabriel – Morgan Stanley

Tim Huff – RBC

Alon Olsha – Macquarie

Myles Allsop – UBS

Anna Mulholland – Deutsche Bank

Jatinder Goel – Citigroup

Operator

Andrew Lindsay

Good morning everybody. My name is Andrew Lindsay, I run the Antofagasta office here in London. Just to briefly introduce everyone we have here today we have Diego Hernandez, our Chief Executive; Alfredo Atucha, our CFO; and Alejandro Rivera, our Vice President of Corporate Development. Diego is going to give a presentation, it will be followed by time for questions and people who are watching this on the webcast, I’m told you’ve box underneath if you type your questions in there I will ask your questions on your behalf towards the end of the Q&A session.

And people who are on the audio conference, you can follow the procedure there and we'll be able to hear you ask a question later.

So with that I'll hand over to Diego.

Diego Hernandez

Thank you for your introduction Andrew and may I add my welcome to all of you who are here today, as well as those attending via the webcast and conference call.

I would like to start with an overview of the Group, our operational performance during the year and touch on two key themes, margins and capital efficiency and capital discipline. Following this I would like to pass over to Alfredo who will walk you through the financials in more detail and speak about cost management, a key focus area of the Group. I will then run through our growth opportunities and then close with a few words on 2014 priorities and why we believe Antofagasta remains a solid investment.

When we have finished the presentation I will open the floor for questions so if you do have anything you would like to ask please wait until the end.

Firstly, a quick overview of the Group. We are proud to be presenting a good set of financial results in the challenging copper price environment. We have a portfolio of high quality assets which are well positioned on the cash cost curve generating strong operating cash flow. This is our second consecutive year of record production and we continue to expand our resource base.

Our focus remains on operating and project cost control. We continue to generate strong margins and deliver high returns on capital, but we know we can improve on this. Capital discipline has been central to how we operate and this year we’re making a significant capital return to shareholders of $937 million while still maintaining our capital expenditure programs. Our focus remains on value, prioritizing lower risk, higher return brownfield projects.

With this we continue to invest through the cycle and our strategy remains unchanged. If we successfully complete all of our current projects we expect production to reach nearly 900,000 tonnes in 2018. As you know, safety is a high priority to me. I have previously reported at our interims that we had two fatalities in 2013 and very tragically I now have to report that early this month we had another fatality. The root causes of the fatalities have been investigated and actions have been taken and procedures are being implemented to ensure that incidents such as these do not occur again. The causes of the latest fatality are currently being investigated and once complete we will implement the necessary changes. Our policy is zero fatalities and my ambition is not just to have no fatalities in any one year but to have no fatalities in any year. We are working hard to achieve this.

As we have previously announced, 2013 was the strongest year of production in the Group's history. We produced 721,100 tonnes of copper, 1.6% ahead of 2012 and accounting close to 5% of global mined supply. By-product production was down on 2012 due to lower gold grades at Esperanza and lower moly grades at Los Pelambres.

Although cash costs rose in 2013 due to a number of factors our net cash costs of $1.36 per pound, remain well-positioned on the cost curve and were 3% lower than the guidance we issued at the beginning of the year. Our three brownfield projects are progressing well and I will go into more detail on these later on.

Antucoya reached 32% physical completion as at the end of 2013 and remains on track for production to start in the first half of next year. Costs remain a focal area of the Group and we are implementing initiatives across the whole business to reduce costs and control them better.

Revenue was impacted by lower realized prices resulting in an 11.4% decrease in revenues despite higher production. EBITDA fell 30.1% to $2.7 billion reflecting the lower price environment and higher cash costs as guided for 2013.

Net income decreased by 36.4% to $660 million reflecting this drop in EBITDA and increased withholding tax related to this year's dividend. The Group continues to generate strong operating cash flows although this was down in 2012.

We have decided to make a significant return of capital this year and the Board has recommended a final dividend of $0.861 per share, or $849 million in total, which makes the pay-out ratio for the year 142% compared to 70% pay-out last year. This pay-out ratio is our highest ever and reflects the restructuring of our balance sheet to make it more efficient, while still retaining the Group's activity to grow, either through the development of projects or by acquisition.

We have also amended our dividend policy and Alfredo will explain this to you a bit later, but from now on we will only refer to interim and final dividends and not to ordinary and special dividends. Just so that you are clear, this renaming doesn't in any way reflect any change from our continued willingness to distribute excess cash to our shareholders whenever we deem it appropriate.

Over the last five years our average dividend pay-out ratio has been 78% and equates to some $3.7 billion being returned to shareholders during that period. This significant dividend is to restructure our balance sheet so that going forward we will hold less cash than we have historically. This will make our balance sheet more efficient, especially at times like this when such poor returns are generated on cash.

What we have done over many years is generate high EBITDA margins and to have a healthy return on our capital employed. We show here on this graph, our margins and ROCE over the last five years compared to the constituents of the FTSE 350 Mining Index and you can see that although our returns are down they are still strong.

Going forward our intention is to keep our margins and ROCE strong, not by relying on the copper price, which will strengthen, but by concentrating on managing our costs both on projects and at our operations. I would now like to pass over to Alfredo who will walk you through the financials in more detail and speak a bit about how we will manage our costs going forward.

Alfredo Atucha

Thanks Diego for the introduction. Good morning ladies and gentlemen. I am glad to be here today to present to you the Group financial results and also to discuss about the cost management.

Firstly, I would like to look at the revenue. As illustrated on the graph on the right hand side you can see all of our key commodity prices were down during the year. Our realized copper price fell 10.6% in 2013 which resulted in a $500.7 million decrease in revenues despite higher sales volume, although realized gold and moly prices fell 19% and 18.9% respectively further impacting revenues.

Although there was an expectation of a copper surplus in 2013 this probably did not materialize, despite a strong increase in mined supply supported by better operational performance of a number of mines and brownfield expansions.

China remains a key demand driver for copper and now accounts for nearly 45% of global consumption and although we have seen some volatility in the past month or so and especially in the last week or two, we believe the fundamentals of copper remain strong. In the shorter term it is less clear but we have learned not to make conclusions too early based on events in China as data and sentiment there change rapidly.

This graph shows a movement in our cash cost before by-product credit. Between 2012 and 2013 we saw a 9.8% increase in these costs to $1.79 per pound. The most significant single factor to impact costs during the period was the expiry of favorable price energy contracts of Los Pelambres which left the mine purchasing power at the spot prices. This has had a $0.12 per pound impact on cash costs at Los Pelambres, or $0.08 per pound impact at Group level.

With the tight current power market in Chile securing energy at favorable prices in the central grid has been extremely difficult, however the two further purchase power agreements which were signed as part of the Alto Maipo transaction in the middle of 2013 have secured additional power for Los Pelambres. This long term contract was signed at a price considerably lower than today's spot market levels, by the end of 2018 all the Pelambres current power needs will be provided under long term agreements.

Esperanza costs were negatively impacted by increased mine movement costs as new phases of the pits were developed, as well as the use of higher cost stock piles accounting for a $0.10 per pound increase in cost. El Teroso had a strong operational performance during 2013 with considerably lower costs than in the same period last year, mainly due to lower asset consumption and prolonged mining activities of the higher grade Mirador pit.

Although we saw an increase in 2013, for 2014 we expect to see flat cash costs before by-product credit, despite mining lower grade and this reflects some of the saving that we expect to achieve during 2014.

EBITDA fell 30.1% to $2.7 billion year-on-year. The main reasons for this fall were, first, the lower realized commodity prices as discussed earlier although revenues were partially supported by a 2.7% increase in copper sales volume. And second, higher cash costs principally driven by Los Pelambres increased energy costs and Esperanza higher mine movement as explained on the previous slide.

Although these factors led to $1.2 billion fall in EBITDA, as Diego pointed out on Slide 9, the Group still has a strong EBITDA margin relative to the sector at 45.3% and we are committed to ensuring we continue to have good margins.

This 2013 net profit of $659.6 million was down 36.4% compared to 2012. We have stripped out the full impairment of Antucoya taken in 2012 for fair comparison year-to-year. The main components for the fall in the year's profit were related to the $1.2 billion drop in EBITDA and higher withholding tax as a result of the higher dividend pay-out ratio. This was partially offset by lower corporation tax and lower royalties as profitability dropped.

We have included a more detailed slide here to explain why the effective tax rate in 2013 was 40.5%, considerably higher than our historical level, as this largely explains why our net earnings are much lower than many analysts have predicted. The principal factor for this increase is that we are distributing more than 100% of our net earnings for the year and this means that withholding tax is considerably higher than normal. In Chile we have to pay withholding tax on any profit distributed outside of the country, that means that when we fund the payment of a dividend withholding tax is charged on this account, currently at about 18%, and so this reduced our net earnings.

The main reason our net earnings were less than predicted is because we had paid a larger dividend than expected. Just to show the impact of this, if we had paid a dividend at a 35% pay-out ratio our net earnings would have increased from $660 million to approximately $830 million. Historically our effective tax rate has been in the range of 30% to 32% and in the future we expect it to return to these levels.

Another factor impacting the earnings was that in 2013 royalties decreased from Group average of 6% following the completion of a temporary sliding scale royalty which was enacted following the earthquake in 2010 and reversion to the preexisting lower royalty rates between 4% and 5%.

Despite the decrease in revenues the Group continued to generate significant cash, $2.7 billion during 2013. As you can see from the top graph other than for the tax payment during the period the other major cash movements were, first, the payment of $0.90 2012 full dividend which equates to $887 million plus the 2013 interim dividend. Second, capital expenditure of $1.315 billion which includes $596.5 million spent on the Antucoya project. And finally the net repayment of $530 million of debt, a significant proportion of which related the Esperanza project financing.

This resulted in a closing gross cash position of $2.7 billion at the end of the year, compared to $4.3 billion in 2012, at the end of the year 2013.

After accounting for debt the net cash position was $1.3 billion or on an attributable basis $1.5 billion. New dividend policy, earlier this month the Board approved a new simplified dividend policy. We have moved away from the progressive ordinary dividend to a dividend linked to free cash flow and earnings. This is a prudent way for a single commodity business like Antofagasta to look at the level of dividend it pays.

We are now committing to pay a minimum annual dividend of 35% of net earnings. And when we determine that we have excess cash we will distribute this once we have taken into account the Group's current and future cash balance while considering, but first, free cash flow and earning potential under different copper price scenarios, and secondly any significant known or expected funding commitments.

I will now talk briefly about the costs and how we are managing them at Antofagasta. As illustrated in the graph our starting point is good. The Group remains well-positioned on the cost curve, well within the second quartile. We will stay in the second quartile even while we have declining head [ph] grade and, if possible, we will bring ourselves down the curve by the rigorous implementation of our cost control initiatives, a number of which I would like to touch on now.

The Group is starting from a good position with low cash costs and with a relatively simple structure with only four, soon to be five, operating mines all in one country. There is always scope for improvement, especially at this point on the commodity cycle when negotiating power has shifted from suppliers of goods and services to the operations.

We have had a partially centralized supply change management system up to now but we know more benefits are available if we centralize this function further, reducing inventories, applying common policies and standards across the Group and benefiting from economies of scale. This work is underway now.

The mine supply industry has in many areas only a few players who have a substantial market share. We believe that by looking into new territories to source new suppliers we can open up competition and find more keenly priced products with the same quality as those currently on offer. In particular we will be looking in China where we will work with local agents to conduct supply analysis and quality assurance.

We also want to redesign our contract management model to improve productivity basically and target to reducing of costs, not margins. We are starting by running a diagnosis of productivity with our top 30 contractors to understand where the savings can be made and we'll later rollout this program to our top 200 suppliers.

We also want to change how we manage and run projects, rather than using EPCM contractors we now plan to use larger Antofagasta led project teams instead to ensure our interests lie at the heart of the project and to lower our capital costs. We see Encuentro Oxides project the first opportunity to do this and we're working hard to reduce the current $760 million capital expenditure budget.

There are also a number of other initiatives. To support water consumption, energy and productivity are underway such as our new long term power purchase agreement at Los Pelambres and our increased use of automated operating systems at our mines. Together all of these initiatives will allow us to offset the challenge of declining rates and we hope lead to real savings across the Group.

Now let me please pass you back to Diego. Thank you.

Diego Hernandez

Thank you Alfredo. Now let's move into growth. Despite the last 10 years of strong copper price performance commodities are cyclical. Our strategy when prices are lower is to focus on the higher return/lower risk projects such as brownfield and debottlenecking marginal expansions, although steadily advancing greenfield projects ready for future development. As you can see in our portfolio roadmap we have a number of projects at all stages of development and I would like to touch on these individually.

The timeline graph on the previous page and the graph here illustrate the impact of our current portfolio roadmap on the Group's production profile from 2013 to 2018. Brownfield expansions at El Tesoro through Encuentro Oxides and the Los Pelambres marginal expansion project provide medium-term production growth to nearly 900,000 tonnes per year by 2018, an approximate 25% increase.

Further out projects such as the Centinela Mining District concentrator through metals and the Los Pelambres further expansion will support longevity of production and further growth after 2018 and into the next decade. The Group's nearest term growth options are in Chile at our existing operations. Esperanza debottlenecking project to reach 105,000 tonnes of ore per day from current levels of 86,000 tonnes continues and we expect the project to be completed in 2015. This will add 10,000 tonnes to 12,000 tonnes of copper production a year.

The Encuentro Oxides project which is currently in feasibility stage will provide feed for El Tesoro to ensure maximum utilization of the existing solvent extraction-electrowinning plant and maintain production at 100,000 tonnes of copper per year.

Although at Los Pelambres the marginal expansion project to lift daily production by 15% to 205,000 tonnes of ore per day, entered feasibility late 2013 and we expect this study to be completed later this year. In addition to increasing throughput the project would include installing additional grinding capacity to support production as the operation moves into harder ore phase of the pit towards the end of this decade.

The Centinela Mining District includes a portfolio of projects for longer term development and growth. Perhaps the biggest change in our approach to the region has been on how we are approaching the development of the Esperanza Sur and Encuentro Sulphides projects. We were going to develop them separately but now intend to develop them as a combined project to reduce the capital intensity and maximize value. This project is currently in pre-feasibility stage and we expect to make a decision to advance the project to feasibility later this year.

Los Pelambres remains a world class asset with a significant resource base, triple the size of the current mine plan and offers the opportunity for significant expansion. However this will be a very major project and will require close interaction with the local community and the need to obtain a number of significant permits so the timescale for this is not clear at this stage.

We continue to develop our portfolio of growth projects outside Chile. Twin Metals is the Group's most advanced international opportunity with a significant resource base and the pre-feasibility study will be completed by the middle of this year. It has a large polymetallic ore body but being in America will take some time to advance through the rigorous permitting system.

Beyond Twin Metals we have further expanded our portfolio of early stage exploration agreements with various junior mining companies during the year. Our strategy of partnering with third parties allow us to utilize their in-country experience and knowledge and we evaluate progress at each project on a regular basis. The Group's successful in-house exploration has supported the continual growth of our resource base which was grown 75% over the last five years and now stand at 16.2 billion tonnes.

Lastly I would like to run through our 2014 priorities and close with our investment case and then I will open the floor for questions. For the existing business safety remains our priority and we will continue to target zero fatalities and to reduce our reportable accidents.

We will continue to focus on cost control and management and deliver on our 2014 guidance and continue to get the best operational performance from our assets. For our growth projects and opportunities we will progress Antucoya and Esperanza brownfield expansion projects, complete the Encuentro Oxides and Los Pelambres expansion feasibility studies and complete the pre-feasibility study for the Centinela Mining District and advance our various exploration projects around the world.

You have seen this slide before but just to recap. We have a portfolio of high quality assets which are well-positioned on the cash cost curve, generating strong operating cash flows. This is our second consecutive year of record production and we continue to expand our resource base.

We remain focused on cost management at both the operational and project level. We have demonstrated that our margins and capital efficiency remains sector leading. Our 2013 final dividend demonstrates our commitment to capital discipline and returning capital to shareholders.

And lastly we have not changed our strategy and we continue to invest through the cycle prioritizing higher returns, lower risk brownfield projects which will see us reach production of nearly 900,000 tonnes in 2018.

Thank you for your time and now Alfredo, Alejandro and I will be happy to take any questions you may have.

Question-and-Answer Session

Jason Fairclough – Bank of America Merrill Lynch

Thanks Diego. Jason Fairclough, Bank of America Merrill Lynch. Your peers BHP, Rio, they're talking about threshold gearing targets, so for BHP $25 billion, for Rio $15 billion, they say when their gearing gets below that level they will automatically return capital to shareholders. You're talking about returning excess cash to shareholders but could you help us think about how you're framing the balance sheet. Is there actually a target to move to net debt or will you stay net cash?

Diego Hernandez

No, no, it's not a target to move to net debt. We will return cash according to the market conditions, according to our portfolio of projects, our commitments and also we will continue to look after opportunities. Then we will not retain cash that we will not use on the short, medium term,

Jason Fairclough – Bank of America Merrill Lynch

Okay, so just to push you on this a little bit. So your peers broadly are targeting one times EBITDA as a net debt level. Again you're saying that the prudent, the appropriate balance sheet for Antofagasta is still net cash or is it something closer to zero?

Diego Hernandez

No, no, it's still net cash. We are a single-commodity company. We're a pool corporate player. We don't have the diversification that these major companies have. Then I think that we will keep on safe ground.

Fraser Jamieson – JPMorgan

Fraser Jamieson from JPMorgan. Just on the point about paying out cash, you've expressed a view that you're fairly positive on copper. You've gone through a number of the projects that are in the pipeline. Why aren't you accelerating some of those projects? Is it purely a case that you're going as fast as you can on as many projects as you can at the moment or is it the case that some of these longer term projects at the moment don't look as if they deliver great returns and you're looking to reengineer those before you push them further down the development pipeline?

Diego Hernandez

We are going at the speed that we have to go. If you look back, many companies have taken the view of fast-track the projects and the result has been high project cost and not really saving too much time. Then, I think that we are keeping very strong discipline on our projects. I think that to ensure that the projects will be on time and on budget, when you take the investment decisions, nowadays you need to advance a little more on detailed engineering in a way that when we take the decision, you can commit quite quickly the main contracts at conditions and prices where you will avoid to have surprises that comes when you change scope on your contracts.

Then, the first target in our project is to be on budget. Of course, the second one is to deliver the promise. That's important. And I think that we are going out from the fast-track practice. Then, we are doing what we can do.

With that, also, the permitting takes longer now than what it used to take and then again you have to decide, because the environmental permits, when you have the permit, you commit to do the project with a certain scope. And, nowadays, when you have to change the scope because of surprises when you are doing detailed engineering compared to basic engineering, this will require a lengthy process to change or to modify your environmental impact study. Then, it's much better to really have a well-advanced project in terms of detailed engineering when you take the execution commitment.

Alain Gabriel – Morgan Stanley

This is Alain Gabriel from Morgan Stanley. My question is on your growth targets for 2018. This implies 180,000 tonnes of growth versus 2013. Can you give us a split? We already know Antucoya. We know Los Pelambres. But where is the rest coming from? That's the first question. And second question, on the CapEx split for 2014, have you set a budget that you can share with us on the split by mine? Thank you.

Diego Hernandez

First, in Pelambres, we’re adding capacity. We are adding around 90,000 tonnes of coal per year, but half of that is to replace capacity that we will lose because of harder ore and half is new additional capacity. Also, you have to consider some lower grade. Then, that's for Pelambres.

In Esperanza, we are adding 10,000 to 12,000 tonnes of coal per year because of going to 105,000 tonnes. In Tesoro, we are only extending the life with Encuentro Oxide, and to make use of the 100,000 tonnes of copper capacity that we have there. If we don't do the project, then our production will drop to half of that. Antucoya will go to around 85,000 tonnes of coal per year and Michilla will probably be shut down during this period.

For the CapEx split, Alfredo or Alejandro, if you can answer that?

Alfredo Atucha

The CapEx for 2014 is going to be close to $1.9 billion, of which sustaining CapEx will account for $500 million, and the balance is going to be in connection with the development cost. Perhaps the most important item within that development cost is going to be still Antucoya, close to $1 billion and then finishing the Esperanza upgrading to reach the 105,000 tonnes per day. That explains the $1 billion close for Antucoya and close to $254 million for Esperanza.

Tim Huff – RBC

Yes. Tim Huff at RBC. Just a few questions. One, the payout ratio at 35%, is that going to be split into an interim and a final or are you just going to assess that at year end as a final div?

And on the cash balance going forward, you said you still want to maintain a net cash balance, but I assume that that now means sub-$1 billion is a level that you're much more comfortable with than in the past. And if you do maintain a net cash level below $1 billion, if an opportunity were to come along as a small acquisition, does that also mean you'd be willing to go into a temporary net debt position?

Diego Hernandez

Yes, of course, if we have to face an acquisition, then we have to finance that. We have a credit rating now that we didn't have before. We obtained that rating end of last year. Then, any big acquisition, of course, if we have the opportunity, we have to go to the market, to the financial market.

On how much money we will keep, with what we are doing now, say, we will have a net cash position of $1.2 billion, $1.3 billion. And if you take out the debt, well, that goes down to $400 million.

Alejandro Rivera

After the distribution of this dividend, our cash -- total cash buffer is $1.5 billion and you need to consider that we have a high debt capacity in order to use this together with the cash in hand to face any opportunity arising from the market. So I think our total cash position is enough to face the development of our project portfolio and also to face any or to take advantage or to capture any opportunity coming from the market in the future in terms of acquisition or merger or something like that.

Diego Hernandez

But we haven't seen for the time being. During 2008, 2009 crisis, well, the industry, the companies that were in a good debt position, good position, were waiting for opportunities. They didn't appear. Later on, there were some acquisitions at high prices, some write off and now again, with all this talk about capital discipline, particularly from the majors, we expected to have some sales of assets. That didn't happen or only a few happened, and then I think that's one of the reasons why we decide to give back some of the money that we have accumulated.

Alon Olsha – Macquarie

Alon Olsha from Macquarie. Two questions. Just firstly on tax, can you give an update on the tax outlook for the next few years, given the proposed increase in the corporate tax rate and the potential for scrapping of the FUT mechanism? And then just secondly, on the cost saving initiatives, can you just help us think around what the potential savings there could be? Should we think about gross cash costs at the Group level going down 10% to 15%? Or given declining grade, is it better to think about a flat gross cost outlook?

Diego Hernandez

Well, on the cost this year, we gave guidance at similar levels to what we achieved last year and that includes some savings and includes some drop in grades. Then overall, I think the good news is that we broke the trend of costs going up. We don't know what the effect of the exchange rate will be this year and that's related to corporate price and also Chilean economy expectations. For the time being, we have seen a devaluation of the peso. That should help us to keep the costs under control.

We are taking well all the actions that Alfredo described there. Some are short term results. Others are medium and long term results, will be reflected later in our balance sheet. But just to give some examples, instead of negotiating the insurance per company, we put in one package and we save $8 million compared to last year. These kind of things are reflected immediately. Others will take more time, but we have been very proactive looking after that.

In terms of tax, the new government started last week, and they reiterated that they will send a bill of law for a tax reform that will go on the first 100 days or less of this new government. We haven't had access to the bill of law yet. The business community probably will have some opportunity not to discuss the bill of law before it's sent to Congress, but at least to give their opinion about the changes.

The changes announced on the program when they were on the campaign are not in detail. One thing that we know for sure is that the tax on profit that currently is 20% will go to 25% in a period of three to four years. Let's see. And the second one is that if you keep dividends, today you pay the withholding tax only when you distribute, and now probably we will have to pay every year, even if we keep the money and we don't distribute dividends. That's the FUT issue.

They announced also a compensation for that in terms of investment. If the company reinvests, then you will have a kind of tax deduction, but it's unclear how that will work. Then I think that that discussion will go ahead on the next 60 days.

The mining companies will be less -- that's a general change. The mining companies -- that will affect everybody. The mining companies will be less affected because many of the mining companies that have completed the amortization and depreciation of their CapEx, they are paying full tax and they are distributing dividends. On top of that, we pay the royalty. Probably other companies that keep -- don't distribute dividends or use that cash to invest in Chile or elsewhere, they will be more affected.

Myles Allsop – UBS

Myles Allsop at UBS. Just to clarify a couple of things and then ask a question. So with your effective tax rate, with the new government, your base case assumption is that it stays in the 30% to 32% sort of range. Is that the way we should think about it going forward?

Diego Hernandez

Yes, but not having the bill of law, it's very difficult to give details on that.

Myles Allsop – UBS

And then with the growth to 900,000 tonnes, should we -- again, just rephrasing the question from earlier, should we be assuming that with your cost savings and so on you'll be able to keep your gross unit cash costs at $180 in 2018 when you're producing almost 900,000 tonnes?

Diego Hernandez

I think that the Encuentro Oxide project will not decrease the cash cost in Tesoro, because of the grade. But the CapEx is a much lower intensity CapEx, because we are using the existing assets. The Pelambres one certainly will improve the cost and the Esperanza one, the marginal expansion also will improve the cost. There is another project that is a small project that we haven't announced yet, because we are looking and it's not in prefeasibility yet. It's to put a moly plant in Esperanza. That will help on cash costs. The moly grades in Esperanza increase with time and that will be helpful.

And Antucoya, I think that we can manage that better than announced. We are securing some acid for 2015 and 2016 at better prices than what we had in our feasibility study. We secured a long term contract in power and normal prices. Then I think that -- and then we’re capturing synergies because we have all our operations in Chile. The companies were run quite independently, and now we are -- some of the functions we are controlling as a group and not company by company.

Then, to answer your question, say cash costs should be under control and we don't expect to go out of the second quartile.

Myles Allsop – UBS

And then a couple of other quick questions. Could you give us guidance for CapEx beyond 2014 as well, just as we look into 2015 and 2016, with the kind of plan to get up to 900,000 tonnes, where CapEx will normalize out? And then one very final question on your international projects, because this always seemed -- how much are you spending each year? And is that another great cost saving opportunity, because you haven't had a huge amount of success outside of Chile. It feels that there's a lot of money being poured down the sink there.

Diego Hernandez

I think that we don't see exploration as money that we throw through the window. We see that as an investment. And I think that Twin Metals has been a result of that and we hope to have other results in the future. I think that the way we handle exploration is quite effective compared to many of our peers. We don't have a big group of our own geologists that are expat in different places in the world. What we have is a very small and competent group of geologists that travel around the world, some in Santiago. We have also one in Europe and one in Australia.

We make these deals with junior companies, the junior companies that are in a jurisdiction that is interesting to us and that has a competent group of geologists that are working hard because of course they own the company.

And this model I think has worked quite well, and today, with the issues with the junior companies that are all looking for financing, then I think that it's not too difficult to select the right ones. Then, we are not in a situation where we need to cut everything. I think that we need to look after the long term. It's quite important. And that's why we will continue this effort and as a result of that, to increase our resource 75% in 5 years is I think -- I don't know if there are other companies that can tell the same story. And I think that that's a strength that we have and we will continue to have.

For the CapEx, if you can help me?

Alfredo Atucha

Sure. As I mentioned, CapEx for this year is going to be in the range of $1.9 billion. Next year, that is going to be reduced to close to $1.2 billion. The same amount for sustaining CapEx, in the range of $400 million to $500 million. But on top of that, the Company will begin the construction of the $760 million in Encuentro Oxide. Half of that is going to be probably spent next year and the balance is going to be in 2016.

And what is next after that is going to be the Los Pelambres margin expansion to bring that plant to 205,000 tonnes per day. Total CapEx for that project, as it was mentioned is going to be $1.2 billion and that probably will begin spending money by 2016 onwards and you may assume that the sustaining CapEx will be maintained in the range of $400 million, $500 million per annum.

Anna Mulholland – Deutsche Bank

It's Anna Mulholland from Deutsche Bank. Could I ask a couple of details on the power costs at Los Pelambres? What was your average price per kilowatt hour that you paid in 2013, and what do you expect for 2014 and 2015 before your new power purchase agreements kick in? Thanks.

Diego Hernandez

Just what we paid last year is $200 [ph] per megawatt hour. That is quite high. We were paying previously around $90. How much we will pay this year, we don't know in Los Pelambres, because we're at the marginal cost, and that will depend if it's a dry year or not, the rain and so on. But what we have assumed?

Alfredo Atucha

$155, $160 per megawatt.

Diego Hernandez

On the second half of this year, we will have this wind farm starting to generate, and then 20% of the power will be at normal long term price.

Jatinder Goel – Citigroup

Jatinder Goel from Citigroup. Just a question on your labor negotiations. How far have you been so far and by when do you expect to close the negotiations this year? And have you factored in anything in your cost guidance for this year? And just a follow up on that, does the labor think of related to a dollar based company, so that with weaker currency, they might expect a higher premium on negotiations? Or do you think the lower copper price can overrule that and you can still get a reasonable deal? Thank you.

Diego Hernandez

Well, we have four mines, Antucoya that has also trade union now. The negotiation with Antucoya, if we have a negotiation, it's not so complex, because the company is not in production. This negotiation is with the operators that we have had.

On the other four, Pelambres, we anticipate the negotiation was due I think in August this year, and we closed that recently. It was announced and then Pelambres is now with a contract for the next 48 months.

Then, we have Esperanza coming on the second half of the year, and we will see if we anticipate or not or if they want to anticipate. And then we have Michilla in December and then we have Tesoro the first quarter of next year.

We don't anticipate to have too many issues or problems or a very demanding bonus or conditions from the trade unions, because, of course, with this market, people know that things are less good than they used to be. And the cost of these negotiations has been included on the budget for this year.

The peso, if the peso weakens, well, people in Chile think in pesos not in U.S. dollars. That will not -- that will affect positively if the peso is weak to us, to our costs.

Fraser Jamieson – JPMorgan

It's Fraser Jamieson again from JPMorgan. I just had a follow up on the CapEx side of things. Antucoya, I think, Alejandro, you said there's $1 billion left to spend on that or there's $1 billion to spend in 2014. You've already spent just over $1 billion and the budget I think is $1.9 billion, so is that over budget? And is there any more to be spent in 2015?

And then on Esperanza, you've obviously got the project cost which you've laid out, but then it looks like sustaining CapEx there is $250 million in 2014, which is higher than Los Pelambres, which is double the size. So can you just talk us through what is long term sustaining CapEx at Esperanza and that point about Antucoya, please?

Diego Hernandez

Alejandro will explain that, but just to clarify, I said that Antucoya is on time and on budget, and the budget is $1.96 billion and we are on budget.

Alejandro Rivera

Well, in Antucoya, it's $1.9 billion. That figure has been maintained. So far, we have spent close to $900 million. This year, we will spend close to $980 million and there's going to be very little left for the following year. So the total figure is going to be $1.9 billion.

Fraser Jamieson – JPMorgan

Esperanza?

Alejandro Rivera

Well, in Esperanza, after completing the upgrading of the plant that is going to be done this year. This project is not expected to have any further new development CapEx. Perhaps the only new one may be the moly plant in the future.

Diego Hernandez

Yes, but that's not yet..

Alejandro Rivera

It's not yet approved, and all the rest is going to be just sustaining CapEx in Esperanza.

Fraser Jamieson – JPMorgan

So in sustaining CapEx, Esperanza about $250 million a year.

Alejandro Rivera

No, no, no. In Esperanza this year, it's going to be $250 million, but this includes, as I said, the upgrade of the plant. So it's going to be finishing what we have done in Esperanza in order to reach the nameplate capacity, plus bring the plant to 105. So on a normal basis, it's going to be less than that.

Fraser Jamieson – JPMorgan

It's maybe one to continue after, but I thought it said $460 million of CapEx at Esperanza for this year of which $250 million is the project, meaning that there's about $210 million of sustaining. So it's maybe one to.

Alejandro Rivera

In this year, let me recap the figures for this year, for clarity. This year, the total CapEx is going to be $1.9 billion, roughly speaking, of which sustaining, it is close to $551 million and all the rest is going to be just development cost. A big part of that is going to be Antucoya, as I just said close to $1 billion, $980 million and then $250 million for Esperanza. And sustaining Esperanza next year probably is going to be in the range of $100 million in 2015. This year, probably, it's going to be slightly higher because we have to incorporate new mining fleet.

So on top of the upgrade of the plant, the $250 million I was talking about, this year the sustaining CapEx in Esperanza is going to be close to $200 million on top of that. So that is the figure that you were talking about.

Jason Fairclough – Bank of America Merrill Lynch

Jason Fairclough, Bank of America Merrill Lynch. Just a follow up on the projects. Could you remind us which of these are actually Board approved as of today? Obviously, the Esperanza 105 is. It's going ahead. If we look at Encuentro Oxides and then the Pelambres marginal, are those Board approved yet?

Diego Hernandez

The Encuentro Oxides, the feasibility should be completed by July this year and then it will be approved. They will approve some -- so far, some early works that we have done. We bought some camp [ph] that was available there for another mine that stopped and we are bringing that to Encuentro and so on. The marginal expansion, the Pelambres expansion, we are doing the feasibility, that should be ready by the end of the year and then we have to apply for the environmental license and that will take probably a year or a little more. Then, the Board will approve the execution of the project only after having the environmental impact study approved. We had the approval of the environmental impact study of Encuentro Oxide last year.

Jason Fairclough – Bank of America Merrill Lynch

So just to push you, then, so approval of Encuentro by the Board would be early 2015, and approval of…

Diego Hernandez

No, of Encuentro Oxides, no, this year.

Jason Fairclough – Bank of America Merrill Lynch

This year.

Diego Hernandez

The second, probably third quarter.

Jason Fairclough – Bank of America Merrill Lynch

And then the Pelambres marginal would be?

Diego Hernandez

Next year.

Jason Fairclough – Bank of America Merrill Lynch

Would be mid next year?

Diego Hernandez

Probably mid or end of next year, depending on how.

Jason Fairclough – Bank of America Merrill Lynch

Okay, thank you.

Diego Hernandez

Okay. Then thank you very much for coming. Thank you.

Operator

This concludes today's call, ladies and gentlemen. If you would like to hear any part of this conference again, a recording will be available shortly. Thank you for joining. You may now replace your handsets.

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