First Quantum Minerals Management Discusses Q1 2014 Results - Earnings Call Transcript

| About: First Quantum (FQVLF)

First Quantum Minerals Ltd. (OTCPK:FQVLF) Q1 2014 Earnings Conference Call May 2, 2014 9:00 AM ET

Executives

Clive Newall – President

Hannes Meyer – CFO

Zenon Wozniak – Director, Projects

Martin Walker – ‎Interim Group Treasurer

Juliet Wall – Wall General Manager, Finance

Analysts

Brett Levy – Jefferies

Ian Rossouw – Barclays Capital

Tom Meyer – CIBC Capital Markets

Michael Flitton – Citigroup

Alex Terentiew – Raymond James

Alain Gabriel – Morgan Stanley

Greg Barnes – TD Securities

Oscar Cabrera – Bank of America/Merrill Lynch

David Charles – Dundee Capital Markets

Fawzi Hanano – Goldman Sachs

Roger Bell – JP Morgan

Matt Murphy – UBS Securities

Cailey Barker – Numis Securities

Kerry Smith – Haywood Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Quantum First Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions].

I would now like to hand the meeting over to Mr. Clive Newall, President. Please go ahead, Mr. Newall.

Clive Newall

Thanks very much, operator and thank you everyone for joining us today. We have several First Quantum personnel on the call with me. There is Hannes Meyer, CFO; Zenon Wozniak, Director Projects; Juliet Wall, General Manager, Finance; Emma Cowdrey, Senior Manager Financial Reporting; Martin Walker, Treasurer; and Sharon Loung, Director, IR. As usual, following a few housekeeping items and some opening comments, Hannes will go through the financial results which were published yesterday after the close of the Toronto market. We’ll open the lines then to take your questions. Just a reminder, a presentation which accompanies this conference call is available on our website www.first-quantum.com and can be accessed either on the event section or on the Q1, 2014 results conference call button under the news section of the homepage. Before we begin, I must note that over the course of this conference call, we’ll be making several forward-looking statements. And as such, I encourage you to note the risk factors particular to our company which are detailed in our annual information form and available on our website and on www.sedar.com.

Now to begin the review, comparative earnings for the quarter totaled $126.8 million or $0.22 per share. This is inclusive of $26.7 million or $0.05 a share on favorable acquisition related adjustments. Not unlike other companies in this space, results for the quarter were impacted by the decline year-over-year in market price for our main metal copper, nickel and gold. In total, it amounted to almost $118 million of the gross profit level. However, our highest sales volumes and lower unit costs for both copper and nickel provided some offset. Altogether, the operations generated 371 million of cash flow. We’re very pleased with this strong start for the year which builds on the momentum of 2013. All of our operations turned in good performances underlined by continued sound management of the factors under our control, and benefits from the investments made in process improvements. Both Ravensthorpe and Kansanshi once again had solid performances, with a focus on keeping a good maintenance schedule and vigilance on sustainable cost and process improvements. Ravensthorpe has consistently delivered good performance from the start of operations in 2012.

The mine’s margin improvement year-over-year is a result of these efforts. With the nickel price improving, we expect Ravensthorpe to be even more substantial contributor to the company’s profitability. Kansanshi recorded one of its highest quarterly production numbers even though the seasonal rains was the most severe in operating history. It’s disappointing that the extent to what has been accomplished there is somewhat obscured by the ongoing lack of in-country smelting capacity. However, we will continue to favor copper cathode production in order to draw down the copper concentrate inventory and release that working capital over the course of the year. The 14 million tonne per year oxide expansion is essentially fully commissioned so we’re confident in our ability to execute that plan. So far in April, the percentage of cathode production is up to 55% of total from a 40% as reported in Q1. Q1 cash cost of production for both copper and nickel continues to trend down. Nickel at $4.37 per pound, 18% below the same quarter last year and on the noted good performance of Ravensthorpe and also Kevitsa which is in the midst of its winter.

During the quarter and subsequent good quarter end, we completed major elements and reorganization of our financing and capital structure to support significant capital expansion and development programs underway. It involves several initiatives and was a major accomplishment. However, in addition to the reorganization, we also restructured the promissory note with ENRC, which I do not believe was completely undisturbed when it was announced. In summary, all outstanding interest at 3% then due, totaling $50 million was paid. The principal was reduced by $70 million and that too was paid to us. Interest on the remaining 430 million principal was increased to 5% on February 28 until December 31, 2015 and that interest totaling $40 million was also paid. So what is outstanding and due in December 31, 2015 is the principal $430 million. While the overall new structure is more appropriate, cost attrition provides us with the financial results to complete our major development programs, we also believe it’s prudent to continue to look at opportunities to provide additional flexibility.

Good progress was made at each of our projects under development. The addition of night construction shifted the Phase I copper smelter have made a difference, and much of the schedule slippage incurred last year will likely be reversed. The team is confident that it will meet its target to complete construction and start commissioning in the third quarter of this year. Sentinel continues to track well on plan in all areas and should start commissioning in the third quarter, and within the original $1.9 billion capital estimate. This bodes very well for Cobre Panama project which is being designed with the same concept as Sentinel, albeit on a larger scale. The detailed designs for all areas of Cobre Panama is progressing with approximately 20% complete for the process plant, 75% complete for the shiploading and jetty and 75% complete for the power station. Procurement of main process plant equipment is in progress on the first structural steel packages have been issued for tender. Those works are progressing well which allow us to start concrete works in four to eight weeks time.

Since April 23rd, one our contractors has been on work shortage. That contractor is affiliated with a larger organization which is on a nationwide strike which you may have seen news of on this because it’s affecting the completion of the Panama canal expansion. That Cobre Panama most work have been stopped at the power plant important coast work construction. But at the moment, this has not affected the schedule as we work well ahead in all of those areas. However, if the stoppage does drag on, we’d have to look out for options. As many of you are also aware, national elections will be held on Sunday May the 4th in Panama. The polls all indicated tight race, regardless of the outcome we’re not expecting any significant shifts in the external operating environment. Those three major candidates are stating publicly that they will honor the Minera Panama contract.

So with that brief summary, I’ll ask Hannes to go through the financials.

Hannes Meyer

Thanks, Clive and hello to everyone. Turning to the first slide and start with Q1 2014 highlights on slide eight of the presentation. Copper production increased to 113,000 tonnes for Q1, that’s up 34,000 tonnes or 43% versus quarter one of 2013. This quarter results include 7,400 tonnes higher production at Kansanshi, along with a incremental 26,400 tonnes contribution from the acquired operation. We’re presenting a full quarter production in the current quarter. Nickel production for Q1 2014 increased by 800 tonnes or 7% on the prior year quarter reflecting highest production at both Ravensthorpe and Kevitsa. Copper C1 cost was lower at $1.38 compared to $1.52 last year. Nickel C1 cost was lower at $4.37 pounds compared to $5.34 pounds last year. Gross profit was lower than the same quarter last year. Weaker prices and lower sales volumes were partially offset by lower cost pre-acquisition operations, and 68 million in incremental contribution from the acquired operations. Kansanshi’s sales volumes were impacted by continued lack of Zambia’s smelter constraint. Comparative EBITDA of 364 million was in line with both Q1, 2013 and the prior quarter.

Turning to slide nine, dealing with production. As shown in the graph on the slide, the Group delivered production graph against Q1 2013 for both copper and nickel and remains broadly in line with the strong quarter’s production reported in Q4, 2013. Kansanshi reported 12% increase in copper production in the quarter, despite particularly harsh wet season, with the mine benefitting from the expansion work undertaken and a focus on producing cathode over concentrate. Nickel production of 11,800 tonnes was 7% higher than corresponding quarter last year. Turning to the next slide copper C1 costs, overall copper C1 costs for the quarter of $1.38 per pound $0.14 or 9% lower than Q1, 2013. C1 cost benefitted from the addition of lower cost operations which produced at $0.91 per tonne but down for Q1, 2014. Q1 costs of pre-acquisition operations were broadly in line with Q1, 2013 at $1.57 set down. Lower operating costs at Kansanshi and Kevitsa were partially offset by lower gold credits at Kansanshi and Guelb.

Turning to the next slide of nickel C1 cost, Group nickel C1 cost was $4.37, $0.97 or 18% lower than Q1 2013. Ravensthorpe nickel C1 cost were $4.23 versus $1.34 lower than last year with processing efficiencies, low sulfur cost and the weakening of the Australian dollar helping to drive cost lower. Kevitsa nickel C1 cost were $5.19 down $0.10 per tonne lower than Q1 2013, primarily driven by lower processing costs slightly offset by lower byproduct risks rising from lower realized prices. Slide 12 on the financial overview. Gross profit excluding fair value adjustments was 308 million for the quarter, 14 million or 4% lower than Q1 last year. This included $68 million incremental contribution from the acquired operations. Lower realized prices on copper, nickel and gold combined with lower copper and gold sales of pre-acquisition operations were largely offset by lower costs at Kansanshi and Ravensthorpe. Comparative EBITDA was in line with Q1, 2013 and the prior quarter despite weaker metal prices. The comparative effective tax rate of 39% was in line with the same quarter last year.

Turning to the next slide, gross profit the chart details the gross profit in the quarter compared to the corresponding quarter last year. As mentioned previously, the impact of lower prices reduced gross profit and pre-acquisition operations by $118 million, $69 million impact from lower copper and $32 million from lower nickel prices. Costs were lower for this quarter in particular at Kansanshi and Ravensthorpe. Copper sale volume for the quarter were both lower at Kansanshi and Guelb, partially offset by increase in sales volumes at Ravensthorpe and Kevitsa. Incremental contribution from the acquired operations versus Q1 last year was $83 million before fair value adjustments comprising [inaudible] at $50 million, [inaudible] at $15 million and 18 million. Fair value acquisition adjustment in the quarter impacted profit by $27 million, an additional $14 million compared to the fourth quarter. This results in a net incremental contribution from acquired operations of $68 million. Quarterly net debt movement and that’s on slide 14, the Group ended the quarter with net debt position of just over $3.7 billion, compared to $3.3 billion at the beginning of the quarter.

Working capital has increased during the quarter many of you to some increase unfinished inventory at Kansanshi and of that about $20 million related to concentrated [inaudible]. Increases in prepayment in Kansanshi and then lower payables relating to timing of payments to key suppliers and contractors many at Cobre Panama and Kansanshi that was roughly $100 million. Payments received from the NSG during the quarter comprised 70 million principal plus additional interest of $55 million. Tax paid for the quarter was 97 million mainly relating to payments made by Kansanshi and Çayeli $588 million was spent on capital in the quarter which included $115 million at Cobre Panama, $192 million at Trident and $222 million at Kansanshi. Kansanshi included $89 million from the smelter project, $48 million on circuit expansion, $16 million on the mining fleet, $15 million on power line and workshops and $12 million in the capitalized stripping.

At quarter we had 1 billion of committed undrawn facilities available and $833 million of cash and cash equivalence including $86 million of restricted cash. We have now completed the major elements of reorganization of the finance and capital structure laid out this January, including reorganization of our bond structure February in exchange of the FQM Akubra to give more appropriate capital structure, signed a new $2.5 billion term credit facility to refinance the short-term funding put in place at the time of Inmet takeover. Beyond the process of completing the syndication of $2.5 billion facility and this will be finalized probably in the next week. The current financing provides long-term financing to complete our major development program. As is prudent, we continue to look at opportunities which provide more flexibility.

So turning to the next slide the slide 15, the market guidance, production guidance remains unchanged to that given on the previous quarter’s release. Full year copper and nickel C1 costs remains unchanged. Expected total 2014 capital expenditure is approximately $2.1 billion to $2.2 billion. This excludes cap life interest and any pre-commercial commercial production cost at Sentinel. This spent reflects a significant advancement of First Quantum’s development projects over the course of 2014. Capital forecast includes just over $600 million for Cobre Panama, about $518 million on Trident and $600 million on Kansanshi major projects. Thank you, Clive.

Clive Newall

Thanks, Hannes. So operator, could we now open the line for questions please.

Question-and-Answer Session

Operator

Certainly, sir. [Operator Instructions]. And our first question comes from the line of Brett Levy with Jefferies. Please go ahead.

Brett Levy – Jefferies

Hey, Clive. Hey, Hannes. Let’s see, is there any way adjusting Zambia’s weather – if you had a normal weather pattern in Zambia, could you sort of figure out kind of what the EBITDA impact or the revenue or volume impact was from kind of wash days to the normal weather that you guys had at Kansanshi?

Clive Newall

Now that’s I think you need to go our higher authority and if you want to Hannes and I don’t quite we’re not that senior. Okay, I think in each year all the pass of EBITDA through the year is pretty similar with the first quarter is always impacted by rains whether there bad rains or not so bad rains. It is just everything is just a bit more expensive to do a little bit more difficult. So that’s inevitable. Quite what you call a normal month because Zambia’s weather is bipolar, it’s either raining or it’s completely dry. There isn’t an average climate there.

Brett Levy – Jefferies

All right. And then just kind of doing the math and at somewhat lower metal prices on the copper side, it looks as if the perhaps that minimum liquidity of a 1 billion at the back half of this year may be in somewhat of jeopardy. The way you guys connect the dots is that something you may do something to increase your liquidity to make sure that that 1 billion is your cushion at the peak points of spending?

Hannes Meyer

Brett, I’m not sure where the 1 billion come from I mean we do evaluate our cash we look at various metal prices and downside scenarios and say 275 and 250 sort of what we need or what something lines to we need to ensure that we continue with our capital spend. So we consider evaluating various opportunities and say how do we create additional flexibility in the company.

Brett Levy – Jefferies

And then lastly, I’ve noted that among all the copper producers even at some folks are forecasting somewhat in an oversupply and the risk is a period below three buck copper going for some period here. No one is hedging. Is that generally because the copper producers, including yourselves have got a more bullish outlook for the near term for copper than perhaps some of the prognosticators on the industry?

Clive Newall

I think that’s probably true. I think the industry in general sees well of course we have much longer term time horizon anyway that we’re looking at long life mining operations and in our decision making. But I think generally, we also recognize all those supply constraints which are going to keep fairly reasonably balanced market going forward I think in most mining companies do.

Brett Levy – Jefferies

And you guys would not consider hedging in the next sort of 12 to 24 months?

Hannes Meyer

No, that’s not guarantee part of – not planning.

Brett Levy – Jefferies

Okay. Those were my questions.

Operator

Our next question comes from the line of Ian Rossouw with Barclays. Please go ahead.

Ian Rossouw – Barclays Capital

Hi guys. Just a couple of questions on Kansanshi and Sentinel, just firstly on the concentrated build up, you’ve previously given indicative targets that you were looking to draw down about half of that stock piles over the course of the year. Given that you still build up some concentrated in the first quarter, do you still feel that target is achievable for the full year? And may be just if you were mentioning that 55% cathode production in April, what are you sort of targeting to be the eventual sort of average for the year or I guess where do you need to get towards the backend of the year for you to achieve that 50% reduction target? That’s the first question and then just on the Enterprise you’ve previously mentioned you are looking to ramp that up with copper ore in the given what happens to nickel prices just wanted to sort of get your thoughts on perhaps starting it up with nickel ore and in terms of timelines did you decide that how quickly can you ramp that up? And then also there is a discussion with the government regarding exports tariffs for concentrates. Thanks.

Hannes Meyer

Ian, I’ll answer the first question and then give back to Clive for the second part of that. The concentrated stock pile we saw a slight increase and this was concentrate stock pile I think it was 180,000 tonnes of concentrate in the end of December quarter and that increased more than 10,000 tonnes, 13,000 tonnes for the current quarter. Our plan is to reduce that by about 200,000 tonnes over the course of the year. So previously we produced it at about 60% concentrated and 40% cathode mix. Those circuits we made the changes during March and you can see that result coming through in April where we have that split of about 35% cathode 40% concentrate. With that we are starting to see some reduction in those concentrates stock pile. Just going back to your last question in terms of export tariff we are not currently discussing any of the lifting of the export tariffs with the Zambia government.

Clive Newall

Zenon, would you like to comment on the state of the project?

Zenon Wozniak

Yeah, sure. Thanks, Clive. With the Enterprise project, in reality we really wanted to we could speed up the construction and finish it a bit earlier, but at the moment we’re concentrating on finishing Sentinel. And then as the skilled labor etcetera comes off Sentinel, they are working on the Enterprise processing plants. So one is following the other and on that basis, the Enterprise processing plant we’re targeting completion of construction by the end of this year and then commissioning etcetera very early next year. And it’s very flexible, so it can be commissioned on copper or can be commissioned on nickel and run on either. So I guess that would be a commercial decision as the end of the year gets closer.

Ian Rossouw – Barclays Capital

Okay. Fair enough. Thank you. So the base case is still for copper or as you said previously or you depend on the commercial towards the end of the year?

Zenon Wozniak

We actually provide additional capacity to Sentinel otherwise it’s used on nickel and Clive you may want to comment further.

Clive Newall

Well I think also the elections in Indonesia this year and who knows what the outcome of that might be with regard to the export ban. So we reserve judgment Ian, until the end of the year when we’re ready to roll, we’ll have that flexibility.

Ian Rossouw – Barclays Capital

Okay. Thanks, guys. I’ll leave it there. Thanks.

Operator

Our next question comes from the line of Tom Meyer with CIBC. Please proceed.

Tom Meyer – CIBC Capital Markets

Thank you and good morning. I’ve just coming back to the rains in Zambia I’m just curious if it did impact progress of the power line? And if it did, or I’m also curious to see do you have any flexibility like you did by adding a night shift at the smelter? Do you have any flexibility to speed up the progress of the power line it requires?

Clive Newall

Do you want to take that Zenon?

Zenon Wozniak

Sure. We would have flexibility to speed up the power line if required, because you can construct a power line from many different points along its route, the slowest is starting at one end and working away all the way to the other end. But at the moment, the power line is on schedule the short section of line for example that will give us the first 90 megawatts of power to Sentinel, to Trident is well advanced and should be finished by about the end of May, over the month two weeks from end of May. So that’s very well advanced at the moment and well in hand. We will actually be energizing switchboards from this weekend with the generating system that we have on site. So we are actually starting to energize at Sentinel from this weekend onwards and the power line or the shorter section of power line might cause a problem. The longer section of power line is in progress and at the moment on schedule. If we need to speed it up, we could look at opening up more work fronts along the route. So is it possible, for sure, but at the moment we are not having to do it. If you look at the smelter, we actually made a conscious decision to put in a night shift because we wanted to recover and accelerate some of that work. That’s available on the power line, but at the moment we don’t’ need to do it.

Tom Meyer – CIBC Capital Markets

Okay. And then just coming back to Enterprise just reading through the MD&A, it looks like there is a little bit more modeling that’s going into that resource. And I’m curious if it just relates to potential metallurgical challenges with processing or is it just selectivity that you’re targeting for the mine itself?

Clive Newall

No, it’s actually the result of more intersections in separate mineralized bodies that have been identified over the past whatever 18 months of drilling. Drilling is completed now so really just looking at that additional material and seeing how it might fit into the development strategy.

Tom Meyer – CIBC Capital Markets

In the sense that you are being required to batch it or blend it or more selective mining process?

Zenon Wozniak

I don’t think so. It’s just really modeling the ore in situ.

Tom Meyer – CIBC Capital Markets

Okay. I’ll leave it there. Thanks very much.

Operator

Our next question comes from Michael Flitton with Citigroup. Please proceed.

Michael Flitton – Citigroup

Thanks for taking my question. I’ve got a couple of questions around the financing side and Panama. Firstly, can you just elaborate on the commentary around the prudent need to look further financial flexibility, just what you guys mean by that or options you’re looking at, what’s guiding that? And then on VAT receivables you’ve mentioned that your standoff with the government around $100 million of receivables. Could you just comment on the discretionary rules you are saying have been applied plus the government there is how long will that take to be resolved? And then final with Cobre Panama, obviously just following up your commentary about the contractor is there any further risks you see in projects since the last just any commentary on scheduling or CapEx there? Thank you.

Hannes Meyer

I’ll handle first few questions and ask Zenon to deal with the third question on Cobre Panama. We continue to look at our cash flows and sensitivity around lower metal prices and say what do we need to provide us with enough flexibility in the Group. So we’ll look at markets opportunistically just to create additional flexibility for the company. So I think we’ve done that in terms of our refinancing of our bank and converting that to term and over credit facility of five years, and we’ll continue to look at the capital structure of the company. In terms of the VAT receivable, we’ve perceived Tuesday received $18 million that refund on Kalumbila and that’s the Sentinel Enterprise project. We continue with our discussions with the government with the Ministry of Finance around commission of general rule and the two rules that we are challenging one relates to identifying the end customer, and another one around depositing money in country. We have filed a court case, I think it was in November we’ve detailed that in the MD&A and then another company has also filed a court case against those rules. Court date hasn’t been fixed, so we are we think those rules are acting outside the act, and we are taking action in terms of that. We will wait for the but in the meantime we are continuing discussions with the government to see how we get our VAT refunds repaid. So I’ll hand it over to Zenon for the Cobre Panama question.

Zenon Wozniak

Yeah thanks, Hannes. It’s not impacting us greatly at the moment, that work stoppage that specific area at the port where we were ahead of schedule. We are self performing a lot of work at Cobre Panama at the moment and we are working also with a couple of specific contractors that are providing us with skilled labor etcetera. And if it were to continue, we would simply ramp up or increase our level of self perform and start to undertake those work. It is an area, as I said where we were ahead of schedule so we were looking at it closely. And it will continue for any length of time and certainly take some action. There is, at the moment no alarm bells on schedule or capital costs. The work we’re doing at the moment is probably quite difficult in terms of the project because it lot of rainfall etcetera, but we’re doing it quite well and as I said in some areas we’re ahead of our schedule. So it’s early days, but everything is going quite well and to planned at the moment.

Michael Flitton – Citigroup

Okay. Thank you.

Operator

Our next question comes from the line of Alex Terentiew with Raymond James. Please proceed.

Alex Terentiew – Raymond James

Hi guys. Just a couple of questions I mean the Zambia on the smelter first off you noted in your press release 2 million tonne complex you mentioned that a couple of times. Has it basically been decided that the 2 million tonne a year is what you’ll ultimately build or are you still contemplating going larger and doubling Phase I to 2.4 and in line with that is the timeline for Phase 2 still 2017?

Clive Newall

Zenon, do you want to expand a little on the smelter possibilities?

Zenon Wozniak

Yes for sure. It’s fair to say quite a lot of options in expanding the smelter and the steps we’ve looked at was going to 1.5 million tonne per annum going to 2 million tonne per annum, and we’re now looking to going to 2.4 million tonne per annum. So that will ultimately be a decision that would be taken and the 2 million tonne per annum will be the case that we worked up in the most detail, but we are currently working in a case of expanding 2.4 million tonne per annum. The timeline wouldn’t change, because whether you go to 2 or 2.4 it’s driven by long delivery of the smelter furnace rate for example which doesn’t change, whether you go to 2 million tonne or 2.4 million tonne per annum. So it really does see a case of what throughput we need the smelter to be in the future and 2.4 million tonne per annum would involve some additional CapEx over 2 million tonne per annum. So that decision just be made once we finish our studies on expansion options.

Alex Terentiew – Raymond James

Okay. Great. Thank you. Another follow up question on Enterprise here, back on the site trip back in February I’m correct here the stripping at Enterprise had not yet started. So I’m just wondering has stripping commenced yet to put you in a position to begin production if you choose in 2015, or do you have your press release notes that some environmental approval reviews are under application? So do you have the necessary approvals in place to begin stripping if wanted to?

Zenon Wozniak

The application for the approval went in last month. We’re expecting questions and the reviews now in May and then approval within two to three months. So, essentially then we’d be in a position to start pre-stripping and opening up the mine.

Alex Terentiew – Raymond James

Okay. And at the time as well there was quite a bit of talk nickel prices at the time were under 6.50. So at the time the economics were not as favorable with nickel prices higher now and the 10% export duty still in place, are you leaning more in towards processing the Enterprise ore or are you still going to make a decision at the time if you have future discussions with the government on that duty?

Zenon Wozniak

I think we’ll continue discussions with the government around that particular export duty. I mean there is no nickel smelter within Zambia, so when I look at that from the economic side, I think it’s pretty robust that on a cash cost side on Enterprise nickel. Clive you want to comment on that?

Clive Newall

No, I think it’s a discussion that we will continue having with the government and who knows where we’ll be with metal prices by the year end.

Alex Terentiew – Raymond James

Yeah. Okay, understood. One last question if I may quickly on Ravensthorpe, recoveries in Q1 was high 85% and if I look back over the past two years Q1 consistently has the highest recoveries up to 6% lower and the rest of the year. Is that trend just coincidental or is there something that we should expect going forward? Again just wondering if it had to do with weather managing the wet season, mining certain types of ore, different times in a year?

Clive Newall

It’s got to be a mix of all types, I imagine.

Alex Terentiew – Raymond James

Okay. That’s fair enough. Thank you.

Operator

Our next question comes from the line of Alain Gabriel with Morgan Stanley. Please proceed.

Alain Gabriel – Morgan Stanley

Hi guys. I have a quick question on Franco Nevada do you think you have any updates following the end of the quarter? And did you set any timeline or any deadline for completion of the discussions with Franco Nevada? Thank you.

Clive Newall

No I think with regard to the discussions with Franco Nevada, they are confidential commercial discussions, we can’t really discuss them here.

Alain Gabriel – Morgan Stanley

Have you set any timeline at all any deadline?

Clive Newall

No, I mean not specifically. We will resolve them if we can in due course.

Alain Gabriel – Morgan Stanley

Thank you.

Operator

Our next question comes from the line of Greg Barnes with TD Securities. Please proceed.

Greg Barnes – TD Securities

Thank you. Hannes post the end of the quarter in capital restructuring where is your available liquidity now?

Hannes Meyer

Well, I think we – all we’ve said is the liquidity as at quarter end, Martin would you like to comment on that?

Martin Walker

Just in simple terms liquidity as we stand in the movement comes from the undrawn five year committee debt facility which we put in place elements of that plus customers

Greg Barnes – TD Securities

So that undrawn facility is 2.5 billion?

Martin Walker

2.5 billion is the total facility.

Greg Barnes – TD Securities

And you had 1 billion available at the end of the quarter how did they match up?

Martin Walker

The billion is the revolving portion of the facility.

Hannes Meyer

Yeah so we took that at the end of the quarter 1 million would be the amount outstanding that was based on the facility to is been replaced now committed five year facility.

Greg Barnes – TD Securities

So you have 2.5 billion in available liquidity today plus the cash?

Hannes Meyer

No. So the available liquidity comes from the undrawn elements of new committee five year facilities. The accounts we got at the end of September were based on the our facility which was also 2.5 billion but were not committed would have run out at the end of June. So you can assume on the based on 31st of March the undrawn element will be 1 billion.

Martin Walker

At 1 billion of undrawn facilities 832 cash available.

Greg Barnes – TD Securities

Okay so really unchanged during end of the quarter then?

Hannes Meyer

Correct. Half of them is now committed to five year term.

Greg Barnes – TD Securities

Okay, okay. And then on your financial modeling, and when you look at potentially adding more flexibility to the balance sheet, what copper price do you go down to where you would actually need that more financial flexibility?

Hannes Meyer

I mean we look at say various options what happens in these type of scenarios. I mean it’s quite difficult to do to the low metal pricing because some of the metal price mix might change as well input cost might change as well. I think we are comfortable that we put a good funding plan, that we are looking at the different smelter options and saying how does that impact in the future. So we are looking at various options and just saying how do we create additional to the company and provide that in the event that lower metal prices due to on its way to future and then we say how do we fund it. So I think we’re comfortable at where we are at the moment so there is no immediate need. Look at that and say is there good opportunity in the market, then we use some of that to may be some more in the undrawn facilities and just use that as an insurance.

Greg Barnes – TD Securities

Okay. Just one final question, Clive particularly interested in the completion on the smelter I think it was 43% when we were there and where are you now?

Clive Newall

60%, last month which was April it was a 7% month we now have four months of 8% plan and then it drops off 6% or 5% progress to the end. So currently it’s 60% and going strongly and we included a in the presentation which you would have seen we can’t give all the details but it is definitely coming together.

Greg Barnes – TD Securities

Okay. Thank you.

Operator

Our next question comes from the line of Oscar Cabrera with Bank of America Merrill Lynch. Please proceed.

Oscar Cabrera – Bank of America/Merrill Lynch

Thanks operator. Good morning everyone. Just wanted to get back into your discussion around prudent capital structure, could you provide perhaps debt-to-equity or net debt-to-EBITDA targets that you are looking at? And during your construction phase for the next couple of years, what level of liquidity or cash on the balance sheet actually do you think you would require?

Hannes Meyer

If we look at debt to equity when we generate targeted ratio on the long run of about 30% debt-to-equity, we do recognize that we put a big spend program and that will continue through this year until about the middle of next year. As you see the ramp up at Sentinel and Enterprise and the smelter coming online, that does produce additional cash flow and EBITDA. We have designed our funding facilities to such an extent bank facilities that it provides additional increment debt-to-EBITDA ratios in this construction period that we put additional acreage for the Q2 next year to middle of next year where after that it comes down. So we do recognize it is some of the series of high debt-to-EBITDA and debt-to-equity ratio in the next year that was EBITDA coming online those ratios should reduce then.

Oscar Cabrera – Bank of America/Merrill Lynch

Could you be more specific please in terms of that you have just approximate number so that we have an idea I understand that you run sensitivity scenarios we do too, but just have an idea what you actually are looking at?

Hannes Meyer

I think debt to EBITDA we’re looking at probably rates not more than 3 in the long run. We recognize that we hire that in the short end over the next year. But they probably like to get closer to their investment range sort of sensitivity issues, but probably not more than again in the long run. It’s probably a target ratio for us.

Oscar Cabrera – Bank of America/Merrill Lynch

And in terms of liquidity in the balance sheet this period 500 million or 1 billion?

Hannes Meyer

500 million provides the liquidity we look at undrawn facilities and say that does provide some liquidity for us. So if we brought 1 billion of undrawn that’s plenty of – if we got 500 I think that as we –You have to look at as when is our peak capital spend over the next year we’ve got quite an intensive capital program but they reduce that amount of liquidity requires also same decrease.

Oscar Cabrera – Bank of America/Merrill Lynch

But would it be fair to say then at the peak of your capital then 500 million is what you’re looking at?

Hannes Meyer

Yeah probably something like that it’s probably a fair assumption.

Oscar Cabrera – Bank of America/Merrill Lynch

Okay, great. Thank you very much. That was very helpful. Now if I may comment on the power line and the fact that you’re electrifying the power line is great. Is there any risk that the power generation within Zambia will be able to electrify the requirements that you need i.e. is there any risk that the damns that are providing this for electricity are not completed or could you comment around that? I trip to operations back in November there was a question with regards to some of these damns not being completed at time therefore the pardon being unavailable to you.

Clive Newall

I think Oscar power in Zambia has been tight for a long time and as you know we do a low and always have done. And but the power of the mining industry have always received priority from the government in Zambia underground mines for very obvious regions it’s pretty dangerous simply cut them off. There are a very large number of power projects various stages of development and construction and one of them actually more than one of them one substantial one of the connected in with the power line that’s currently in construction for us. So I think we are reasonably comfortable have you more examples to that Zenon?

Zenon Wozniak

I mean under the current scenario we certainly have power to be able to commence on Sentinel and there was quite a bit of power allocated for Lunwana which they were continuing. So there was actually some spare capacity at the moment above what our estimates were and then other than that I would just reiterate that you were just saying Clive.

Oscar Cabrera – Bank of America/Merrill Lynch

Okay. That’s great guys. Thanks very much. If I may one more, in your comments with regards to the smelters in the region and this is more towards your estimates for copper costs in 2014. Could you comment on the cash cost that you expect to see in Kansanshi during the year and what are your sulfuric acid assumptions with that?

Zenon Wozniak

I think in terms of the cash cost for the year I mean we do see a slightly increased cost of compared of loss but that’s contained within our cash cost guidance and is unchanged and we just plan for taking more oxidized or mixed at Kansanshi. So

Clive Newall

I think more – so this year Oscar sulfur prices have gotten perhaps a bigger impact and if you can predict what the sulfur prices are going to be –

Zenon Wozniak

And we have seen some savings in terms of the sulfur and most of that in operations recently a year ago. So you wouldn’t seem to change in the cost at Kansanshi or no cost savings or reductions any if smelter comes online but you’ll see some changes in terms of sulfur consumption.

Clive Newall

We’re manufacturing about 80% of our asset requirement in the moment and across all of that is manufacturing from sulfur. So it really is the very sulfur price sensitive.

Oscar Cabrera – Bank of America/Merrill Lynch

Okay. That sounds great. Thank you.

Operator

Our next question comes from the line of David Charles of Dundee Capital Markets. Please proceed.

David Charles – Dundee Capital Markets

Hi yes. I have two questions. I suppose the first one is could you give us enough data on the potential for those ZESCO tariff increases in Zambia. I’ve seen some news out there that suggests that negotiations are ongoing I’d like some color there. And I suppose as part of the Cobre Panama not only you’re negotiating with Franco Nevada, but there was some comment that you would may be chat with your Korean partners as well as what they intend to do with their interest. And I’m just wondering could you give us an update on that as well? Thank you.

Clive Newall

Do you want to talk about ZESCO?

Hannes Meyer

I think we’ve seen some confidence in ZESCO we’ve seen some of the news around that I think we’ve got a power agreement with ZESCO and Sentinel and Kalumbila and there’s also one at Kansanshi that will have to be renegotiated in the next year, so we’ll have to look at Kansanshi. But I think I don’t know much more details to add on that in terms of the ZESCO.

Clive Newall

It’s just not entirely clear as to how it would affect our operation at this point.

David Charles – Dundee Capital Markets

Have you actually chatted with the government or is it just a question that they don’t really understand what they really want to do or is it just not clear between what they want to happen and your current contracts that you have with them?

Clive Newall

Well we’ve got certain agreements with so we’ll act within those agreements and we’ll continue a dialogue with government along those lines.

David Charles – Dundee Capital Markets

And with the discussions with the Korean partners on Cobre Panama?

Clive Newall

Yeah with the Korean partner I think it’s there out there in the market with a number of banks looking to provide a valuation of their stake in Cobre Panama. So I think that indicates that they may be seeking a change of stages but quite how it would pan out and what the end result will be is unknown at this point.

David Charles – Dundee Capital Markets

Thank you very much.

Operator

Our next question comes from the line of Fawzi Hanano with Goldman Sachs. Please proceed.

Fawzi Hanano – Goldman Sachs

Hi thank you and good morning. Just a couple of question most of my questions have already been answered. I’d like to follow up on one of them on the net debt position. Could you tell us a little bit more what level of covenants would we hit for net debt to EBITDA or gross debt to EBITDA? Next question which I’ll get more specific to the operations firstly at [inaudible] the mine rate has been declining it’s down to 5.5% which is great. How much further would you guys expect this to decline by year end and also can this be reversed when you move to different areas of the mine? And second one will be on government grant sales of both copper and gold have been lagging production quite significantly over the last two quarters, can you give us a bit more explanation as to why is that happening?

Hannes Meyer

I think on the first question on debt to EBITDA I mean we are seeing in the short term our covenants got hit in terms of that sufficiently covered.

Fawzi Hanano – Goldman Sachs

And is that on net debt to EBITDA or gross debt?

Hannes Meyer

It’s on net debt to EBITDA.

Juliet Wall

In terms of we made that note in the MD&A the great looks so since last year it was about 6% coming down on to that 5.45% may be just a for the rest of the year but as we also know there are some efficiency projects in place that are up to date at Sentinel that cost reductions [inaudible]. A lot of the reduction has to have between last year and this quarter.

Fawzi Hanano – Goldman Sachs

Reverse that as well as you move out in the current areas of the mine?

Juliet Wall

Not for this year not significantly.

Clive Newall

I don’t think so. Well I think in regard to Guelb I think a lot of that is timing issues on the sales it’s kind of lumpy just depends on sales occur.

Fawzi Hanano – Goldman Sachs

Okay. So it’s not a recurring guess so we probably see us made up over the next couple of quarters?

Clive Newall

Yeah it’s always been.

Hannes Meyer

I mean we add a bit of build up in terms of finished products as well over the last quarter that I may that should reduce over the course of the year.

Fawzi Hanano – Goldman Sachs

Okay. Thanks guys.

Operator

Our next question comes from the line of Roger Bell with JP Morgan. Please proceed.

Roger Bell – JP Morgan

Hi gentlemen. Thanks very much for the call. I’ve got two questions around the comments from the capital structure. Presumably you do scenario analysis on your liquidity position on an ongoing basis. So I guess the question is why did you feel specifically in this release that it was important to flag that you’re looking at the capital structure? And then secondly, if it were the case that in a scenario which liquidity fell below $500 million threshold for instance, almost by definition that would mean that that wasn’t available to you so what would your first call be then? Would it be good rating equity or would you consider asset sales could you give any more color what other options are on the table?

Zenon Wozniak

I think we came to major phase balance restructuring six to nine months. So we’ve now worked through that, we’ve optimized our capital structure, we’ve got all the notes at the same level the bank is at the same level. So I think we are now in the position that we can actually going to sit back and say look at these options through what is a bit did you for the company going forward. And it’s just as a cool range of options available but whether additional bank so we’ve got all of those markets available to us strong balance sheet in terms of good earnings. I think the second question sort of leading down where we push into the corner, it’s saying what sort of level we’re comfortable we are not on a liquidation position where we say 500 million what is the absolute supply, so process. That is just to say in lower metal price scenarios, yeah we probably like to keep something available. We know we are near that we don’t want to anytime soon. I mean the various actions the company has taken apart in terms of cutting back in terms of capital projects or rationalizing in terms of cost I mean we know scenarios and that is I think that 500 million will be taken out of context in a particular question what we’d like to add as a minimum and that’s probably what I’d like it’s not something that we plan for at the moment.

Roger Bell – JP Morgan

Okay. So the reason that you’re flagging looking on the capital structure is simply that you feel already optimized the now you’re looking at other ways of organizing your capital. I mean it just sort of seems a little bit odd that if you don’t think that any of the near minimum liquidity, but you sort of feel flag it specifically in the press release today I think that’s what’s interesting to investors.

Zenon Wozniak

I think I mean we’ve been as I said we came to this phase and we had major restructurings major refinancing in terms of bond exchange refinancing with the bank. We’ve done all of that now and now we are looking at the company and the structure going forward and saying what should we do something else. And so we will assess those opportunities and say is that a good time to do something, but I think that’s the reason why we put something out there.

Roger Bell – JP Morgan

Okay. Thanks very much.

Operator

Our next question comes from the line of Matt Murphy with UBS. Please proceed.

Matt Murphy – UBS Securities

Hi. Could you help me out with the smelter CapEx initially the big one[ph] was 6.90 and then you talked about the expansion for 500. This MD&A talks about 800 for big ones plus some components for the expansion. Does that mean bring forward some of the CapEx or is it still 500 later so basically is it now 800 plus 500 or is it 800 plus 390?

Clive Newall

Zenon you can answer this?

Zenon Wozniak

Okay no worries. Some of the CapEx has been brought forward because we are of the view that this smelter will be expanded. So some things are much easier to do now while you’re building the current smelter than what they would be later if you came back and try to expand them. As an example, things like building bigger substations for future drives, putting in larger pipe racks, increasing the size of the services pipelines and things like that have been done in this space. So that when you come back later and you expand it to some number whether it’s 2 million tonne 2.4 million tonne, whatever the figure is you can do it. So those things have been done now which are put us some good state in the future. What it then means that some of that CapEx has been spent out instead of expansion in the future and then we’re also as I said, looking at the options of expanding into what size and we’re looking at those CapEx numbers and we’ll do them again that $504 million number was done as a study phase, little while ago now. Not to say that there is anything wrong with it but we’ll obviously go back and have a look and just make sure of it because we’ve got a lot more experience now having nearly completed the first smelter would be shortly and go back CapEx number and what’s less to do after having done some expansion work in this first phase.

Matt Murphy – UBS Securities

that makes sense. Okay. On Kevitsa, is there anything that has been pointed out as a reason for the delay on the permit for the expansion or is it just the process running a little bit longer?

Clive Newall

I think with anything in Finland, it’s some of the companies that had in the region that has slowed down the permitting process for everybody to be quite candid including us.

Matt Murphy – UBS Securities

Okay. Thanks.

Operator

Our next question comes from the line of Ian Rossouw with Barclays. Please proceed.

Ian Rossouw – Barclays Capital

Hi guys just a follow up question on the VAT issue in Zambia. Just trying to understand that you’re saying that there is an ongoing judicial review, is that more just to challenge those two rules you mentioned, Hannes? What about the existing or the outstanding 192 the outcome of the court review has anything to do with the outstanding amount and what’s your mechanism of actually getting that money back from the government?

Hannes Meyer

Ian they are linked together judicial review what we called for November so we’re writing for that court case. And the VAT that was outstanding that is the amount that’s because of commission of general rules so those are the exact rules that we’re challenging. So once we get ruling and I think the amount that can send you about $142million outstanding at the moment. So that total VAT is looking at $142 million, so that’s once we get that ruling I mean then it comes to make mechanisms of recovering that amount. We are significant tax payer in Zambia and I’m sure we can find ways of offsetting some of these VAT. I mean we are paying quite significant tax payments and mineral royalty taxes. So we’ll look at I mean there are recovered varieties second phase. The Zambian government went out recently also significant bond so I think they now sitting with the quite a bit of cash on the balance sheet as well in the moment.

Ian Rossouw – Barclays Capital

Okay. Thanks.

Operator

Our next question comes from the line of Cailey Barker with Numis. Please proceed.

Cailey Barker – Numis Securities

Yeah hi guys. Just a couple of questions just in terms of smelter, how can we expect it to sort of ramp up over once it’s been through the conditioning to the sort of 1.3 million tonnes is that three to six month process or do you see yourself achieving that?

Zenon Wozniak

The smelter ramp up is quite a lot of the skill of the operator. So it is important that we recruit and train a good team to run the smelter and that influence how quickly the smelter ramps up. Generally smelters don’t ramp up quickly, typically they might get to the first stage relatively quickly like within few months 70% production, but to get to a 100% it takes quite a bit of tweaking. And in the past I think there have been few examples where it never actually even got to 100%. So before we started, we feel this number they never understood what the constraints were that we overdesigned in those areas that have been constraint on other smelters. So having said that, I think we’ll get to 70% number reasonably quickly if things go well, and that may be on the top of my head after a few months. And then if with strong operations, good operators and with the over design, we would then get that remaining 30% more quickly than would otherwise be the case but it is quite difficulty exact time figure on it. That may take a number of months more.

Cailey Barker – Numis Securities

Okay. Thanks. My second question is on Kansanshi just in terms of the split between sulphide mix and oxide tonnage going to at the moment. I noticed the mix was quite down this quarter. Could you just give us a say on how you expect those two to pan out for the rest of the year?

Hannes Meyer

Well that’s way we 40% coming through concentration mainly from sulphide 35 coming from cathode so that will be mix in oxide and that’s probably 40% 45% coming from sulphide and concentrate.

Cailey Barker – Numis Securities

Got it. Great. And then just my final question just on Cobre Panama still going through some of the design phases, but when do you expect to be in a position to give us an update on some of the final license like costs?

Clive Newall

The operating costs you mean?

Cailey Barker – Numis Securities

Yes.

Hannes Meyer

So the operating costs we were looking around the middle of the year to have done our numbers.

Cailey Barker – Numis Securities

Okay fine. That’s all for me. Thanks very much.

Operator

our next question comes from the line of Kerry Smith with Haywood Securities. Please proceed.

Kerry Smith – Haywood Securities

Thanks, operator. Hi Hannes at Kansanshi on the operating stats tons of waste and tons of ore actually mine were significantly lower this quarter than Q1 at the year ago Q4 versus of last year. Was that by design was that function of the rain?

Clive Newall

That is by design I mean when we did our planning we looked and so that we got this huge concentrate stock pile we got to reduce that and the way of reducing it is actually cutting back on the mining, mining sulphide. So we own stripping and we own mining [inaudible]. The entire grade that’s the point the outside higher grades in the sulphide the overall average great that is a lot less tonne.

Kerry Smith – Haywood Securities

Okay, okay. And then the cost that you report on a profound basis for the mining was significantly higher this quarter as well as it has been is that a function of the higher fixed cost components the fact that you’re losing less tonnes or is it a function of the weather as well just wondering how your cost –

Clive Newall

It is both Kerry because you’re right because we’re mining smaller tonnes with the same fixed cost it wasn’t actually wet season, wet quarter under the costs.

Kerry Smith – Haywood Securities

Okay. So you would expect that those costs would tend lower on the mining side then on a [inaudible]

Clive Newall

It has been the same every other year so I imagine this it will be the same.

Kerry Smith – Haywood Securities

All right. Okay. Okay. And then could you may be Hannes would know what is the actual CapEx lost spend of Sentinel and Phase I for the smelter as of the end of the quarter?

Hannes Meyer

I’ll ask Juliet to answer that.

Juliet Wall

The remaining cash to spend will be spent from the smelter over the rest of this year it just on the 200.

Kerry Smith – Haywood Securities

The rest of 200 okay. So you spent 600 effectively so far then Julia is that right?

Juliet Wall

Overall smelter related yes slightly more to 650.

Kerry Smith – Haywood Securities

So it was 650 then to get to 800 do 150 is that the number?

Juliet Wall

That had actually increased some of the preparation for further expansion that Zenon talked to you as well. If you are looking for specific for the 800 we just spent about 630 with about another 75%

Kerry Smith – Haywood Securities

Okay. So 170 million to spent. So what would your number be for Sentinel as well Julia?

Juliet Wall

For Sentinel we would have spent around about 1.37 to date and we will for this year, we are expecting about another 340, 320, 330 we originally thought it would all flow in this year, but there will be a small amount flowing in early parts of ‘15 about 30 million.

Kerry Smith – Haywood Securities

30 million okay. Okay, okay great. And just so I’m clear the 800 million for the CapEx for Sentinel the new number that does include the incremental capital for the Phase II work that you are planning to do is that correct?

Zenon Wozniak

You said Sentinel.

Kerry Smith – Haywood Securities

I’m sorry smelter I’m sorry.

Zenon Wozniak

It improves the capital for the sorts of things that I mentioned earlier like the largest services, biggest substations etcetera. What we try to do is wherever we could we try to make it as easy as possible in the future to expand so that we didn’t have to come back and change things we’ve done now.

Kerry Smith – Haywood Securities

Right, right. Okay, great. Thank you.

Operator

And sir that was our last question.

Clive Newall

That was the last question did you say?

Operator

Yes, sir.

Clive Newall

Okay. Well then thank you very much everybody for being on the call today with us and we look forward to talking to you again at the end of the next quarter. I don’t think there were any follow up questions requiring answers. So thanks for everybody and see you later. Cheers.

Juliet Wall

Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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