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Executives

Amy Rajendran - Group Manager, Investor Relations

Roland Junck - Chief Executive Officer

Heinz Eigner - Chief Financial Officer

Bob Katsiouleris - Senior Vice President, Marketing, Sourcing and Sales

Michael Morley - Senior Vice President, Metals Processing and Chief Development Officer

Analysts

Junior Cuigniez – Petercam

Rob Clifford – Deutsche Bank

Tim Huff – RBC

Stephanie Bothwell – BOA

Wouter Vanderhaeghen – KBC Securities

Amit Pansari – Societe Generale

Luc Pez – Exane

Philip Ngotho – ABN AMRO

Nyrstar NV (OTC:NYRSF) Q2 2014 Earnings Conference Call July 24, 2014 3:00 AM ET

Amy Rajendran – Group Manager, Investor Relations

Welcome everyone to our webcast this morning to discuss the first half results of 2014. With me today I have a select number of NMC members. We have Roland, Chief Executive Officer; Heinz, Chief Financial Officer; Bob, Senior Vice President, Marketing, Sourcing and Sales and also Acting Senior Vice President to the mining segment; and also we have Michael Morley, Senior Vice President Metals Processing and Chief Development Officer to run you through today’s presentation. There will be a Q&A session at the end. And if there are any other questions, I’m more than happy to take them.

And with that I’d like to hand it over to Roland.

Roland Junck – Chief Executive Officer

Yes, thank you very much, Amy, and good morning everybody. Briefly going through the first half year as you may, gross profit, €637 million, was slightly up by 1% compared to second half 2013, 2% up by first half 2013. But underlying EBITDA out of this gross profit was up by 12% half year on half year and even 26% year-on-year, at the level of €110 million. It’s also a consequence of project lean being actively pursued. We did an additional serving of around €22 million so it – we are confident of that and we are on track to deliver the €75 million of cost reduction, a sustainable cost reduction that we have indicated to be reached by the end of 2014.

Our net debt position has also improved by 3% half year on half year and even 14% year-on-year base, it is now at the €653 million and the net debt to EBITDA ratio has come down as you can see, 3.1 times. The committed undrawn liquidity headroom and cash on hand is higher, €768 million at the end of the first half of 2014. Port Pirie, near Whyalla, the redevelopment had been approved of course based on the agreement, on this innovative funding package that we found in Australia and that actually limits the impact of the significant investment on our balance sheet. And we have also moved ahead with our smelting strategic review project portfolio. That sounds complicated but we have progressed on the different projects which are in that package. I'm sure Michael will come back to that.

On the graphs you see the evolution of gross profit margin and EBITDA margins which have a very positive trend. Now, this has been backed also by the good operational performance. As you know, operation performances are never good enough, but nevertheless on the mining side we reached about 140,000 tons which is 4% up half year on half year, 1% up year-on-year that is Zinc production, Zinc contained from our own mines.

Our average costs have come down, $66 direct operating cost per ton as we measure them, which is an improvement of 1% or 3% on a year-to-year base and we will continue to work on that cost reduction in the second half of this year. We have new mine plans and operational efficiency plans in place. We also have, as you know, already identified two assets as not being core and which we will dispose over time. And last but not least we also got under the streaming agreement with Talvivaara, 17,000 tons of zinc contained in the first half of this year. So, on the metals processing side, the zinc metal has been at the level of 552,000 tons that has been down 3% compared to second half last year, but 6% up compared to the first half 2013, but fundamentally, as you know, we run our capacity flat out, so any plan maintenance or whatever stock has a direct impact on the total production we can do.

I’m actually very pleased to see that we have been able to reduce significantly our average unit cost to €477 per ton, which is 3% down on the second half of 2013, but actually 18% down on the first half of 2014, and which places us again in a cost situation of the year 2010, so being able to compensate all and more than just cost inflation. And the lead production has been flat in Port Pirie; it has been at the level of 93,000 tons, it has been flat on H2 2013, but as H2 was already significant improvement compared to H1. It is up 8% on the H1.

Now, positive outcome is also marketing, sourcing and sales. Now, you know that we have two operational segments mining and metals processing, and then we have marketing, sourcing and sales in order to support those two segments as well on the sourcing side for metals processing and on the sales side for both. And I must say I’m very happy to see the progress we have made by having decided to have this dedicated organization.

First of all, I must say that Nyrstar-Noble marketing agreement has been in operation, and not only has been in operation, but you know, it’s core marketing agreement, it has actually been meeting or even exceeding our expectations, that’s the first one. The second one is, you remember that in terms of total volume two-thirds of the former Glencore European volumes were going to Noble but one-third was going to the direct marketing. . And also there we have made significant progress not only in terms of in-house expertise to market directly, but also in terms of new customers and new areas, new geographic areas where we have been able – that we have been able to tackle.

We have of course also then as a consequence of this seen improved zinc premiums. And I must say also positively this year compared to the year before and even the year before, the significant treatment charge increases. So the premiums uplift was 12% on H1 2013 for metals processing segment, and I’m confident that will further go ahead. So with this I would like to pass over to Heinz in order to speak about the Group financial results. Heinz?

Heinz Eigner – Chief Financial Officer

Thank you very much, Roland, and good morning to all on the call. Turning to page number 7 of the presentation, the H1 result of 2014 shows then – half, there the financial performance improved. Both gross profit and EBITDA improved in absolute terms as well as in relative terms. Metals processing delivered €108 million of underlying EBITDA which is a 44% increase compared to the second half of last year and that happened on the back of higher premium income, tight operating cost control, and yes, we also did enjoy the slightly improved price environment relative to zinc during the first half.

Mining saw a sharp reduction in EBITDA as we did not have the benefit of the strategic hedges that we had entered into last year and that matured during the second half of last year. Therefore mining headline EBITDA was negatively impacted from the absence of such a benefit. What is clearly visible in both segments are the benefits of Project Lean. We saw further implemental cost reduction of $22 million, which makes us very comfortable to achieve by the end of this year, the €75 million targets that we had established.

Turning over to page number 8 which talks about the cost control, direct operating costs went down €15 million compared to H2 and are lower by €44 million if you compare to the first half of last year. As a result, EBITDA on a unit basis at the bottom of the chart increased by €17 half over half and €24 per ton of zinc produced at €24 year-over-year.

Over the same period to express this a bit differently, EBITDA margin, as you saw earlier on Roland’s chart increased from 6% to 7% to 8% in the first half of this year. And in summary, this evolution makes us, as I said before, very comfortable that we are going to achieve our €75 million cost reduction target by the end of this year.

Turning over to page number 9 and page number 9 talks about the balance sheet and elements of the balance sheet, we continued there to focus our intention on the balance sheet and achieved a working capital reduction by €55 million compared to the second half of last year. And we did that despite the period-end zinc price going up by 6% from December to the end of June and at the same time, Roland talked about that earlier, we moved as of January 1st into the new arrangement with Nobel and at the same time we started to market a large part of our commodity grade material and alloys to the rest – to Europe and the rest of the world.

At the bottom, CapEx continues to be tightly controlled. When you exclude the growth element that is included in H1 and you exclude that for the same periods last year, we are flat half over half and relative to the first half of last year we actually reduced non-growth CapEx by €23 million. Then turning over to page number 9, sorry 10, all of these efforts on the profitability of the company and the balance sheet management has resulted, this focus has resulted in a solid financial position and an ample liquidity.

As Roland said, we reached in terms of cash and committed funding that were available, a headroom of very close to €770 million. Year-over-year, net debt decreased by more €100 million and the net debt to EBITDA ratio went from 3.9 a year ago to 3.6 at the end of last year and 3.1 now. In addition to that, we are actively evaluating funding options for the SSR investments and we are hopefully evaluating the capital structure of the company and want to address the upcoming maturities ahead of their – them occurring.

So, with that, I turn over to Bob who will talk about the general market sentiment at the moment and marketing, sourcing and sales. Thank you.

Bob Katsiouleris - Senior Vice President, Marketing, Sourcing and Sales

Thank you, very much, Heinz. Good morning everyone. I’d like to start with slide number 12 and look at price trends through the first half of the year. Talking a look at zinc, we’ve seen through the first half of the half, January through March-April, quite a bit of volatility, really led by financial institutions moving both paper and their positions in and out of zinc. And then in the second half really – probably in the last 2.5 months, we’ve really seen movement driven by what we call structural demand and that leads into very nicely a discussion we’ll have later on the LME inventories.

Across the rest of our portfolio in terms of silver and gold and the rest of the metals complex, more or less flat pricing in terms of both our expectations and what we’ve seen in the marketplace. So the story has been really driven by zinc and that’s really what we’ll focus on today. Draw your attention to slide 13. First and foremost we’ll take a look at LME zinc stocks which are down significantly since last year we’re now in and around the 650 level with prices sitting in and around the $2,360, $2,370 level. In addition to those prices, it’s important to point out that premiums especially in Europe and U.S. have remained relatively strong in line with pricing.

We’ve seen a little bit of a drop in premiums in China, but we expect that to sort of stay relatively flat through the rest of the year. Looking at demand, we’ve seen really about a 3.25% increase in demand even versus our own expectations for the first half and the full year. A lot of that increase really is coming from the European building sector and U.S. automotive, both of which are significantly ahead on the demand profile for zinc. So, we’re seeing quite a bit more zinc demand in galvanized sheet for the building sector which has been a very pleasant surprise, strong housing market, strong construction market, a real inflow of liquidity into the European construction and building sector has really driven that.

We’re also seeing improved galvanized exports from China, part of those are on the building side, but mostly automotive. So, all in all, a very good story also supported by the happier results of the European steel makers supporting the 4% to 5% compound and annual growth rate. A look at the inventory levels, there has been quite a bit of a discussion in terms of what is happening in inventories, what is happening in New Orleans.

Look, a lot of that and our view is pretty straight forward. We see a roughly 50-50 split in terms of those inventories about half and slightly more recently really fuelling the demand picture, the other 30% to 40% really a movement between on-warrant and off-warrant zinc. Having said that, we’re seeing more and more of a focus on the demand side then on the financial side, which is very, very positive.

Now, looking at slide 14, I want to just make a couple of comments on the supply. We have – as Roland mentioned, put together a really talented group of marketing analysts and marketing leaders. We are now putting together our own view, bottoms-up view of both supply and demand. So, I think it’s important to present that to you today and you can see that vis-a-vis Wood Mackenzie’s view and other views as well. And it’s really a reflection of a couple of different things. First of all, both as a producer and as a miner and as a marketing organization we have a view of both demand and supply. I’d like to think that that view is proprietary to Nyrstar, but it points out some very interesting issues in terms of timing of the oncoming structural deficit which we believe will happen and also our view of which mines will come on stream and which mines will not.

It also stresses how critical our own mining portfolio is and how we are planned for the gap well in advance of the gap for our smelting segment. In addition to that, just wondered also to make mention of really an outstanding note that RBC Capital Markets put out just recently came really took a very, very good look at the capital intensity of the projects in the pipeline and really look at the breakdown price of those projects versus the projects that have been put in place over the last 10 years. We really see a dramatic difference in breakeven capital and breakeven pricing.

So very much supporting Nyrstar’s view, which is more or less in line with the industry view. We’re very pleased to take and present this position to the industry and to the financial markets. On slide 15, I’m trying to summarize here exactly how our marketing sourcing sales teams works and how aligned it is really, but not only the mining segment and the metals processing segment, but also with the group strategy and so as a team, we really focus on optimizing not only at our product portfolio, but also our sourcing portfolio to create added value both to our smelters and for the markets that we planned.

And those markets are product market, geographies both in the way we source and when we place our products that is not only zinc, but that includes sulphuric acid, a wide range of precious metals and metals like indium and germanium concentrates. So, I would say a very good start. I’m pleased as well to see how active the team has been in terms of really focusing a regional and product strategy for both the way we source and we sell. I think the resulting benefiting in premium, yes, there is a commodity component to that benefit. However, there is definitely a mix and a alloy component as well that has made its way through to the metal processing results and I’m very pleased to see how the teams interacting both with the metal processing segment, a mining segment, and of course industry on a whole.

So, that’s really all I had to say on slide 15 and with that, I’d like to turn it over to Michael for a review of Metal Processing segment.

Michael Morley – Senior Vice President, Metals Processing and Chief Development Officer

Thanks Bob. Good morning everyone. Turning to slide 17, I’m just looking at the segment performance as a gross profit level. Gross profit was up for the segment 4% on the second half of last year, 8% year-on-year and that’s fundamentally driven by a number of things, TCs are up, half on half driven by a higher benchmark, which was offset by lower production, but also partially offset by a high proportion of concentrate purchases outside of benchmark contracts.

As Bob has mentioned earlier, premiums were up significantly half on half of 12% and also a year-on-year 23%, reflecting as Bob mentioned market conditions but also the very good work around marketing and sales team. Free metal for the segment was down 3%, reflecting the lower volumes half on half and byproducts are also down reflecting a number of things including gold, silver, and copper prices, a lower production at Pirie, particularly due to an unplanned shut in May of this year, and also that was partially offset by improved asset prices and also pleasingly an increase in Indian production sector, significant increase in Indian production, up 50% half on half and also increased production from Clarksville of the germanium leach product that we now produce from our Mid Tennessee concentrates.

Other was down half on half and that is primarily attributable to lower freight cost, which was good to see, that was driven by improvements in our sales and procurement mix, again attributable to the good work around marketing trend supported by what is currently a favorable ocean freight environment and I think it’s important and also it’s to note that improvement because it’s somewhat remarkable given the fact that we have now in-sourced significant portion of the European book and we’re delivering more metals on a delivered basis compared to the former arrangements under the Glencore contract.

Moving to operating costs, an improvement half on half of 3%, the year-on-year is significant improvement of 18%. In absolute terms, it’s down 5% half on half and 13% year-on-year and that is very pleasing to see as Ronald also mentioned and that is driven by significant cost control performance particularly in external services and we’re also seeing lower energy costs and also somewhat benefiting from a weakening Australian dollar against the euro in the first half.

All that driving a significant increase in EBITDA as a segment level, up 44% on the second half of last year to €108 million. Turning to CapEx, sustaining CapEx was relatively stable with €32 million, growth capital has increased half on half due to the Port Pirie redevelopment which represents about €11 million in the first half and also the smelting strategic review work which represents approximately $2 million in the first half. Both in line with guidance and as I’ll talk about shortly ramping up into the second half of this year also.

Zinc production was slightly down on the second half of last year, but in line with our expectations given the planned shut profile. And as Ronald also mentioned lead production was in line with the second half of last year a 93,000 tons and that despite the unplanned shut in May that I mentioned earlier. That said, I think it is very pleasing to see a Port Pirie continued process stability and it’s also important to highlight that the average blast furnace throughput in June was actually the highest since November 2011. So, we are seeing some significant and sustainable operating performance improvement at Port Pirie.

Turning to slide 18, all that in the context over the same time moving forward with our key strategic priorities in the segment and also within the context of the broader strategic direction of the group. From a segment perspective, our two key strategic priorities remain that the Port Pirie redevelopment and the ongoing work on the smelting strategic review projects, both of which are a fundamentally underpinned by a different view of how we value our raw material feed. And that is fundamentally complemented by the own mine supply that we have acquired over the last few years which are becoming increasingly valuable to our metals processing segment.

And we’ve seen year-on-year a meaningful increase in the internal supply of our own concentrates to our metals processing segment. Around about 40% of own mine production being supplied to our metals processing segment in the first half of last year increasing to over 50% in the first half of this year and that is a trend that will increase as we continue with the Port Pirie work in the smelting strategic review work, we would expect a level to reach a number approaching 90% which does underpin the value of that supply to the metal processing segment.

The Port Pirie redevelopment is fundamentally driven by the desire to increase process flexibility. And that allows us to increase the value proposition of Port Pirie by valorizing the value that’s currently contained in our internal residue, so fundamentally minimizing the value leakage that we currently experience. The smelting strategic review work as was spoken about before is really about increasing the value that we are able to bring into our metals processing segment, increasing our capacity to then valorize that value in order to produce an increase range of valuable products for the market, particularly mine and metals.

What though is critically important for part of these strategic projects is that we are creating a fundamentally different business model for the segment, which is driven more by free metal and less by volume driven treatment challenges.

Turning, if I can to slide 18, sorry, slide 19, just a little bit more detail on Port Pirie, again and we’ve looked at some of this material before but as a reminder, the business cases is driven by firstly an increase in throughput and this seemed the plan is the existing bottleneck of Port Pirie. That increased throughput is driven by or is fed by our own internal residues. So we see in Port Pirie price redevelopment approximately half of it’s raw material requirements fit by internal supply.

That’s driving an increase in gross profit across all metals which is fundamentally driven by increased free metal and with the modest increase in operating cost on a per ton basis, we see operating cost per ton decreased significantly. That’s driving the economics of the business and we continue to expect a levered IRR in the 25% to 30% which implies an unleveled IRR in the range of 15% to 20%. A lot of work has happened since we announced on the 16th May the funding package. And as a reminder, the funding package which is structured in three tranches, the first through a direct contribution of Nyrstar, the second through project level financing, which is supported by the Australian federal and South Australian governments. And the third tranche supported by forward sale of a portion of the incremental free silver production we expect from Pirie.

From pre-feasibility to final feasibility, as you recall the CapEx did increase and we’re not sitting at €338 million and we’re very confident with that figure from pre-feasibility to final feasibility on a like for like basis, CapEx increased by less than 10% in fact more in the order of 5%, I think that’s attributable to the work that was done over the last year or two years supporting the feasibility work. The remaining increase was driven by increased scope by decision to include the redevelopment of the asset plan, but also an increased contingency and allowance for inflation over the spend horizon.

In fact as we sit now approximately 20% of the overall capital was reserved for contingency and the inflationary allowance so, we’re quite confident in that number. We’re provided previously an overall CapEx profile and in our first half release we’ve also included perhaps more – a more granular view on what we expect capital to be over the coming years. We have provided a range for each year, but overall we still expect capital to be around the €338 million. As I’ve said, lot of work has been undertaken since the funding package was finalized on the 16th of May, a number of significant contracts have been now awarded, I mean, the second half of this year, we expect to see activity ramp-up significantly, early site works are due to commence this month.

The accommodation camp for the workforce will also be completed over the coming two or three months. Site works will commence aggressively in September and continue to ramp-up and importantly, filing will commence in September as well. So, we do expect to see a lot of activity on site in the second half of this year, and a lot of that work is also being tied into the plan shutdown we have in Port Pirie during November, which is a great opportunity to get in front of the work program.

On that, I’ll now hand back to Bob to provide an overview of mining performance during the half.

Bob Katsiouleris – Senior Vice President, Marketing, Sourcing and Sales

Thank you, Michael. Look before I begin, I’d like to first and foremost thank Graham for his contribution to the mining segment and just let everyone know working closely with Graham on our transitioning into this role and closely in terms of really working and making sure that we have exactly the plans we need to have in place for the second half.

So with that, we’ll start with slide 21. I want to draw your attention firstly that – the figures that we’re looking at are in U.S. dollars millions, which is a slight change from what we reported in the past, but the euro figures are in annex. So, looking at zinc concentrate and production, more or less consistent, again consistent increase in line with where we thought we would be, you see a nice trend from 2010 to 2014, look at the performance I think is an excellent performance considering the operational issues we had in our Tennessee mines which have of course since been resolved and that really, really reflect a lot of the operational excellence and the initiatives that we had across the portfolio through the first half of the year so, a very good solid consistent performance across the entire mining group.

If I look at the other metals and concentrates, when you draw your attention to the gold to the gold piece which is the first one. This is really the drop in gold is really our decision to defer the El Toqui gold campaign. As you know in Toqui, we mine high gold, low gold and zinc and lead so, we shows to really focus on zinc and lead through the first half of the year and deferred the gold campaign to the second half.

Having said that, we are definitely on track to meet our full year production guidance on all metals. Silver, lead, and copper more or less in line with our expectations for what we produced in the first half. Looking at gross profit, again down 4% versus the first half last year and 3% versus the second half of 2013 considering the impact really of the gold campaign and also the impact of the strategic hedges that we benefited from last year, I would say I’m pleased with the gross profit figure at this time. We still have a lot of work to do, which are come to later in terms of the mining strategic review both focus on production, cost and efficiency, but all know considering the mix of metals produced, I think the GP result is a good one. We also see the impact of TCs favoring the smelters versus the mines, which also had an impact on the half year results.

The mining unit cost per ton again a good improvement across the entire portfolio of our mine, really starting to see the benefit of renewed focus on operational efficiency, unit cost across every site so, very pleased with that figure and again a significantly – significant focus in the second half continuing the first phase of the mining strategic review.

Looking at EBITDA, you can clearly see the benefit of the strategic hedges on the 2013 results and it’s important to note that on the like for like performance basis, you look at the 35 versus 32. I think we’ve performed well in terms of delivering a certain level of EBITDA so, again a key focus for the second half. CapEx in line with where we thought would be, it’s interesting to note the $7 million for the growth CapEx. I said the majority of that CapEx is focused on Campo Morado and the test work we’re doing on the lead, zinc, copper ore body developing it. I can say at this point in time that, that test work is very positive. We’re very excited about the results and putting in place a program to really release the value of that benefit both across the mining segment and hopefully our smelters as well.

If I can draw your attention to slide 22, slide 22 is an interesting slide that if you look at the left side of it, it’s really a reflection of how we see the markets and which we operate as a mining segment. And there is three distinct parts of that market. There is a market to mine portion, there is a mine to market that we respond to and of course there is a smelter side of it as a mining group. The key area of focus for us will be responding to the structural deficit of zinc concentrates and that’s what I mentioned before clearly we acknowledge that structural deficit exist, having these mines at this point in time for Nyrstar is critical as both Michael mentioned for not only from a value standpoint, but also from a zinc unit standpoint.

So as such, looking at the first part of the way we respond to these three areas of the market, we are going to prioritize mining production, improved costs, and a real good understanding of great recovery in line with not only our production in cost structure, but also in terms of what the market needs and our smelting requirements. So, it’s a very good representation of the way we feel the mining strategic review, yes, there is a key focus on cost, at key focus on efficiency and optimizing great recovery, however, in line with what we see the opportunities are in terms of geographic opportunities, freight opportunities as well and the opportunities presented by our smelters and other smelters.

I think there is a possibility for real step change improvement in our mining results. So that will be a key area of my focus really bringing that expertise both on what’s available as options to our mines internally and externally whilst maintaining a key operational focus and of course safety as well.

So with that, I’d like to finish this slide 23. Again, the core aim of course is to improve EBITDA and maximize free cash flow. We are well into Phase I of the mining strategic review. The second phase is more in line with sort of schematically what I am showing on slide 22, really a focus on alignment on value, options, logistics, and of course the opportunity that SSR will represent to the mines as well. And that’s a key one especially as we plan on increasing the amount of concentrates a little bit from our mines to our own smelters.

So with that, I’d like to turn it back to Roland for a couple of comments on our outlook going forward.

Roland Junck – Chief Executive Officer

Yes, thank you very much, Bob. So, I think as you are aware we’re pursuing a valorization strategy basically through our integrated business model, so valorization strategy so, the assets we have meaning the value of defect, we have in the mines, the capabilities we have on the smelters, so our geographical presence worldwide as a global leader in zinc, of course also as I have already mentioned so, our partnerships we have on the marketing, sourcing and sales, this will be translated into further expansion of our market reach. In terms of geographies, product mix and customer mix, I am pleased also to say that we have a new office in Hong Kong which will help us to be more present in Asia and of course with our focus on premium for metals processing.

As Michael already mentioned on our mining side and especially in relationship to the value contained in our own concentrate, we will focus on further integrate them and the consumption of their production inside the company. It has already, as mentioned, going to be in the first half 2014 to 52% and in functional development of our technical capabilities on the metals and processing side, we will even increase furthermore that internal consumption in order to maximize the value which just contained and we would not necessarily reach all gaps in the market.

We will continue to work on the core projects as we already mentioned not only the Port Pirie project, but also the SSR project. But for the second half 2014, clearly we will deliver on our guidance in terms of production. We will continue stringent, and the word stringent comes up now especially in an environment where metal prices are going up, we have to continue in a stringent way to cost – to control costs and to deliver on Project Lean. We also have to maintain despite this positive environment, the stringent capital allocation process to really make sure we invest in the best opportunities for the group.

As I said, further commercial strategy steps are important to (indiscernible) the right focus in simple terms on the right product mix and even meeting still in a better way market demands and changes of the market demand. Deliver on time and budget key milestones of our projects as mentioned deliver and what has been planned and worked out in the mining segment last year and especially at the first half of this year deliver on those actions and as a consequence on the results of the mining strategic review in the second half. And last, but not least, we are evaluating access to capital markets to address incremental capital expenditure that is why we do that is pretty evident as we have to fund €250 million SSR, the projects, and obviously also having a bond which coming to its maturity at the end of the 2015 and there is a consequence we explore all possibilities that we have in the market.

For that – or with that I am convinced that we remain on track with what we want to achieve with the strategy we are pursuing and with this I would like to close this presentation and obviously we are happy to take your questions. Thank you very much.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will now take our first question from Junior Cuigniez from Petercam. Please go ahead. Your line is open.

Junior Cuigniez – Petercam

Hi, gentlemen, thank you for taking my questions. I have two, if I may. The first one is on the smelting EBITDA. It would be helpful if you would quantify the amount of EBITDA, which was impacted by weakening of the Australian dollars. So in other words, what would EBITDA have been at constant FX to what extent as you reduce service and energy costs to what extent are they sustainable? Is the EBITDA in excess of €100 million, is that the new run rate we should be looking for at flat metal prices? And second question is on the zinc price, you said it was driven by a structural demand, strong car sales, a rebound in construction markets, etcetera. Does that imply that you see further value beyond the current level and does that also mean that you don’t see this as a current hedge opportunity? Thanks.

Roland Junck

Okay, thank you very much for the question. Heinz will give you an answer to the EBITDA of the metals processing and but what I would say like to say what I said this morning already in terms of the zinc price and Bob can further evaluate on that. When – memory of people is short, so when we say, no, that the zinc prices have to see high actually we should go a little bit further back, looking at what has happened after the financial crisis and when you look at zinc prices in 2011 first half and even 2010, we were at zinc prices of $2,400, $2,600 per ton at stock levels, inventory levels, on the LME, which may higher than what they are to-date and further away from the supply demand or demand supply gap which we are coming close now. So, there is actually, in my view, an augment that the zinc prices is under evaluate or under evaluate for the time being and that is upside potential book may further evaluate on those items.

Bob Katsiouleris

Yes, just one additional comment to what Roland mentioned before I turn it over to Heinz to answer your first question. I think it’s also important to think about the LME rules and how they are impacting queues and the essentially improved transparency that we have really between the zinc unit in concentrate and a zinc unit in an ingot. The result of that is I think we’re now in an euro where demand – fundamental demand is going to be much easier to tract into both an inventory position and produce a position. So as such, yes, we have a view that’s structural demand is going to continue to impact the zinc price and a way that is now in more transparent, but also more dynamic. And as such, whether we hedge or whether we don’t hedge, I think that’s a separate question really driven by if anything opportunities and volatility. But beyond that, I think having the assets, having the ability to produce the right product in the right geography at the right time is really where the value is. Heinz?

Michael Morley

Heinz, it’s Michael. I can answer Junior’s questions I think.

Heinz Eigner

Yes.

Michael Morley

Junior, three questions, I have probably written them accurately impact of Australian dollar on operating cost is in the order of €4 million to €5 million for the half. In terms of external services what I mentioned before the two primary drivers of improved operating costs were external services and a reduction in energy cost in terms of external services. It’s in the order of €5 million half on half. Is it sustainable, yes, I think it is sustainable and we will continue to look for further opportunities where they are available to sustainably reduce the cost base of the segment. Your last question was whether you can expect this to show a new run rate for the segment, I’m not going to comment on that, other than to say, I think we’re pleased with the segments performance in this operating environment. And I would have been disappointed if it would have been less in this operating environment, but again I want to underpin the good work with – between the segment and our marketing team is worked. I think that does represent a step change in the segment’s performance.

Junior Cuigniez – Petercam

Okay, it’s pretty clear, so if (indiscernible) around €45 million of the fixed income to a EBITDA of 104, and then of course it is sustainable improvement in the energy costs and the external source – outsourcing, then you come to a run rate, which seems in excess of €100 million if that’s correct.

Michael Morley

That sounds like the right math.

Junior Cuigniez – Petercam

All right, thanks, bye.

Michael Morley

Thank you.

Operator

We will now take our next question from Rob Clifford from Deutsche Bank. Please go ahead. Your line is open.

Rob Clifford – Deutsche Bank

Good morning. Just a simple question. In the mines description, it talks about modified mine extraction techniques for El Mochito. It also talks about at Myra Falls Mine plan modifications enabling higher zinc and silver grades. Can you just talk about what those modifications are? It sounds a bit like high grade to me, but I was just curious to know what you’re doing there to get that out? Are these sustainable?

Bob Katsiouleris

Yes, Rob, this is Bob. Thanks, Rob. Look, at Mochito the mining technique is actually a different mining technique, it’s not only more efficient and more actually less capital intensive, it’s something that we have been working with our technical team for the better part of 2.5 years and we are seeing the benefits of that across the ore body including the chimneys that we are – have planned for the better part of the year to get into so, as we deployed that technique, we are very pleased with the results both in terms of great recovery. I think in Myra, Rob, it’s a different situation in terms of both the way we’ve done our top modeling work and the way we positioned where and how we’re going to mine. So, I think the results there have been excellent and to some extent, have exceeded our expectations leading to better than expected grades across the ore body. So, the step change in terms of improvement has really come at Mochito and I think we’re very keen to see the benefit of that in H2 of this year as we deploy that across all the areas and sectors that we’re actively mining in.

Rob Clifford – Deutsche Bank

So for Mochito, it’s sustainable performance improvement?

Bob Katsiouleris

Yes, yes, it is.

Rob Clifford – Deutsche Bank

But Myra Falls, is that also sustainable or is that just a one-off?

Bob Katsiouleris

Yes, Rob, sustainable through the rest of this year and I think probably too early to tell right now what 2015 looks like. We’re in the process of putting together our plans for ’15 and a life of mine plans and we’ll have a better idea at that point.

Rob Clifford – Deutsche Bank

Okay, thank you.

Operator

We will now take our next question from Tim Huff from RBC. Please go ahead. Your line is open.

Tim Huff – RBC

Yes, good morning. I just had three quick questions. First of all on CapEx, thanks for providing the component breakdown for the next couple years, it’s very helpful. In the second half of the year, it looks like you’re going to have a step up to around the €200 million level plus or minus €30 million and that could sustain through the first half of 2016. I was just wondering if you could give us some color around maybe that level and what the variability that would be – would it come down to something as simple as zinc pricing and financial performance in each half year period and you guys taking an opportunity to spend a little bit more when you have a good six months.

The second question on the Port Pirie shutdown in May, sorry, I didn’t catch it completely, but I was just wondering if that’s finished or if it was ongoing into the second half of the year? And then the third question was on your slide, I think it was slide number – it was the slide on the mining profits. It was slide number 21. And you were talking about gross profit from the second half of ‘13 to the first half of ‘14. And in there you have the other component, which has gone from a positive $18 million to negative $16 million in the first half, that’s actually has a pretty big impact on your EBITDA. I was just wondering if you could give us a little bit more color – sorry, that’s in U.S. dollar terms. I was wondering if you could give us a little bit more color on what actually caused that whether it’s sustainable and any other thoughts around the other costs there. Thank you.

Michael Morley

Tim, it’s Michael. Maybe I’ll jump in first and answer the Port Pirie question. That shut occurred, yes, unplanned shut occurred in May and it was rectified during the course of May as well and as I mentioned, I think we saw a significant improvement into June as a result of the work we did in May when we saw June blast furnace throughput actually reach record levels since late 2014, but that unplanned shut was limited to the impact of that was limited to May. In terms of CapEx, if I understood the question, Tim, and correct me if I haven’t, but I think the question was how much variability could we see in that CapEx guidance in H2 if financial performance were to improve half on half, was that your question?

Tim Huff – RBC

Sort of the opposite, I wasn’t expecting you guys to quantify it. We’re expecting variability on the half year CapEx figures for the next 4, 6-month periods through the first half of 2016. I’m just wondering the variability in that CapEx or the flexibility that you’ve left in that for the SSR growth projects. Will that be dependent just simply upon financial performance or are you going to set that CapEx for those – for the next two years and just run it as is, well, I guess the question is, is there a lot of flexibility in those CapEx numbers?

Michael Morley

Okay, sorry, this is SSR related. So, when you might recall when we first outlined the SSR – the results of the SSR work we gave CapEx guidance and I think it was on the Q1 IMS call. We also made it clear that we have the option throughout that portfolio projects to defer some of that CapEx if we choose to. We weren’t being forced to spend any of that CapEx, it was growth CapEx with significant returns therefore, the strong buyers to though it is quickly as possible, but we weren’t forced to. And there was a – in fact, there is a number of alternative sequences. The one that I outlined on the Q1 call was we could choose to defer and therefore flatten that CapEx profile, but that would defer the execution or implementation of that project pipeline out until 2019. What we’re guiding in the half year relates is the CapEx profile with if you like the accelerated program which would have the pipeline implemented by 2017 and as we’ve also outlined in order to support that we are looking at funding options. But we still retain as I said at the Q1 flexibility to defer that spend if we chose to.

Bob Katsiouleris

Tim, this is Bob. Just coming to your question on the GP impact, in the other is where we capture the impact of the strategic hedge on GP so, where you see the strategic hedge shown on the EBITDA portion of the results on the GP side is that’s how we decided to show the impact of the strategic hedge half on half. So, really that’s kind of where those figures are coming from.

Tim Huff – RBC

Okay, that’s really helpful. Thank you.

Operator

We will now take our next question from Stephanie Bothwell from BOA. Please go ahead. Your line is open.

Stephanie Bothwell – BOA

Yes, hi, everyone and thanks for taking my questions. I have two. Firstly on cost in the mining division, during the first half Project Lean has obviously had a slight positive impact on your unit costs. Are you able to give us some color on how you see C1 cash cost tracking into second half? And my second question is on working capital, where again you’ve had some success in reducing your working capital requirements. But again, how do you see that tracking into second half and what’s the sustainable level for working capital in the business?

Bob Katsiouleris

Stephanie, hi, this is Bob. I’ll take the first question and I’ll let Michael and Heinz adjust the second one. Yes, we’ve seen benefits in the first half of Project Lean. I think we’ve always seen the benefits of lean focus on direct operating costs across the mining segment. We expect to see that continue and slightly improve at least the expectation in the second half. And I think that really will be led by some of the initiatives we have across all the mines. And in addition, of course not having the maintenance issues that we had in Tennessee that really slowed us down, I should point that we were on a record phase prior to those unplanned maintenance shutdowns that we since resolved. So, getting that benefit as well and having that flow through to direct operating cost is what we expect for the second half. Heinz or Michael, working capital. Heinz?

Heinz Eigner

Yes, I can take that question. Hi, Stephanie, good morning. It’s probably one of the most difficult questions that you’re asking or at least the answer is quite difficult. First of all, question is what price environment do you assume? I think we expressed earlier the view that, well, it is to think we are clearly not of the – we haven’t seen a peak here. And therefore in the moment, the price would increase. We definitely would also see increased working capital requirements. Relative to what we have done in terms of volumes and also commercial terms on the – on both sides, the customer side as well as on the supplier side. I think that we had probably gone to the mix that I can see in the reasonable future. So from that, I would not expect substantial further improvements are possible and then we have the price evolution that I mentioned earlier. And I think the other aspect then on the horizon that we clearly should also factor in more, once the Century mine comes to its end of life. I think then we will be confronted with having to deal with a number of lot smaller suppliers, and we may also need to do some blending in the future of material to allow optimal feed mix into the smelter. So, in the course of next year, I would actually expect higher working capital requirements for the mining part of the business. I would be happy if we can, price aside, maintain the same performance for the second half that we have shown in the first half.

Stephanie Bothwell – BOA

Okay, thank you. And perhaps just one follow-up question from me. On your undrawn finance trade facility, could you confirm aside from this financial covenant on that whether there are any restrictions on how those funds could be used and if you were to draw down on them?

Heinz Eigner

By nature of that facility it’s a working capital facility and that then also illustrates its purpose, but from the facility agreement itself, yes, cash is fungible and there is no restriction in the use of the funds if you were to grow from that facility.

Stephanie Bothwell – BOA

Okay, so you could use those funds potentially for growth plans if you needed to.

Heinz Eigner

Yes, we could do that, but, yes, it would probably not be a very wise thing to fund a CapEx program by a working capital facility. But technically we can.

Stephanie Bothwell – BOA

Sure. Okay, thank you very much for your time gentlemen.

Operator

We will now take our next question from Wouter Vanderhaeghen from KBC Securities. Please go ahead. Your line is open.

Wouter Vanderhaeghen – KBC Securities

Hello, good morning, couple of questions. First on the forward sale of silver, can you give us some more color on the timing and, yes, when will the cash – when will be the cash in on that forward sales? That’s first. Secondly, on the Century concentrates, can you give us an indication on the volumes that you expect to be delivered in ‘14 and ’15, are they already declining in ’14 and is ‘15 really going to be the last year of deliveries of Century concentrates? And then finally on Talvivaara, quite on open question, but since the latest conference call we had at the first quarter trading update, is there any change in sentiments that a good solution can be found there? Thank you.

Heinz Eigner

Bob, would you go ahead and take the Century volume question, please.

Bob Katsiouleris

Yes, I’ll take Century, Heinz and I will turn it back over to you for the silver and the Talvivaara question. Wouter, this is Bob, a couple of comments on Century. We expect 2014 to receive all of our planned shipments from Century. So, we have seen no issues and anticipate no issues in terms of supply through 2014. As it stands right now, we have an excellent relationship with MMG and the Century mine. We are anticipating a drop off beginning probably in the first quarter through the second quarter of 2015, leading to by the middle of 2015 may be spilling over a month or so into Q3 before Century deliveries stopped completely. So in our current plan, we have – what we call the post Century plan and the plan that we’ve been put in place for years now in line as well with what Michael discussed before with SSR. It’s sort of mid 2015 and might spill a month or so into Q3. Heinz?

Heinz Eigner

Hi, Wouter, good morning. Relative to the forward sale of silver that is part of the funding package for Port Pirie, we have done a lot of prep since we entered into the binding agreement with the federal and South Australian governments. However, we also don’t want to lay the funds in advance of actually not incurring significant spend. But as Michael explained earlier we will see a substantial increase in the spent relative to the Port Pirie redevelopment and therefore, we will execute its forward silver sale during the course of the second half of this year. On the other question relative to Talvivaara, I think you know we entered as of April 1 into this agreement under which we provide incremental liquidity to Talvivaara as zinc deliveries occur that has worked quite well since April. I think it’s fair to say that we had a lot of engagement together with the administrator first of all and then secondly with a number of other stakeholders in facilitating the financial solution for Talvivaara and I think I used in your question to growth sentiment, I would say the sentiment is slightly improved on being able to find the financial solution relative to Talvivaara, but it’s clearly up to Talvivaara to provide their detail. I would expect that sometime during second half of this year that will be a solution one way or the other.

Wouter Vanderhaeghen – KBC Securities

Okay, thank you.

Operator

We will now take our next question from Amit Pansari from Societe Generale. Please go ahead. Your line is open.

Amit Pansari – Societe Generale

Hi Roland and Heinz. First of all congratulations on such a good set of results. I have a question byproducts contribution in the smelting segment. So when I see the leach product, your contribution half on half has increased by €10 million despite the fact that the prices for lead, copper – lead, silver and gold were flat year-on-year – half on half. At the same time, sulphuric acid contribution remained constant half on half despite a lower volume. And we know that spot prices have been doing – we are very weak in the first half of this year. So I just want to understand like how that is developing and how we read that going forward from here?

Heinz Eigner

Okay, thank you very much for the question. Michael will be the first and maybe Bob can say something to the asset prices later. So, Michael, please.

Michael Morley

So, we’re seeing a number of ups and downs at a byproduct that will for the segment. Firstly, we’re saying across gold and silver reduced volumes and IRR as I mentioned being driven by the unplanned shut that we have in May at Port Pirie. We’re seeing copper relatively stable. In terms of indium as I mentioned we are seeing a nice significant 50% increase in production half on half and we’re also seeing an increase in germanium leach production from Clarksville, as I mentioned being fit by the mid Tennessee germanium-rich concentrate. In fact for our germanium leach product, were – we saw in the first half record production, which is very pleasing although, that’s obviously dependent on performance at mid-Tennessee. That’s being – volumes being offset by prices copper, gold to down half on half, but a good indium and germanium price environment. In terms of asset as we saw volume down attributable to zinc production but we are saying an increased price environment so, largely netting off against each other.

Amit Pansari – Societe Generale

Thank you. And if – I have a follow-up question, if I may, would it be possible to quantify the impact of weaker AUD on the segment results in the first half, the smelting segment, in terms of euro millions?

Michael Morley

Sorry, weaker energy process.

Amit Pansari – Societe Generale

Weaker Australian dollar.

Michael Morley

Australian dollar, okay, I mentioned that briefly before, half on half, the balance that we’re seeing from the Australian – weaker Australian dollar, within the order of €4 million to €5 million.

Amit Pansari – Societe Generale

Thanks.

Michael Morley

Thank you.

Operator

We will now take our next question from Luc Pez from Exane. Please go ahead. Your line is open.

Luc Pez – Exane

Hi, gentlemen. Two questions, if I may. First of all on the depreciation part which seems to have been increasing pretty extensively, could you break this down between the mining and the smelting division and otherwise to understand whether this is a more sustainable figure going forward. That’s my first question. And secondly, with regards to mining, could you maybe be a bit more precise as to what you have in mind when it comes to mining plan in Campo Morado going forward during near term H2 and for the next two years? Thank you.

Heinz Eigner

Hi, Luc, good morning, it’s Heinz. I take the depreciation question, even though I don’t have the numbers in front of me, but what you need to consider is that we had from the mining side be higher volume that we produced and as the majority of the depreciation there is linked to the production profile that we have. Secondly, the other impact that has done if we have not – historically not put that much of CapEx into exploration and development, therefore the visible life of mine has at a number of the mines reduced as they are continued to mine and that leads them to an increase in the depreciation rate. Going forward, and Bob will probably also talk about that in terms of our focus clearly we will put more focus on exploration CapEx going forward.

Luc Pez – Exane

So is it fair to say that at some point we should see more of this exploration CapEx and less of the G&A coming through the P&L?

Heinz Eigner

Yes, but that will obviously not happen half over half that is more gradual to…

Luc Pez – Exane

For the next few years, I guess.

Heinz Eigner

Yes, yes.

Bob Katsiouleris

Yes, Luc, hi, this is Bob. I’ll pick-up your question on Campo. Looked specifically, we are working on developing a complex lead, copper, zinc body in the – in El Largo area of the deposit. Both the drilling, the test work has been very, very positive and we are now at the point of both design through the concentrator in terms of redeploying the asset in terms of the process flow sheet and tailoring it to the work that we’ve done both a deposit level and the bench scale. So, look, we expect by, I would say sometime early to mid next year to start seeing the benefits of the lead, copper, zinc through the process. And in addition to that probably by the middle of 2015, we will also have an opportunity to change the marketing arrangements of that – of those concentrates either directly be ourselves or is the marketplace to really benefit from hopefully improved payables for the lead and the copper portion of that ore body. So, that’s all in on a plan. It’s all showing in the capital that we’re spending both on the development and a portion of that capital will also be spent to make some of the changes in the concentrator that will be in line with the ore grades we expect as we mine all three concentrates through the processing plant. So, roughly I would say, I expect that to be wrapped up by H2 and we should start seeing the benefit of it probably by mid 2015.

Luc Pez – Exane

Thank you.

Operator

(Operator Instructions) We will take our next question from Philip Ngotho from ABN AMRO. Please go ahead. Your line is open.

Philip Ngotho – ABN AMRO

Yes, hello, good morning, gentlemen and thank you for taking my questions. Maybe just over the, just a clarification question, you’re talking about a liquidity headroom of €768 million at the end of the first half. I assume that also includes then the bond that was – that matured at the beginning of this month so that your current headroom is, what it is 120 million lower, is that correct?

Heinz Eigner

That is correct, Philip, good morning.

Philip Ngotho – ABN AMRO

Okay, okay, good morning. Okay, yes, just to get that straight. Then going on a bit on the capital structure, you said that you are actively evaluating the capital structure. I understand that you need funding for the SSR growth plans. But also I was wondering is it – are you also looking to lower the overall debt level given that you now have €750 million of outstanding bonds, is that also part of the target, the goal?

Heinz Eigner

Yes, thanks for the question, Philip. Relative to evaluating the capital structure of the company, it’s probably important to state that as of now and our decision has been made, what actions are we going to take. But I think it is fair if you go to excess capital markets we would also look at reducing level it’s over time. You have seen that evolution already year-over-year and from December of last year. Over the time I would expect and we would work towards next to achieve a leverage of 2.5.

Philip Ngotho – ABN AMRO

Okay, net debt EBITDA of 2.5. Okay, that’s helpful. Then just wondering as well, I mean when we talked about at last year, about the SSR growth plans, you said that you have the funding, it was clear that the funding wasn’t in place yet, but you indicated as well that you were looking at options, which would be non-dilutive for shareholders, so streaming agreement prepayments. I understand that you’re looking at other options. I know you mentioned now as well that you are also looking at other options, but you have also included the option of equity markets. So just wondering what has changed in the meantime?

Heinz Eigner

Nothing really has changed, I think it’s fair to say that we still continue to evaluate a number of alternatives, also alternatives that we’ll not cause dilution and also potentially not incur indebtedness similar to what we have done relative to Port Pirie. But as I said before, decision currently has not been made and therefore, yes, it’s a bit premature to know in detail comment on that.

Philip Ngotho – ABN AMRO

No, okay, but I understand but it’s more because you now explicitly mentioned that equity market is an option and before you ruled out, you said it should not be dilutive and active.

Heinz Eigner

Yes.

Philip Ngotho – ABN AMRO

So that’s – just wondering the change of wording if there is a reason for that.

Heinz Eigner

Yes, perhaps the thinking has gone on and also the feedback and the dialogue with shareholders have continued. And I have actually had a number of shareholders that we are projecting to the company that the SSR investments are actually the typical type of investments that for which you would call to equity capital market. And so, our thought process in our dialogue has continued and I think we would probably not have been guiding you guys appropriately if you would have not made this comment. It’s simply saying all options are on the table.

Philip Ngotho – ABN AMRO

Yes, okay, I understand. And just maybe the last question on that. When do you expect an update on that or is it something for the – yes, do you have any timeline on it, when the plans will be announced or decision will be made?

Heinz Eigner

Yes, I think we saw in the presentation that we will refinance or wants to do something about the maturity that will happen in April of next year – state of maturity and I wouldn’t wants to wait until the first quarter of next year. So, from that, very likely second half of this year.

Philip Ngotho – ABN AMRO

Okay, okay, clear. Thanks for that, very clear answers. Then maybe just on the mining segment again, on Campo Morado, what are you seeing again the head grades coming down, I know it’s part of your – it has your attention. But just wondering if you can give an update on that and also what the current, yes, how are you looking at the mine, where it as at the moment in terms of cash costs and whether it’s a potential non-core asset as well?

Bob Katsiouleris

Philip, this is Bob. No, we don’t see Campo as a non-core asset. I think at this point, the decrease in head grades is something that we’ve anticipated and I think we’ve talked about before. I think bringing on both the new deposit in Largo and the complex lead, copper, zinc ore body, I think we’ll stabilize not only head grades, but actually we’ll increase the value per ton available to our concentrates hence the market and I think that’s what we’re working on right now. So, I think our – I think we’re in line with our plans. I think in terms of direct operating cost which is a way we like to look at our mines instead of C1 cash cost, I think they are very much in line with where we want to be. I think it also the newer – the newer part of the mine will also present an opportunity for us to improve the efficiency and extraction of what we’re doing with Campo as well. So, if you combine that with higher in situ value of the concentrate, then I think we could be a very well-positioned going forward.

Philip Ngotho – ABN AMRO

Okay. Just last question that is it cash flow positive at this moment?

Bob Katsiouleris

It’s not cash flow positive at this moment, no.

Philip Ngotho – ABN AMRO

Okay, okay, thank you. Those are my questions.

Operator

As there are no further questions in the queue that will conclude today’s questions-and-answer session. I would now like to turn it back to the host for any additional or closing remarks.

Amy Rajendran - Group Manager, Investor Relations

Thank you everyone for your time and if there is any other questions that came that we couldn’t answer today, do drop me a line and my details on the website. Thank you again.

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