Dundee Precious Metals' (DPMLF) CEO Rick Howes on Q2 2014 Results - Earnings Call Transcript

Aug. 2.14 | About: Dundee Precious (DPMLF)

Dundee Precious Metals Inc. (OTCPK:DPMLF) Q2 2014 Earnings Conference Call July 31, 2014 9:00 AM ET

Executives

Lori Beak - SVP, Investor and Regulatory Affairs

Rick Howes - President and CEO

Hume Kyle - CFO

David Rae - COO

Analysts

Sam Crittenden - RBC Capital Markets

Josh Wolfson - Dundee Capital Markets

Adam Low - Raymond James

Oliver Tuner - GMP Securities

Operator

Welcome to Dundee Precious Metals Q2 2014 Results Webcast Conference Call. I will now like to turn the meeting over to Ms. Lori Beak. Please go ahead Ms. Beak.

Lori Beak

Good morning everyone, Lori Beak here, Senior Vice President Investor and Regulatory Affairs. Welcome to DPM second quarter conference call. With me today are Rick Howes our President and CEO; Hume Kyle our Chief Financial Officer; Adrian Goldstone, Executive VP, Sustainable Business Development; David Rae our COO; and John Lindsay our Senior Vice President of Purchase.

After close of business yesterday, we released our second quarter results and hope you've had an opportunity to review the material. All forward-looking information provided during this call is subject to the forward-looking qualification which is detailed in our news release and incorporated in full for the purpose of today’s call.

Please not that operational and financial information communicated during this call has generally been rounded and is in U.S. dollar unless otherwise noted. On this morning’s call Rick will comment on our Q2 operating results as well as the progress being made on our capital projects and exploration programs for the quarter. Hume will then provide an overview of our Q2 financial results and our guidance for 2014.

With that I’ll turn the call over to Rick.

Rick Howes

Thanks Lori, and hello everyone and thanks for joining us today. We continue to optimize asset performance and execute our growth strategy with good progress to report on several fronts this quarter. We saw improved cost performance, strong operating performance at Chelopech Mine and record production at the Tsumeb smelter in the quarter. The Kapan mine was negatively impacted in the quarter by a temporary shutdown that was taken following mine fatality which occurred in May.

On a consolidated cost per tonne of ore processed and cost per ounce basis, results were well below our guidance in the quarter. There were positive developments in the advancement of the Krumovgrad open pit project and in June we completed an increase in our revolving credit facility by 125 million to 275 million with our banking syndicate.

Company earnings in the quarter were impacted by several extraordinary items which are not reflective of the Company’s underlying operating performance. A $70 million impairment loss was taken on the Kapan exploration and valuation assets related to the previously contemplated open pit expansion. We also recognized a $6.8 million impairment loss in respect to certain equipment that was purchased for the previously contemplated Chelopech metals processing facility.

Adjusted earnings exclusive of some of these extraordinary items were in line with our expectations for the quarter. Smelter had record concentrate throughout of 60,000 tonnes in Q2 which was a 22% increase over the Q1 results. This resulted in a second consecutive quarter of positive EBITDA contribution from the smelter, although not quite as high as in first quarter due to the lower tolling rates for Chelopech concentrates and the higher ratio of third party concentrates in the feed mix.

It’s important to note that these same tolling rates benefit the Chelopech earnings offsetting the lower smelter earnings. The significant improvements in smelter performance are a result of the additional oxygen available from the second oxygen plant that became operational in February and the improvements achieved in smelter operating practices and online time.

The annual maintenance shutdown scheduled for July is already underway and is expected to be completed in early August, on schedule. Besides the normal furnace rebricking, the shutdown work will include a number of planned improvements to further enhance smelter performance. The acid plant construction performed by Uditeck [ph] is progressing well with expected construction completion by the end of this year and first half is expected in May of 2015. The scheduled slippage is due to higher than normal rainfall amounts that occurred in March as well as some subcontractor performance issues which have now been rectified. The impact of these delays have been communicated and managed with the key stakeholders and we do not expect this will result in any further government action. There is no expected increase in capital cost as a result of these delays.

We anticipate completing the agreement with TransNamib for the rail transport of the acid this quarter. The acid plant remains the only outstanding item to be completed under the cabinet directive issued to DPM Tsumeb. All our other items have now been completed.

We continue to explore a further expansion opportunity for the smelter to 320,000 tonne per annum of complex concentrate feed, subject to suitable feed, sources commercial terms and project economics. We anticipate completing these studies by the end of this year.

The Chelopech Mine performed well in the second quarter with metals production well above first quarter levels, and exceptional cost performance results. Although gold recoveries to the copper concentrate have improved, they have not yet reached the levels we expect from the new flotation circuits. Further optimization of the new circuits is ongoing and is expected to continue over the balance of 2014. As a result the upper end of the guidance for 2014 gold production has been reduced to 130,000 ounces from 138,000.

In the interim additional gold is reporting to the pyrite concentrate which partially offsets this impact. Metals production in the third quarter of 2014 is expected to be lower than metals production in the fourth quarter of 2014 as a result of mine sequencing and the associated variation in the grades.

Cash cost per tonne of ore processed was well below our guidance at $38 a tonne. Pyrite production from the new pyrite recovery circuit was on track for contracted deliveries in the quarter, which cash cost per ounce coming in below our 2014 guidance.

In May 2014, an underground worker was fatally injured in our Kapan mine. Operations were immediately suspended and over the course of a three-week period an investigation was initiated involving company officials, government representatives and outside experts to ensure any recommended changes to the mines work and safety procedures were implemented prior to resuming operations.

Production has resumed but has not yet returned to expected levels, resulting in production guidance being reduced to reflect the lower level of production. Work is continuing on building the developed and drilled inventory levels to levels to which will return the mine to full production capacity of 50,000 tonnes a month.

The Kapan underground expansion study is nearly completion and we expect to release preliminary results in Q3. After only 14 months in office, the socialist led national coalition government in Bulgaria was forced to step-down after numerous scandals. New elections have been set for October 5th. The party that formed the previous government, the center-right GERB party is currently leading in the polls. The President will appoint a caretaker government to run the country in the interim period before elections.

In relation to our future growth projects through the Krumovgrad open-pit project, things are finally progressing after a prolonged period of delay. On July 7th, the Krumovgrad Municipal Council approved the terms of reference submitted by the Company for the preparation of the detailed development which allows us to proceed with preparations and submissions of that plan. This is a critical step in a local land use land acquisition and construction permitting process and is a prerequisite to allowing construction of the project to proceed.

The terms of reference approval process had been a subject of delays and administrative court deliberations over the last year. We were able to achieve this through intensive efforts to engage the community in a dialogue and to build trust between us. We believe this decision by the Krumovgrad Municipal Council represents a significant shift in the views of the municipal council and the local community towards this project and as a strong recognition of the benefit the project can bring to the region.

Although this does not guarantee that there will not be further delays in the permitting process, this is a very positive development in moving Krumovgrad forward. It is anticipated that we will be in a position to commence construction within six to 12 months. The remaining permitting steps include approval of the remaining terms of reference and DDPs, land use re-designation, land purchase, and finally the issuing of the construction permit.

Our exploration team is active with exploration activities around existing operating and development assets. We have recently completely gravity and ground magnetic surveys around our Chelopech operations, which are showing a number of promising pore free and epithermal targets for further drill testing. We continue to add additional materials surrounding the existing Chelopech deposits through our underground exploration resource definition program. Also at Krumovgrad, we have defined eight possible targets through ground magnetic, airborne magnetic, and gravimetric and geochemical sampling which will be tested in the near future.

At Kapan, our regional exploration program work continues on several anomalies identified from our 2013 program. Drill testing of two of these will begin in September. On July 28, 2014, our partially owned exploration projects Avala and Dunav in Serbia announced that they had reached in agreement to combine the two companies. Completion of this will be subject to regulatory and shareholder approval. Both are advancing their discoveries. Dunav recently announced an update on their Kiseljak and Yellow Creek copper-gold porphyry resource and Avala recently released a PEA on the Timok sediment-hosted gold project. The focus remains on controlling cost and executing on our performance targets on existing operating assets as well as completing our mandatory capital commitments at the smelter and moving our Krumovgrad gold project forward.

Thank you, I will now turn it over to Hume, who will review the financial results and the 2014 outlook.

Hume Kyle

Thanks, Rick. As Rick noted, Chelopech and Tsumeb performed reasonably well during the quarter while Kapan's results were a little short of expectation due to the temporary shutdown in June following the fatality in the mine.

For the quarter, our adjusted net earnings were $0.07 per share, up from $0.03 per share in 2013 primarily due to lower third-party treatment charges at Chelopech, high volumes and tolls at Tsumeb and a favorable impact from a stronger U.S. dollar. These were partially offset by higher depreciation.

For the six months, we reported adjusted net earnings of $0.05 per share down from $0.08 in 2013, due primarily to lower metal prices, lower metals sold and higher cost, partially offset by high volumes and tolls at Tsumeb, lower third-part treatment charges at Chelopech and a stronger dollar.

Our reported unadjusted losses per share for the second quarter and first six months of 2014 were $0.57 and $0.67 compared to earnings per share of $0.12 and $0.13 in 2013. These results include several items that are excluded from adjusted earnings but they're non-reflective of the underlying performance of the business. In aggregate, these net after-tax losses amounted to approximately $89 million in the second quarter, $77 million year-to-date, compared with net after-tax gains of $12 million and $6 million in 2013.

As Rick stated, these increased losses relate mainly to our decision to write-off $70 million of capitalized exploration and evaluation costs at Kapan that has been incurred primarily to support the merits of an open set expansion, which required a higher level of upfront drilling than the underground expansion currently being evaluated. This work continues to support the merits of an underground expansion and is expected to be completed later this quarter. Adjusted EBITDA for the second quarter and first half of 2014 was $32 million and $49 million, up from $21 million and $47 million in 2013, reflecting the same factors that impacted adjusted net earnings.

Aggregate deliveries of copper and zinc concentrate of 35,500 tonnes for the second quarter was comparable to 2013. Deliveries of copper and zinc concentrate of 66,700 tonnes for the first half were 7% lower than 2013, due primarily to lower ore production at Kapan and lower cost of grades at Chelopech. Consolidated cash per tonne of ore processed at our mines for the quarter was approximately $46 or 3% lower than 2013 due primarily to higher volumes or ore processed at Chelopech.

Year-to-date cash cost per tonne was $48 and was comparable to 2013. Concentrated smelter increased 30% and 35% to 60,000 tonnes and 109,000 tonnes during the quarter and the first half compared with 2013, benefiting from the second oxygen plant reduced commissioning related down time that impact the 2013 and host of other operational improvements that have been made at the smelter.

Looking at each segment, at Chelopech Q2 copper concentrate production was 7% higher than Q2 2013, due primarily to higher volumes of ore processed while copper concentrate production for the first half was 10% lower than 2013, due primarily to lower recoveries and lower grades experienced in the Q1 2013. Cash cost per tonne of ore processed was $38 for the second quarter, down 5% from the same period in 2013. This increase was driven primarily by higher volumes, lower royalties and lower electricity rates, partially offset by a stronger euro relative to the U.S. dollar.

Cash cost per tonne of ore processed in the first half of $40 was slightly lower than 2013. Adjusted EBITDA for the second quarter and the first half was $35 million and $55 million compared to $31 million and $78 million in 2013. The increase in the quarter was due primarily the higher payable copper concentrates sold and lower third party [indiscernible], partially offset by lower volumes and payable gold and concentrates sold.

For the first half this decrease was primarily due to lower volumes of concentrate sold and lower metal prices, partially offset by lower third party treatment targets. And Kapan Ore Mine during the second quarter and first six months were 35% and 28% lower than the corresponding periods in 2013. This reflects our decision to temporarily reduce mine production to rebuild development inventory and the impacts related to the fatality at the mine.

Both the second quarter and first six months at Kapan -- sorry for the second quarter and first six months Kapan reported adjusted EBITDA of $1 million compared to nil and a loss of $1 million in the corresponding periods in 2013. These increases were due to several factors, most notably metal price adjustments on provisionally priced sales and higher grades of concentrates sold, partially offset by lower concentrate delivery and higher cost per tonne concentrate sold.

Lower metal prices also had an impact on the results for the six months. Cash cost per tonne processed in the quarter and first six months of $89 and $91 were up from $67 and $71 in the corresponding periods in 2013, reflecting lower volumes of ore mine in process and higher spending on initiatives aimed at delivering higher target development rates.

As noted earlier at Tsumeb concentrate smelted in the second quarter at first six months was 60,000 tonnes and 109,000 tonnes, up from 46,000 tonnes and 80,000 tonnes in the corresponding periods in 2013. For the first quarter and first six months EBITDA was $7 million and $17 million compared to EBITDA of $1 million and loss before interest taxes and depreciation of $6 million in the corresponding periods in 2013.

These improvements were driven primarily by higher volumes, higher toll rates and a favorable impact. Cash cost per tonne during the quarter and the first six months was $296 and $301 down from $389 and $431 in 2013 due primarily to higher volumes, a weak [indiscernible] and lower spending on fuel following the closure of the reverberatory furnace in the third quarter of 2013. On a consolidated basis funds from operations excluding changes in working capital was $32 million and $49 million during the second quarter and first six months compared to $9 million and $33 million in the corresponding periods in 2013.

Aggregates sustaining the growth capital during the second quarter and first half of the year were $52 million and $103 million compared to $41 million and $102 million in 2013. These expenditures reflect the elevated level of spending taking place at the smelter in 2013 and 2014. During the quarter we increased our revolver by $125 million to $175 million to support the discretionary growth capital requirements of the business. This financing provides the Company with the cost effective work source of funding and increased financial flexibility going forward.

At June 30th, we exited the quarter with $225 million comprised of $25 million in cash and short-term investments and $200 million of undrawn line under the $275 million facility. As Rick commented earlier in our guidance for 2014, I would only add that our cash guidance essentially remains unchanged and while our consolidative forecast for ore and metals productions remain in line with the original guidance, our ranges were updated to reflect lower overall production at Kapan and Chelopech’s gold production being close to lower end of the range previous provided due to lower expected recovery.

At this time, I will turn the call over to operator.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) Your first question is from Sam Crittenden from RBC Capital Markets. Please go ahead. Your line is open.

Sam Crittenden - RBC Capital Markets

Question on the revenue per tonne at Tsumeb. It seems to have come down a little bit in Q2, is that just a mix of the concentrate from where you’re getting the various concentrates from or if you could comment it all on that change?

Hume Kyle

In Q1, there was a greater proportion of concentrate smelter that was coming from Chelopech. In Q2, that was down. So you have the effect of the mix actually affecting the overall toll rate. So Chelopech has a higher toll than a third-party toll. It came down during the quarter due to lower cost at Tsumeb because of the cost plus contract and then offsetting that you have the effect of higher third-party concentrate going through the smelter and it went through at a higher rate, which is basically just following the contract that as we’ve said in the past will increase overtime and if it continues to do that we would expect further increases over the balance of the year and into next year as well.

Sam Crittenden - RBC Capital Markets

Okay and is the revenue per tonne pretty consistent for the third-party and I know you said it’s ramping up with the contract, because it otherwise stay fairly consistent from quarter-to-quarter?

Hume Kyle

Well, it's certainly up over the last year and you would expect to see this year I would say a smaller increase, but it is definitely increasing throughout the year, and we would expect I would say on an overall basis as we work through the lower tolls that previously existed, it would fair to say that we would expect to see an increase north of 10% still to come.

Sam Crittenden - RBC Capital Markets

Okay, thanks Hume. And then just mentioned that Q3 might be a little weaker at Chelopech than Q4. Just curious, is it just a grade sequencing thing in the mine plant, is that really what that is?

David Rae

Hi, Sam, this is David Rae. That's exactly what it is. It’s the sequence in our mine. We will see [indiscernible] and also recoverability, what's exactly happening in Q3.

Sam Crittenden - RBC Capital Markets

Okay and then just last one. On Kapan you’ve taken the impairment charge, the residual book value that’s there. Does that take into account the underground study that’s in progress or is it more based on the costs you’ve incurred on various parts?

David Rae

For accounting purposes, you are essentially required to look at your fair value. So I would say that the residual value that we’ve taken [indiscernible] too reflects our view of what the asset is worth coupled with the fact that, the open-pit drilling costs that we capitalize, while you might able to recover them, in the end we concluded that it would be a pretty heavy drag on the underground expansion. So we took the deal. But we should write them down fully rather than carry them on a lump sum [ph] go forward basis.

Sam Crittenden - RBC Capital Markets

Okay so does take into account your study on the underground mill?

David Rae

Yes, most definitely.

Operator

Thank you. The next question is from Josh Wolfson from Dundee Capital Markets. Please go ahead. Your line is open.

Josh Wolfson - Dundee Capital Markets

I think I'm going to ask the same questions as Sam, just slightly different ways. Regarding Tsumeb and toll processing, it looks like you guys had sort of benefited at Chelopech from lower better contract terms. Can you just I guess give us a bit more information on how we should expect that to materialize going forward?

Rick Howes

Yes, I think that’s not quite right, Josh, your assumption there. The first quarter benefited in terms of the mix that we had higher Chelopech material feeding through at a higher tolling rate and again that’s because it’s looks backward of the previous three months. So it reflects tolling rates based on cost in the quarter that ended 2013 for the first quarter and then because costs same down substantially in the first quarter, then Chelopech benefited from a lower tolling rate in the second quarter. And also the mix of that quantity wise was much lower relative to the third parties. A combination of those two is what really drove the change in the earnings. You got to realize though that again Chelopech would then get increased earnings and reported through Chelopech because of the lower tolling rates as well. So it offsets the lower earnings in the smelter.

Josh Wolfson - Dundee Capital Markets

So I guess it looks like there some contribution of better gross margins have been reported at Chelopech than there is at Tsumeb, which maybe partially explains the lower revenues at Tsumeb. I just want to make sure if that is correct. And you’re saying it sounds like because the costs were lower at Tsumeb in the first quarter, that benefited Chelopech in the second quarter, is that right?

Rick Howes

Right, it’s a three month sort of historical average cost number that's used to calculate that tolling cost plus arrangement for Chelopech.

Hume Kyle

And in addition to that Josh, there actually is -- Chelopech is benefiting from lower third party treatment charges because not all of the material is going to Tsumeb.

Josh Wolfson - Dundee Capital Markets

So relative to where freight and TCRC charges were for Chelopech in the first half of the year, should we expect a similar levels to continue?

Rick Howes

Yes I think that’s fair to say.

Josh Wolfson - Dundee Capital Markets

And then at Kapan based on the write down, are you now no longer proceeding with any sort of open pit opportunity, even small scale?

Rick Howes

Yes, we’re not looking at the open pit anymore.

Josh Wolfson - Dundee Capital Markets

And has there been any sort of update in terms of what the capital requirements would be for this underground expansion or is that still preliminary at this point?

Rick Howes

It’s still preliminary. We’ve got another probably a month of work to finish off, particularly the tailing side of the study for the PEA. So we don’t expect to release that until towards the end of the quarter.

Hume Kyle

I think the comments that we’ve made before that the upfront capital costs associated with the potential underground expansion are relatively light based on what we’re seeing so far, clearly they need to be firmed up but it’s relatively light relative to the incremental production that we would see coming out of the expansion.

Josh Wolfson - Dundee Capital Markets

Were you expecting to see a reserve declared at Kapan at some point?

Rick Howes

We’re basing that PEA on the resource that we released back in, I guess it was August of last year. So we’re not releasing a new resource.

Josh Wolfson - Dundee Capital Markets

And then just last question. At Tsumeb regarding the timelines for commissioning the asset plant, was there anything that changed from the last quarter or this is just firming up timelines at this point.

Rick Howes

We’re just studying up time lines. I think we’ve been talking about mechanical completion at the end of the quarter for a while. And what we’ve done now is we've come out and explained the reasons that we’ve had pressure on those timelines being the very wet, end of summer rains.

Josh Wolfson - Dundee Capital Markets

I guess last quarter we knew that the weather issues and some of the labor issues had impacted timelines and then it was sort of bump back from 4Q to 1Q. And it sounds like the same reasons are being provided to have been pushing back -- to push back commissioning to the second quarter. I just want to understand if there is no additional uncertainties that sort of materialized?

Rick Howes

I mean there was a revisit of the schedule post the first quarter by Uditeck [ph] constructor. And they gave us a new schedule after those delays they encountered and those issues they encountered. They then reforecast the new schedule. And that’s why the new schedule came out post our announcements in the first quarter. So that’s why they changed.

Operator

Thank you. (Operator Instructions). And we have a question from Adam Low from Raymond James. Please go ahead, your line is open.

Adam Low - Raymond James

First question I have is with regards to Tsumeb. Just wondering -- I guess you guys are in the midst of the rebricking right now. Do you have any sense as to what the volume throughput might be like in third quarter?

Rick Howes

So the volume throughput in the third quarter will largely be the same as what we have sort of on a daily and monthly basis in Q2. Potentially the smelter has being responding exactly as we would expect and the only thing we’re working on is that the concentrate smelting relative to the list of production is and concentrate smelting is in good shape and we’re just catching up on the list of production. So what we’ll do is make sure we don’t get out of step and basically hold these smelting rates to where we were Q2 until we've caught up with the list of production. We expect that to happen during this quarter and then we’ll continue to list tonnage in Q4.

Adam Low - Raymond James

No but I guess you guys are going to have, what is it a 30 day outage or something like that? So it’ll be the same daily rates but minus 30 days. Is that the real look of it?

Rick Howes

Just among the operating guidance, exactly right. So for the operating times, we will be operating in the same rates as we were in Q2.

Adam Low - Raymond James

And 30 days is kind of the correct number or is it little bit longer than that?

Rick Howes

For the shutdown that’s right.

Hume Kyle

And all that’s baked into our guidance which remains unchanged for the smelter.

Adam Low - Raymond James

And just to drill down a little bit further on some of the questions regarding proportion of concentrate feed though the smelter from other third-parties at Chelopech, can you guys give us any insight as to whether or not you’re generating a positive gross margin on the third-party toll smelting right now?

Hume Kyle

Yes. We are.

Adam Low - Raymond James

On Chelopech just curious, obviously there has been a little bit of variability in the recoveries through into the copper concentrate. What is your target for the gold recovery since the copper comp?

Rick Howes

Well, the answer to that question is a little bit more complicated than you might like. What it is; it's depending on the characteristics of the ore. So I can’t give you a number. It all depends really on a model which is defined the coke to copper ratio and the head grade. So totaling out a number is not the easiest thing that I can do. What I would refer you to is take a look at the guidance and if you have a look at the guidance window, you can back calculate what the recovery is from in the third quarter. As with the question [indiscernible] is the guidance that we’re going to see is reduced production, is that a result of sequencing in grade and recovery. The answer to that is yes, and it's because of exact the price of [indiscernible] grade rate comes down, so the copper ratio goes up, recovery goes down slightly, and we expect to see that happening in Q4. I don’t know if that’s the answer you’re looking for Adam, but it’s a more complex situation than just what with the recovery.

Adam Low - Raymond James

Okay and with regards to the improvement that is expected going through the back half of the year with regards to the recoveries at Chelopech, how much of this would you say is just a fact of the mine sequencing becoming more favorable versus how much of it is coming from modifications you’re doing at the flotation circuit?

Rick Howes

I think we would say that we have been losing between 5% and 10% on recovery through the period in the first and second quarter and we've been reducing that as we’ve gone through the second quarter. We expect to see that back to where we would normally predict relative to modeling to Q3. And primarily answer to your wide question [ph] , stability in the circuit is what we've done, is we’ve commissioned the new pyrite flotation circuit and we’ve settled everything down and we've made some changes, which had allowed us to assess what is the relative performance and then take steps to improve.

So the sequence of activities that are going on primarily stabilized and then start to identify with improvements you can make and then make them. And the answer of your -- the part of your question is, what else other than just recovery improvement and there is a significant increase, rather than increasing break as we go to Q3 into Q4. So it’s all times great relations the increase in the amount of [indiscernible].

Adam Low - Raymond James

On Kapan I am just wondering, obviously there was a bit of turmoil there late in 2Q and some of that has lingered into 3Q, which prompted you guys to change your guidance. But what are the current throughput rates like in the mine and the mill right now at Kapan?

Rick Howes

The immediate situation is that post these fatalities, our [indiscernible] has been higher than same period late last year and in the first quarter and this year. So we are approaching things on a number of different fronts. Obviously the fatality and the associated investigations and what we identified could be improved, closing time to bring let’s say -- causing delays in the activity around the production while we make sure that these are ingrained in our processes. So the end result of this is that we do have a dilution issue that we're busy working on and we have a production issue which we're busy working on and essentially at this time we're saying that safe production is at a level below over where we like it to be but as we train and as we coach and as we get these standards that we’re looking for brought in, we will see a response in terms of the both production and grade and that’s going to occur through Q3 in Q4.

Adam Low - Raymond James

What would your confidence level be behind the ability to achieve say perhaps 100,000 tonnes through the mill in third quarter?

Rick Howes

We’ve been a little conservative in the number that we've put into guidance for the rest of the year. If you look at it realistically, Kapan has been a disappointing asset for us in terms of its performance. What is not obvious is the effort that’s been put in and the quality of the improvements that have been made and what we’re not realizing though is in terms of the constant produce and incentives of the tonnage and cost. But we are confident in our team and we are confident in the activity that’s going on and we’re expecting this -- what can be classed as serial disappointment turn into something more positive towards the end of this year.

Operator

Thank you. The next question is from Oliver Tuner from GMP Securities. Please go ahead. Your line is open.

Oliver Tuner - GMP Securities

A couple of questions here. A few of them have been asked already but I got a couple of more. Firstly coming back to Chelopech following on Adam’s question there, talking about grades going down in the third quarter due to mine sequencing, is any of the impact in the third quarter due to higher sulfur levels like we saw in the first quarter or is it all due to a great drop there?

Rick Howes

It’s about sulfur to copper ratio and its grade reduction.

Oliver Tuner - GMP Securities

And so we’re basically going to see a drop in the third quarter and then we’d expect a quite large bump in the fourth quarter?

Rick Howes

Yes.

Oliver Tuner - GMP Securities

And then maybe switching over to Tsumeb here. The 30 day shutdown that you’re talking about being close to completing and then getting back to second quarter rates, how quickly does it take to ramp back up to the second quarter rates?

Rick Howes

The warming up of the furnace which will occur soon, takes between four and five days and then what we do is we introduce material over a space of two or three days to ramp to full production. So we will start off with making 30% of production and over three days ramp to full production. All of these things are taken into account in the guidance for yearend. So there is nothing here that we haven’t taken into account already.

Oliver Tuner - GMP Securities

And then maybe lastly just going back to Kapan. At what gold price do you guys start to think about an open pit? Again there I know obviously the focus on underground expansion now and maybe a couple of years back we were thinking more of an open pit environment and higher gold prices. Di you guys have an internal price target or a ballpark figure where you start to think about an open pit again?

Rick Howes

Obviously, the better scenario that we’ve looked at is the underground, for several reasons. One is the much lower capital spend required and basically at these gold prices, a good sort of economic proposition. So you can’t get that open pit really because of the high capital. One it’s a very high capital solution that’s required and you can’t get those kinds of returns at these prices. So I don’t think the subject of where does the open pit kick in, in a price scenario really comes out because it just doesn’t compare as a project to the underground expansion.

Operator

Thank you. There are no further questions registered at this time. This concludes today’s conference call. Please disconnect your lines at this time. And we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!