Paladin Energy's (PALAF) CEO Alex Molyneux on Q2 2016 Results - Earnings Call Transcript

| About: Paladin Energy (PALAF)

Paladin Energy Ltd. (OTCPK:PALAF) Q2 2016 Earnings Conference Call February 16, 2016 6:30 PM ET

Executives

Alex Molyneux - Chief Executive Officer

Craig Barnes - Chief Financial Officer

Andrew Mirco - General Manager, Corporate Development and Investor Relations

Analysts

Glyn Lawcock - UBS

Matthew Keane - Argonaut

Stefan Hansen - Morgan Stanley

Simon Tonkin - Patersons

Operator

Ladies and gentlemen, thank you for standing by and welcome to the December Quarterly Conference Call and Investor Update. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, February 17, 2016. I would now like to hand the conference over to your speaker today, Mr. Alex Molyneux. Thank you. Please go ahead.

Alex Molyneux

Thank you and welcome to the December 2015 half year and quarterly results conference call for Paladin. I am Alex Molyneux, the CEO. With me in the room today, I have Craig Barnes, our Chief Financial Officer and I have Andrew Mirco, our GM Corporate Development and Investor Relations.

So we are going to step into the presentation. There is a disclaimer which we would draw your attention to. And then moving on to Slide 2, we have repeated this message a number of times and it doesn’t really get old for us at the [indiscernible]. I think we can show from our results and how they are evolving in a low uranium price environment that we have the asset base and skill set with optionality to survive difficult markets. We are absolutely positioned for margin and margin expansion when these markets turn around.

We are a global uranium leader and we are the largest investable pure-play uranium miner. We have fully built capacity that includes our Kayelekera mine on care and maintenance which when restarted would immediately increase our production by 40%. And our global resource inventory is almost 400 pounds, which gives us a substantial pool of assets on which to draw future growth from in addition to our current operating Langer Heinrich mine. Langer Heinrich is undisputedly a world class asset. We have said it many times. And this is in terms of its key features, scale, mine life and production cost. Cost at the moment is where this mine is coming to its own. It’s moving well into the first quartile of global cash costs.

And with that introduction, I will hand over to Craig who will go through some of our results.

Craig Barnes

Thanks, Alex. Good morning, ladies and gentlemen. Slide 5 and 6 provides some highlights of the December quarter. Uranium production for the quarter decreased by 9% compared to the December 2014 quarter primarily as a result of lower processed grade, which decreased to 714 ppm from 773 ppm a year ago. The company’s 12-month moving average lost time injury frequency rate was 2.10 compared to 1.39 last quarter and 4.14 for the quarter ended 31 December, 2014.

The realized uranium sales price for the quarter was $37.90 a pound, a 5% premium to the TradeTech average weekly spot price for the quarter of $36.03 a pound. However, for the 6 months to 31 December, 2015, the realized uranium sales price was $40.54 a pound versus the average weekly spot price for the 6 months of $36.26 per pound which is a $4.28 per pound premium.

Record low C1 cash costs of $25.38 per pound for the quarter decreased by 11% from $28.58 per pound in the December 2014 quarter. And we are at the lower end of our December quarter guidance of $25 to $27 per pound. The decrease in costs was largely driven by a reduction in reagent costs resulting from the bicarb recovery plant as well as a weakening of the Namibian dollar against the U.S. dollar. The trend of reducing costs is continuing in the March quarter and we achieved C1 cash costs of $24.36 per pound in January. The reduction in costs from last year resulted in the operation achieving a 396% increase in gross profit to $12.4 million from $2.5 million in 2014.

Cash and cash equivalents at 31 December, 2015 of $136.8 million was within our previous pro forma guidance of between $122.5 million and $132.5 million. Sales revenue for the quarter decreased by 7% to $64.4 million in the December quarter, as a result of 11% decrease in sales volume, which was partially offset by a 4% increase in realized sales price. Underlying EBITDA for the December quarter of $10.6 million was a $17.2 million turnaround from the negative underlying EBITDA of $6.6 million in 2014. In the quarter, we repurchased an additional 17 million of the 2017 convertible bonds for approximately $15.5 million reducing the outstanding amount owing on these convertible bonds to $237 million.

On Slide 7, this waterfall chart provides a breakdown of the change in cash and cash equivalents for the December quarter. Our cash and cash equivalents increased by $28.4 million during the quarter and were made up of the following major cash flow movements. Langer Heinrich generated free cash flow for the quarter of $62.7 million assisted by the timing of cash received from the September quarter sales as well as a reduction in costs. Cash utilized for Kayelekera care and maintenance and corporate and exploration expenditure amounted to approximately $4.8 million for the quarter, a significant drop from the $8.7 million cash utilized in the previous quarter. This drop was expected and is as a result of the various cost reduction initiatives which took place in the September quarter. In the December quarter, we paid $9.2 million interest on the convertible bonds and also on the Langer Heinrich project finance. In addition, we repurchased 17 million of the 2017 CBs for $15.4 million which excluded accrued interest and repaid $4.5 million on the Langer Heinrich project finance.

Slide 8 has two waterfall charts which provide a variance analysis of EBITDA comparing the December 2015 quarter to both the previous September 2015 quarter and last year’s December 2014 quarter. Firstly, comparing to the previous quarter, the chart on the left shows that our EBITDA increased by 66% from $6.4 million in the September quarter to $10.6 million in the December quarter. In the graph, you can see the large variances caused by the increase in sales volumes from 800,000 pounds in the September quarter to 1.7 million pounds in the December quarter. Due to the size of certain sales and also the timing, these large sales volume variances will continue from quarter to quarter. You can also see the positive sales volume variance of $34.1 million was partially offset by the $6.6 million negative sales price variance. As a result of the higher sales volume, cost of sales was also higher and partially offset by lower unit costs.

Exploration, admin and unallocated fixed overheads were all lower than the previous quarter by $1.4 million in total. Comparing to the previous years, December 2014 quarter, the chart on the right shows that the increase in EBITDA was even more pronounced increasing by $17.2 million from a negative $6.6 million in the December 2014 quarter to $10.6 million in the December 2015 quarter. The impact of 11% decrease in sales volume was more than offset by the positive variance in both the sales price and cost of sales performance of $2.8 million and $11.8 million respectively. In addition, exploration, admin and Kayelekera care and maintenance costs were $3.7 million lower than in the December 2014 quarter.

Slide 9 illustrates how all-in cash expenditures reduced from $48.91 per pound in the December 2014 quarter to $39.58 a pound in the December 2015 quarter. This is a reduction of $9.33 per pound year-on-year. All-in cash expenditure includes all spending, including financing costs and the principle repayments of Langer Heinrich project finance. The reduction in all-in cash expenditure has exceeded our expectations and we have therefore lowered our guidance for the full year. The graph on the left compares all-in cash expenditures for the last six quarters and shows that the trend of decreasing expenditure with the December quarter is $39.58 per pound, significantly below the FY ‘15 average of $50.75 per pound. This is also the first time that all-in cash expenditures dropped below $40 a pound and the downward trend is continuing in the March quarter. The all-in cash expenditure is trending towards the $38 to $40 per pound revised guidance range provided for the full year FY 2016.

The waterfall chart on the right provides an analysis of the movement in all-in cash expenditures from the previous year’s December 2014 quarter. The biggest movements have been the reduction in reagent costs resulting from the bicarbonate recovery plant of $6.99 per pound and the weakening of the Nam dollar against the U.S. dollar of $3.39 per pound. Additionally, the reduction in mining costs, CapEx, Kayelekera care and maintenance costs and corporate and exploration costs resulted in $3.71 per pound decrease in all-in cash expenditure.

The table on Slide 10 provides a breakdown of the Paladin’s debt at the face value amounting to $443 million at 31 December, 2015. Since June 2012, Paladin’s debt has been reduced by approximately $471 million. The $17 million repurchase of the 2017 convertible bonds and the $5 million repayment of Langer Heinrich project finance in the December quarter were the most recent debt reductions. The next debt maturity is the $237 million convertible bond due in April 2017. Strategic initiatives are currently being advanced with a view to refinance or repay the April 2017 convertible bond. Based on Paladin being cash flow neutral, we now see the funding gap required to pay the 2017 convertible bonds reduced to $140 million to $165 million.

I will hand you back to Alex to complete the presentation. Thank you.

Alex Molyneux

Thanks Craig. So we are now on to Slide 11. We can say that, so during the last quarter, we reconfigured the highly successful Bicarbonate Recovery Plant at Langer Heinrich Mine. The result is we are now seeing at full $6 per pound of cash savings on what we would say and call an apples-for-apples basis in terms of taking us back to before the Bicarbonate Recovery Plant was introduced. Frankly, this kind of innovation is a key element of our strategy in a weak uranium price environment. When we talk about all-in costs, it’s the team that delivered this success that’s already working on initiatives for FY 2017 and beyond.

When we go to Slide 12, we originally published a chart that looks like this in August of last year and this is the first time since we published that chart that we have updated it. It actually reflects updated guidance which is for lower all-in costs. We are now expecting $38 to $40 a pound on a full year average basis i.e., $1 a pound lower than what we are expecting at the start of the year. You can see, if you were to compare this chart to the previous one, it’s a little bit of a story of swings and roundabouts. We had a better than previously expected impact of currency. Previously, we were aiming for currency to help us reduce our all-in costs by about $1 per pound. And now, it’s helping us by about $2.72 per pound. In terms of volume and grade, we always had a reduced grade. But our volumes are slightly lower than was our original guidance. And that’s also being presented to you in our revised production guidance. So that’s gone from a $0.71 positive impact to a $0.37 negative impact. Efficiency from mining is close to what we have previously been expecting. Efficiency from processing is actually higher than – or it’s not higher, but the cost saving we are projecting is better than we had projected at the start of the year.

And then, we are pretty much on track with the remaining items in terms of capital expenditure, care and maintenance, exploration, corporate and debt servicing. So we are revising this guidance lower. And the two key items that are driving that lower guidance are more efficient processing costs and the impact of the worsening Namibian dollar versus the U.S. dollar. I think what’s important on this point is, I often get asked, what happens in financial year 2017, how will you keep the all-in cost structure ahead of uranium price if uranium price does not go up? And here is our answer. This $38 to $40 a pound is a full year range. To get there, it means our second half FY ‘16, will already be down at a running rate of $35 to $37 a pound. Next year, we will have a big debt reduction which will reduce our total funding cost and then that in itself will have a pass through to our all-in cash cost with respect to the debt servicing element of it. We are quite confident that at current currency assumptions, we are looking towards a range of $34 to $36 a pound for the financial year 2017. It will also include more optimization and direct cost saving initiatives. This is something that we will talk a lot more about in our next results as we refine out budget for financial year 2017.

Moving on to talk a little bit more about the uranium market and the fact that Paladin is uniquely leveraged to the expected upside in the uranium market. Here, we have a chart that shows us uranium versus oil and other commodities. We are not seeing much upside in uranium in the most recent few months, but it seems to be the best performing major commodity out there. There is definitely something to say here because we are not seeing uranium drag down in the correlation low-up with oil prices or other energy commodities. Uranium is really poised to benefit from the fact that its supply side is in a much more disciplined position than for other commodities, given we have had the adjustment of the Fukushima event in the past. It’s all so that we don’t anticipate the same correlation between uranium and other energy commodities going forward because we now have a regulatory environment which promotes the use of nuclear energy versus carbon dioxide emitting energies.

Slide 14, we show something that we are quite focused on at the moment, which is uranium market liquidity. We don’t really think our market is normal per se until we see transaction volumes move at a regular level and more in line with annual consumption. The graph on the top left shows long-term uranium contracting volumes. And in the commentary, we talk a little bit about what’s happening in the volumes in the spot market. 2013 was the lowest liquidity year for uranium because it came after the Japanese reactors actually shut in 2012 and there was so much uncertainty in that year regarding the future for nuclear and whether there would be a large volume of material release into the market associated with the – a permanent shutdown in Japan. That didn’t come to fruition and now Japan is starting. Since 2013, liquidity has improved in the market every year. But it’s still well below normal. Long-term contracting volumes in 2015 were 81 million pounds and there were 49 million pounds in the spot market, i.e. 130 million pounds total transaction market for uranium. Now we anticipate that we will have a larger transacted uranium market in 2016. We currently view that it’s likely we see 150 million to 160 million pounds of material transacted this year and that prices will rise to reflect the slow normalization of the market. A normal market will actually come when we have annual volumes of around about 180 million to 200 million pounds a year, which are volumes that are required to replace the uranium that is actually used in nuclear power generation globally.

Next slide presents our strategy and this hasn’t changed since our last presentation, quarterly presentation. Our strategy is very simple. Number one, it’s to maximize Langer Heinrich operating cash flows through optimization initiatives while preserving the integrity of the long-term mine plan. Number two, we continue to maintain Kayelekera and our exploration business on a minimal expenditure care and maintenance basis. And in fact, we are always looking to drive those costs even further lower. Number three, we are minimizing corporate and administrative costs. And number four, we are making progress with respect to strategic initiatives and partnerships that may result in strategic investment funding and corporate transactions for the company as a way to resolve the – our funding needs for our maturity coming up in April 2017.

On the last slide, we are representing our guidance for the financial year 2016. Our production guidance is 5 million pounds to 5.2 million pounds. That was something that we flagged in our last quarterly activities report around a month ago and it’s a revision from our previously stated 5.0 million to 5.4 million pounds. We still expect, on a full year average basis, an average selling price premium of around $4 per pound for our received uranium price. Our Langer Heinrich full year C1 cash cost guidance is now $24 to $26 a pound and that is a revision downwards from $25 to $27 a pound. We have not changed guidance for the absolute expenditure on corporate cost, Kayelekera care and maintenance and exploration, which we expect to be $19 million, which is $14 million lower than the number for financial year 2015. With these elements of our full year guidance, we continue to expect to be cash flow neutral through 2016 – for financial year 2016. And with that, the second half of the financial year 2016, in aggregate, will be cash flow positive.

The March quarter, we expect sales of 450,000 to 650,000 pounds. Langer Heinrich C1 cash costs of $23 to $25 a pound. The cash balance will reduce to $100 million to $110 million, but this is in line with our overall cash generation for the second half in aggregate. What you can see there is it’s one of those quarters where we have lower sales than normal and that is primarily because we will be building material in advance of a very large, almost 700,000 pound delivery to China that will take place in April 2016, i.e., the following quarter. And so our cash balance will swing somewhat with the timing of sales and sales receipts.

So that finishes the presentation component of what we wanted to do today and I think we can throw to the operator for any questions that people might have on these results in the presentation. Thanks.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And the first question comes from Mr. Glyn from UBS. Please ask your question.

Glyn Lawcock

Alex, good morning. Couple of questions if I may. Firstly, interesting move, dropping down into the CEO role full time, I am just wondering if you could talk through a little bit about the logic behind that, what happens now given your role back at Azarga, etcetera. And I note your fairly interesting incentive scheme, how you directly get a strategic deal done, just wondering if you can talk through potential timing of that? And then the second question, I think is really just around the cost. Clearly, you are really benefiting from FX, which is great, but it tends to also lead to higher inflation. Just wondering if you could talk a little bit about what you are seeing on the ground in terms of inflation, your labor agreement, how long that’s good for, when does it come up for renegotiation, etcetera, because I would have thought, you are probably going to get hurt at the back end from the – from the good exchange rate today? Thanks.

Alex Molyneux

Okay, thanks, Glyn. Now, so, on the first topic, I know that you didn’t congratulate me by the way. But I will say that...

Glyn Lawcock

Congratulations.

Alex Molyneux

Thanks. Okay, I think Paladin is obviously – there is a lot going on. I think there is two elements to disappointment is that number one, I think, I guess the board has become somewhat more, let’s say – we have – let’s say we have grown together in terms of the board being comfortable, I can’t remember the exact language that was used in the press release, but let’s say that the board is broadly comfortable that I have got the skill set at the moment to do what needs to be done at Paladin. And let’s say the position might not be that – I don’t think it’s changed radically, it may not be that – so it’s more about specifically what the company is doing at the moment. You can see that it’s reflected. What’s important to the company is to ensure that it’s best positioned to deal with its funding GAAP and to hopefully achieve the best outcome for a transaction that results in best value capital to deal with that funding GAAP. And I think that the board obviously has insight into things that are going on that may not be baked enough to obviously be able to discuss publicly, but people are reading that into the nature of my remuneration structure. And I don’t think – I think that’s, let’s say, that’s a correct – that’s broadly a correct assumption, but there is nothing we can actually say. We don’t have any timing on the transaction. We can say we have made significant progress. We have a number of things that we are working on, but we – if we had certainty over a transaction and the timing of it, we would actually be making that announcement. So, I hope that answers that question.

With respect to Azarga, I am on a leave of absence from any Azarga Uranium specifically and I will continue to be on a leave of absence from an executive role at Azarga Uranium. With respect to costs, in terms of inflation, I am going to ask Craig to answer that and specifically on the labor agreement as well.

Craig Barnes

Okay. Yes, just on the cost, Glyn, you mentioned obviously we have had the benefit of the weakening Nam dollar against the U.S. dollar. But I think the biggest benefit for our cost has been the drop in processing costs due to the savings on reagents. And then with regard to inflation, the inflation assumption currently in Namibia is 7% and that’s in line with our current wage agreement and the average increase that we expect in costs in Nam dollars if that answers your question.

Glyn Lawcock

Yes, it does. And just quickly then, so that’s in your current agreement, when does that agreement expire, because I would imagine perhaps with the way the exchange rates going, you might end up being pushed to increase that?

Craig Barnes

Yes. I think we recently negotiated new ways and I believe it’s a 2-year wage agreement.

Alex Molyneux

Well, it’s a 3-year wage agreement that we have got to run. Yes.

Glyn Lawcock

Okay, wonderful. Thanks so much.

Operator

Mr. Matthew Keane, your line is open to ask a question. Please go ahead.

Matthew Keane

Yes. Hi everyone. Just a couple of very quick questions, first one on sales, you have given a bit of forecast say where you see the market is going. First one, have you accounted for Chinese inventories and where they might stay and also Japanese inventories, is that in your number, were you expecting that increase from the number you said there, 150, 160 we transacted in the year. And the second half of that question there is, are you seeing those tens out there at present and if so, where about they are coming from, which part of the world?

Alex Molyneux

Okay. So in terms of – so in the long-term, the market has to be 180 million to 200 million pounds because that’s what the world uses every year. And so eventually, the inventory situation has to neutralize. In the short-term, in terms of – as we proceed to that, we believe specifically on China – so we believe inventories and this is the biggest thing that the market misunderstands about our commodity. Inventories will be a source of net buying between now and the end of the decade, not meant selling, okay. So we have Japan is, let’s say Japan is – has got enough inventory so that they may not be in the buying mode. But we have – China will likely need to build their inventory and probably double the size of it between now and the end of the decade to achieve the strategic – the level of strategic inventory that’s in line with Chinese policy, okay. So it might look like they have about 9 years worth last year’s usage. But their usage is growing so quickly that if they can meet the 7-year target, they are going to had to roughly double their inventory by 2020 to hold 7 years strategic inventory. And then we have got inventory build from India which is announced – it’s building an inventory in the order of 50 million pounds or so initially.

And frankly, we can see that being reflected in an early stage in market inquiry. We then have the IAEA global inventory, which is a new initiative and we currently estimate that’s likely to be about 40 million pounds. We don’t know over what period they will try and establish that inventory, but that’s a new global inventory facility for smaller countries and customers that’s being setup in Kazakhstan and its being setup and funded and that’s another inventory build that will take place. So, of course Japan has an excess of inventory, but frankly the rest of the world – and inventories are towards the low end of their traditional bands in Europe and North America. So inventories other than Japan, generally low and in certain situations require substantial additional buying. So this is why we believe the market will normalize to that 180 million, 200 million pound level over the next couple of years. In terms of specific contracting, it’s been a little bit quiet in contracting in say, let’s say January, December. We can see some tenders that need to come up. There is one very, very big tender in the market which is an interesting one at the moment. There is an Asian utility that has a more than 10 million pound tender in the market, which by the way is a re-tender of a tender that was put out twice last year and obviously hadn’t been anywhere near fully supplied. So what’s interesting in the market right now is we are starting to see some tenders coming and we were aware of some others that will have to come down the pipe during the year. But it’s also interesting to see some of the bigger tenders really failing to achieve supply and coming back into the market as re-tenders during that period where uranium prices being low. So at some point, the market has to keep you up.

Now in the very short-term, there is a bit of I think gravity on short-term spot price for uranium and that’s the currencies of production which have all come down quite significantly with the U.S. dollar strength over the second half of last year. And that, if you like – if you are talking about month-to-month spot prices, that can create I think a little bit of downwards pressure or a bit of a ceiling on spot prices. But if we are talking about quarter-to-quarter, half year to half year and this year to next year, I think we are really waiting to see that transaction activity and liquidity pick up and it needs higher prices for suppliers to be willing to close out almost high demand volumes.

Matthew Keane

Sure, okay. The second question I had there, sorry for the lengthy questions and answers. But it was around – your report today required cash – the cash balance or the cash gap required for the 2017 CB maturity, definitely taken into account the amount you require in balance sheet for normal operations, what would that be over and above the obviously, the repayment of the CB, so basically just working capital required to maintain the business?

Craig Barnes

It’s somewhere in the region of $50 million to $60 million, that’s what our current assumption is. There is a lot of moving parts around that as well. And I think over time, it might be that we have the ability to bring that down as well if we can look at ways to smooth our sales and things like that. But our assumption is around $50 million to $60 million. These numbers may actually factor in something more like about $65 million.

Matthew Keane

Okay. So just to confirm that $140 million, $165 million gap, that it does include cash required on the balance sheet to run the business?

Craig Barnes

It does.

Matthew Keane

Okay, that’s all for me.

Operator

Thank you. And our next question comes from Stefan Hansen from Morgan Stanley. Please ask your question.

Stefan Hansen

Good morning. Actually, my question on the funding gap I think was just answered. I mean you have got your next – your bond is $237 million and you have got $137 million in cash with $100 million the difference but – and expectation of being cash flow neutral from now on, but you are looking at a funding gap of $140 million to $165 million, so that difference is I guess timing of sales and that sort of thing, is that…?

Alex Molyneux

Well, hang on. I think we made the point that our expectation to be cash flow neutral on a full year basis. We actually are cash flow positive at the moment and expect to be cash flow positive for the second half. So our – in our numbers, using fairly conservative assumptions, we would have a higher June 30 balance being forecasted internally than was reported for our December 31 balance. So – and by the way, it’s not using commodity price assumptions for that above market. So for that kind of forecasting, we are using real current market assumptions. So that’s then – there is obviously, as we said, there is some leakage or there is some cash that’s not accessible to us because it has to be held back for capital purposes and whatnot. And then our external estimated funding gap is $140 million to $165 million. That’s really what we are talking about that we really would need to be provided from outside the company.

Stefan Hansen

Okay. I mean I guess as you are cash flow positive from now on, meaning you are going to I guess, be more than $137 million cash covered as of the April CB then the working capital amount that you are talking about could actually be more than $65 million? I mean, it’s quite large.

Alex Molyneux

Well, look, I mean, well, even if you took the – it’s not really – I mean, we have got $237 million repayment, deduct $150 million from that and the numbers kind of give or take $10 million, they will work out for you, right, so with the $65 million holdback for holding cash balance.

Stefan Hansen

Alright. No worries. The next question I mean we talked about the change in material influence part of your engagement agreement. What’s yourself and the board mostly focused on, I mean, just looking for a deal that can get you over the near-term funding GAAP or is there an actual change in control, something that the board is focused on?

Alex Molyneux

The board is focused on looking at all deal structures and picking something that is – that provides the best value for investors and has got other elements to it, de-risk in terms of what’s the risk of the transaction, what’s the likelihood of it succeeding blah, blah, blah. So, there is no – what’s happening is we have engaged with a number of parties of different natures to discuss what options and interests there are in Paladin and we are obviously receiving a number of different ideas back in return to that in terms of how they would perceive they would like to work with us. So, frankly, we are getting a lot of ideas in-bounded and they are all quite different structurally and we are working through them in a diligent manner and I can’t say whether any outcome would be. There is no preference for a change of control or non-change of control or anything like that. It’s just that we are working with third-parties. And to some extent, we have to – we are sort of working with what we are provided as well.

Stefan Hansen

Alright. And just one final one on this timing of sales over the next couple of quarters, it looks like you are building inventory for another large sale to CNNC in the fourth quarter and we saw that in the first half that you had a greater premium when you would sold lower volume basically the CNNC agreement seems to be closer to spot. Is that how we should think about the price premiums that we will see in the third and fourth quarter?

Alex Molyneux

I think when we look at the third and fourth quarter, when we look at the fourth quarter, we do – we have some fixed term in that fourth quarter as well and we have a very large number in total sales for the fourth quarter. So, we are building a lot of material for that CNNC contract, but it could actually be less than half our total sales for that quarter. So, I think when we look at the impact on price and we – the margin moves sales between quarters a little bit. I think we – our current expectation is we will have a premium to spot in both quarters. And frankly, the premium looks like it will be higher in the fourth quarter than it will in the third.

Stefan Hansen

Okay, great. Thanks very much. That’s it for me. Cheers.

Operator

Thank you. The next question comes from Mr. Simon Tonkin from Patersons. Please ask your question, Simon.

Simon Tonkin

Yes, good morning, Alex. Congratulations on your appointment. I have just got a couple of questions. First one is capital, is there any large capital items you expect at Langer Heinrich in FY ‘17 such as tailings or stripping etcetera?

Alex Molyneux

The largest capital – so, our biggest upcoming capital item is that we do have in our plan to do a move of the TSF 1 at Langer Heinrich and the total capital number for that, Craig, if you can remind me.

Craig Barnes

I think it’s $7 million to $8 million in total, that’s moving the TSF 1 and then also building TSF 5 construction.

Alex Molyneux

Okay. I think it’s actually a bit more than that. Yes, I think it’s closer to $10 million. So, we are still – we are basically still looking at our numbers. But the question is, for us, right now is whether any of that will be spent in 2017, we are not sure, but the biggest year of that TSF move in a spending sense will probably be ‘18 regardless. But we are just trying to work out the exact timing of it maybe that there is a couple of million dollars of that comes in to FY ‘17.

Simon Tonkin

Okay. And the other question just on grade, obviously we are seeing it trend downwards, how can we think of grade in 2017?

Alex Molyneux

2017 feed grade will be – so what we have said is for the next 5 years or so of mine life, we will be within the current zone of feed grade which is around 650 to 700 parts per million. So we are still finalizing – I mean basically, we won’t finalize our 2017 mine schedule until around May. And – but we had a relatively meaningful drop off in grade from FY ‘15 to FY ’16. And then we have said that we are broadly in the same grade zone for the next few years, but it’s in May that we will work that out. We will finalize our schedule and we will be able to provide some guidance on – within a much smaller level of tolerance around the grade.

Simon Tonkin

Okay. Thanks a lot.

Operator

Thank you. There are no more further questions. Please continue further with your presentation. Thank you.

Alex Molyneux

So no further questions?

Operator

There are no more further questions.

Alex Molyneux

Okay. So thanks everybody for joining our conference call. And if you do have any further questions, then feel free to contact Andrew and he can coordinate all of us to respond and thanks for your time this morning.

Operator

Ladies and gentlemen, that does conclude our conference today. Thank you for all participating. You may all disconnect.

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