Lundin Mining's (LUNCF) CEO Paul Conibear on Q4 2015 Results - Earnings Call Transcript

| About: Lundin Mining (LUNCF)

Lundin Mining Corporation (OTC:LUNCF) Q4 2015 Earnings Conference Call February 19, 2016 8:00 AM ET

Executives

Paul Conibear - President and Chief Executive Officer

Marie Inkster - Senior Vice President and Chief Financial Officer

Peter Quinn - Chief Operating Officer

Analysts

Alain Gabriel - Morgan Stanley

Julian Beer - SEB

Greg Barnes - TD Securities

Oscar Cabrera - Bank of America Merrill Lynch

Matthew Field - Bank of America

Chris Welch - Pareto Securities

Jatinder Goel - Citigroup

Christian Kopfer - Nordea Markets

Justine Fisher - Goldman Sachs

Operator

Good morning, ladies and gentlemen. Welcome to the Lundin Mining Fourth Quarter 2015 and Full Year Results Conference Call and Webcast.

I would now like to turn the meeting over to Mr. Paul Conibear, President and Chief Executive Officer. Please go ahead, Mr. Conibear.

Paul Conibear

Thanks very much, operator, and thank you everybody for joining us on our earnings call and end of year results of 2015. I point you towards the cautionary statements obviously we’ll be making some forward-looking statements during the presentation.

Joining me to assist in the earnings call this morning is Marie Inkster, our Senior Vice President and Chief Financial Officer. And at the end of the presentation we’ll feel the host of questions. And Peter Quinn, our Chief Operating Officer will assist in answering those.

For Lundin Mining, we were pretty pleased with our performance last year. We had strong operational and financial results despite a weak metal price environment. Copper production, we had higher throughput at Candelaria and that resulted in production and cash cost outperforming guidance.

Copper production in Neves-Corvo benefited from higher grades and recoveries and cash costs were in line with our outlook.

At Eagle, nickel and copper production exceeded expectations in its first full year of operations with cash costs in line with guidance.

Aguablanca, which is now a closed operation, did meet our production expectations despite of suspending mining in Q3 of the year. At Neves-Corvo, we had some challenges in zinc production in the first three quarters. We got back on track in Q4. But in aggregate, the lower throughput and plant recoveries did impact zinc production compared to guidance.

However, at Zinkgruvan, we had new records set on ore mined and milled for this mature operation, it had outstanding performance and cash costs were below guidance.

Taking a look at the breakdown of our revenue by mine and by metal, you can see overwhelming the importance of our most recent acquisitions of Candelaria and Eagle now making up 70% of the revenue for the company last year and there will be similar percent forward, near to medium term.

We’re obviously a copper company predominantly with 66% of our revenue from copper. But very important other base metals commodities contributing to the bottom-line nickel and zinc in particular.

We remain very competitive I think in the industry in the base metals space with where our mines perform on a cash operating basis. You can see the Tenke in Candelaria are in the best half of the cost curve, Neves-Corvo pushed up a little bit last year because of the zinc production issues which are credit against copper and we expect that to move back down the curve and become more competitive with good margins this year and onwards.

And you can see clearly that in nickel and in zinc, Eagle and Zinkgruvan are in best cortile and should remain there.

I’ll turn the next few slides over to Marie Inkster to go through some of the financial highlights of last year.

Marie Inkster

Thanks Paul. So, from this slide you can see the affect at the following metal prices throughout the year had on our average realized metal price for sales. Our revenue however was up when compared to the prior year, and this is a function of having Eagle and Candelaria results for the full year. Last year they were only in for a portion of the year.

The incremental revenue from these two operations over what would have been in our statements last year was about $690 million for Candelaria and $235 million for Eagle. Our operating earnings were strong and our net loss which we’ll look out further in the next slide, is due to the non-cash impairments that were taken on the assets at year-end. Our operating cash flow was strong and we produced positive net cash flows in every quarter of 2015.

There are some items here that we’ll look at including the results that we would take out when we look at normalized earnings calculations. The big items are those non-cash write-offs I referred to on the previous slide. So, the $286 million is the attributable, impairment and the tax factor below that on the tax on above items line. This is in relation to those impairments and some other - and the other things. However, there were also some big tax adjustments related to tax losses.

And these are tax losses that were expected to be utilized in the future but we no longer expect to be fully utilize, all of our tax losses. And as such these are also written off. These are mainly in relation to Eagle and to Aguablanca.

So, we had a few calls about the normalized EPS for the quarter. And we’ll try to make that more clear in our future releases for everyone. So to clarify, working back from the annual information, the previous quarter’s information, the normalized EPS for the quarter was a loss of $0.04 per share or $29.8 million.

Our operating earnings as you can see, as the sales, the improvements were driven by the inclusion of Eagle and Candelaria for the full year. So, all positives of course except for that price and price adjustments bar.

And on our balance sheet, the results, is that we continue to improve our financial position and maintain our strong balance sheet. Our net debt was $441 million at the end of 2015 it has come back a bit recently due to fluctuations in the working capital. But overall, we expect that we’ll be able to produce positive cash flow from our operations and fully cover all of our corporate and capital costs to be net cash flow positive in 2016.

Paul Conibear

Okay, thanks Marie. Taking a look at this production and cash cost guidance, so we put this out on January 21, so no changes in what’s being reported here. I can say that the company is expecting to produce an aggregate about 250,000 tons of copper for the year including the attributable, copper from Tenke at about 22,000 to 23,000 tons of nickel and 150,000 tons of zinc. So in aggregate 400,000 to 450,000 tons of metal, coming from the company, more or less similar tons as last year and moving forward to next few years.

We’ve put in stages last year three different levels of cost restraint which got us down to a relatively low capital spend. And that seem obviously continuing this year with taking belts with all the operations and corporately to help offset the impact of the current low metal price environment.

On capital expenditure, I think we expended in the range of about $280 million or so last year. The forecast this year is for $220 million you can see that the biggest component there is the initial significant spend on the new tailings facility, called Los Diques in Candelaria, there is an attribute there to capitalize stripping of $35 million.

And the other mines, we have had some restraint put into the regular underground development sustaining costs, but we are also putting, reinvesting into water treatment and our small zinc expansion at Zinkgruvan and I’ll talk a little bit more in a minute.

Exploration, we’re historically we spend anywhere from $40 million to $60 million in the company annually on exploration. You can see we still have a very significant spend. We think we have very good assets to drill on, in particular Eagle East and Candelaria where most of that money is being spent. Obviously if things get tougher, we can pull back on that that is discretionary. But we prefer not to as we think that we’re going to add very good value with that drilling.

Few comments on each of the mines, Candelaria, 2015 marked our first full year as owners of that mine. It excelled in production above our expectations and above for market guidance. And that was pretty remarkable in our view given the distractions of the transition of ownership. They had a huge tragic flood in the area that the mine had to respond to.

We had the distractions of a permitting exercise and repairing some community relations. And I think the mine is operating extremely well. We’ve improved the five-year production plan. We added four years to mine life 25% to the mine life. And since we got the EIA approved in mid-year last year for the new tailings facility, we’ve made good progress on the construction permits, still a bit more to go on that for the big dam. And we’ve got a fairly large capital project advancing on-budget if not under-budget and on schedule.

Moving to Eagle, again, it was our first full year of operation effecting the bottom-line for Lundin Mining. It exceeded expectations in all regard. The grades coming out of the mine were as predicted or better, especially on copper. The transport of ore from the mine to the mill, which was a bit unknown through, winter seasons went very well.

Throughput to the mill, recoveries, concentrate quality, response to smelters that off-take our product and the shifting of the concentrate to those destinations, all went very well. Despite the reducing copper price, which is an important credit at this mine, we still performed at about $2 million per pound of nickel, so very, very good margins. And the outlook for this mine, for the next use forward is very much consistent with the base plan we had when we acquired.

The one change which we’re hoping will bring significant upside, still to be proven here is the discovery of the high-grade Eagle East deposit. We’ve been encouraged enough to ramp up two drill-rigs to 6 drill-rigs in December and aggressively drilling that discovery. We have another small target in Eagle West we’ll put a drill-hole over to sometime this year as well. And we’re hoping to get a maiden inferred resource out by mid-year on Eagle East.

Neves-Corvo, this mature mine had a very good year for copper production. As I mentioned previously, we had some challenges on zinc, we’ve made some management changes and some process changes there so we’re back on track there. Ultimately, our cash operating costs on a copper basis, we’re in line with guidance at $1.63, similar cost expected this year.

This is a mine where we have we make more money from copper than zinc on a margin basis historically. And our plan for many years now has been to keep it at above 50,000 tons of production and we continue to do that. We completed - successfully completed a feasibility study to double to zinc production from 80,000 to about 150,000 tons annually.

That investment is currently on-hold pending better metal prices. However, we are progressing with the initial stages of permitting as that’s ultimately the critical path on that investment. It’s a very, very valuable zinc asset base there and we intend to expand it in the full course of time.

Turning to Zinkgruvan, I think Bengt Sundelin and his team outperformed again last year. This is a new record of zinc production, the best of my knowledge, 83,000 tons of zinc produced in concentrate last year, was record production from the mine or through the plant, very good recoveries, very high quality concentrate, obviously benefited from foreign exchange, currency weaknesses that all of our operations frankly except for Eagle.

This did contribute to us coming in on or a bit better than guidance on C1 basis. This asset remains very competitive in the best cortile of zinc operations. With the confidence that we can produce more from underground than in the past, we have approved a modest modernization of the front-end of the plant increasing the crushing and grinding capacity, simplifying the plant. That will enable us to produce extra 10% zinc and lead from the facility.

We’re going, slow on that investment, right now we’re doing a bit of blasting inside with the contract that was already committed. And we intend to ramp this project up mid-year this year and have the expansion commissioned prior to the end of 2017. It’s only about $15 million to $16 million, so very low cost and very high return expected on that investment.

Tenke, which we have an equity stake in, run very confidently by Freeport, had another outstanding year. They came in bang on, the amount of capital that was expected to be produced there. We think we had a new record in cobalt production. The cash operating cost, very competitive $1.21. And we took in net cash distributions to Lundin Mining from Tenke and the Freeport cobalt investment in Finland, net $33 million to Lundin Mining.

We’re expecting about the same returns this year at current metal prices. This is so leverage-able to metal price, any up-tick in copper price in our returns to ourselves and Freeport would be significantly better than this.

Once again, on capital projects, Freeport has executed very well on a very large three-year program put in a new asset plant. That’s being commissioned as we speak. It’s gone on or better than schedule and under-budget as well. So, we executed very well. And that not only enables us now to move forward, self-sufficient on asset, we were spending a lot of money on importing asset to supplement needs there until this plant was ready.

The plant is also sized to facilitate for future expansions and it produces a little bit of its own power through heat regeneration from the sulfur burning and another 12 megawatts or 15 megawatts. So that will just help to stabilize our power supply a little bit. So Tenke is performing very well.

We believe Lundin Mining is very well positioned in any market. We like our mix of assets, they performed well I think the share should be very similar to last year in most regards. We will continue to be conservative in how we manage our balance sheet. And expect really good cash flows from all of our operations.

In aggregate, our operations last year produced on average better than 50% operating margin which I think is good in any price environment and especially in a low-price environment. So, we’ll continue to foster those assets and produce even better from them.

Happy to turn the call over now for Q&A. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Alain Gabriel from Morgan Stanley. Your line is open.

Alain Gabriel

Yes, good morning everyone, good afternoon. Just a couple of questions on Candelaria from my end. So, we noticed in Q4 a sharp drop in the gross OpEx at the mine. Would you mind elaborating a little bit what happened there? How did you manage to reduce the costs in that magnitude and would that be sustainable?

And the second part of the question is, in your CapEx budget, I noticed you deferred quite a bit of stripping at Candelaria, while you’ve maintained volumes broadly intact for 2016. How would that deferral impact volumes beyond the current year? Thank you.

Paul Conibear

Okay, thanks Alain. Maybe Marie, if you answer on the cost basis and Peter on the deferred stripping and results for future years.

Marie Inkster

Yes, no problem. Don’t everybody get excited that we’ve made a giant reduction in costs that’s going to be maintained. It was really a reflection of some long-term stock-pile put through the mill. And the cost of that material on Lundin’s books is much lower than current run in mining cost. So, this inventory cost difference. If that weren’t to be factored in, then you’d more in line with the previous quarter cash cost. So, it really was a one-time type effect in this quarter due to that long-term stock pile movement. And Peter I’ll turn it over to you for the second part of the question.

Peter Quinn

Okay, in regards to stripping, obviously we have deferred some stripping in the budget as a result of metal prices. That stripping impact in terms of production does put a change in production out in ‘19 to ‘20. But we have also managed as part of re-phasing of the pit to pull some pounds forward into ‘17 and ‘18. So, even though we’ve deferred volume is stripping, we’ve been out actually improve slightly the production schedule.

But a reduction in metal does occur out in ‘19 and ‘20 and obviously we work through mine plants currently to try to address that as we go forward.

Alain Gabriel

Thank you. Very clear.

Operator

Your next question comes from the line of Julian Beer from SEB. Your line is open.

Julian Beer

Thanks so much, good morning everyone. Just, actually following up from the previous question line on Candelaria. Would you have scope to repeat the deferral of stripping in 2017 in the event that prices stay low or is that pretty much a thing you’re going to have to go ahead with according to the technical report issued last August?

Paul Conibear

Well, let Peter answer, and we won’t be pushing our luck too much Julian. You know that we pushed the mine hard last year and this year, but Peter do you want to say a bit more?

Peter Quinn

Yes, the simple answer to that is yes, we could. Obviously we would not want to do that. Having said that there are several other options available to us with the mine plan to mine more out of stock pile and so forth. And so there are quite a number of options with avoiding deferring further stripping in the pit. But it’s more than possible - we could certain defer stripping if metal prices worsen between now and next year.

Julian Beer

Okay. And given the current deferral for 2016, what sort of impact quantitatively would you expect on the ‘19, ‘20 production?

Peter Quinn

I don’t have that number in front of me. But the answer to that is it’s not significant at this time. And we actually we’ll be able to fill that hole, we created with some deferred stripping. Currently we have trucks in the fleet part through much increased productivity at the truck fleet to availability and run time. We’ve been able to park 16 whole trucks out of a fleet of 46. And we do maintain our forecasted budgets. So catching up on stripping, we have capacity, it’s really just a matter of investing those dollars in stripping.

Julian Beer

Okay, that’s great news. Thanks everyone.

Operator

Your next question comes from the line of Oris [indiscernible] from Deutsche Bank. Your line is open.

Unidentified Analyst

Hi, it’s actually Oris from Scotiabank, not Deutsche Bank. Good morning.

Paul Conibear

Good to hear.

Unidentified Analyst

I just wanted to touch on a couple of things. I guess the first thing is, Paul, I’m just very curious how you’re thinking about asset purchases or sales in this environment. Clearly there are number of assets coming up for sale. Some of them are pretty good quality that you could probably only get at this part of the cycle. Just given how strong your balance sheet is, I’m just wondering kind of where your head is at in terms of whether you think there are opportunities out there that makes sense or whether just given financing conditions, it’s just hard to make anything work right now? Thanks very much.

Paul Conibear

Yes, Oris, I think it’s an issue of discipline. And we were pretty clear to the market when we acquired Candelaria that Julie, and our Corporate Development team would basically have pens down last year. And although we monitored, because it is a unique part of our cycle here where it’s a buyers and a builders market. We spend quite a bit of time monitoring these things that come out and are put out in the form of processes. But for the criteria that we set on size, quality, geography, life, all that sort of thing of asset, haven’t seen stuff come up, that gets us too excited and some of these operations that have come up onto the market.

And those are operations that two or three years ago, people would kind of drool for, they just didn’t come out of the majors like they have. But we’re confident that our asset base that we have right now is good for the company. We’ve got two or three growth opportunities internally between modest one at Zinkgruvan, if Eagle East pans out, we’ve got the zinc expansion we can do when we want to in Portugal. And we’re working hard on drilling and expanding our knowledge of what might be possible in Candelaria.

So, we don’t have any drivers to do anything but we do have financial capability and if a special opportunity comes up this year that fits our criteria, we’d be happy to move on it. That’s within the caveat of keeping a balance sheet still on the conservative end of things.

Unidentified Analyst

Great. Thank you very much.

Operator

Your next question comes from the line of Greg Barnes with TD Securities. Your line is open.

Greg Barnes

Thank you. Paul, or Peter, could you run through the timing on the Los Diques tailings dam in terms of permits when you need them, when it gets done and the overlap with the existing dam?

Paul Conibear

Yes, Peter, go ahead there please.

Peter Quinn

Sure, will. In regards to the construction permits, we expect to be in construction on Los Diques by middle of the year, so late June, early July. Implying that we’ll have those permits, maybe a month before that actual start date of course.

In regards to, and that process is continuing well. That’s six months in advance of the original schedule. We originally plan to be in construction January 2017. So, we’ve pulled the schedule forward, we believe the permitting effort, approvals are going well enough that we’ll see that construction start middle of this year.

That being said, that would have the Los Diques facility ready by early 2018 with the existing facility being full, late second quarter 2018.

Paul Conibear

Yes, just for clarity, Greg, we’re doing a lot of early works of construction there, relocating several power lines, a prudential road, a lot of preparatory work to access putting in a huge crushing screen plant. There has been quite a few early works, construction permits already approved so there is a high level of activity there already. And what Peter is commenting on is primarily the key permits for the big dam.

Greg Barnes

Okay. And the existing facility is full, I think you said late second quarter of 2019?

Peter Quinn

No, 2018 on the current schedule, mid-2018 existing facility is full, we are working on some permits to raise the freeboard in that existing dam, which would give us another year of capacity.

Greg Barnes

Okay. And when do you expect to get those permits in Peter?

Peter Quinn

That permit now is tied to the construction permits that we expect to see here just prior to the middle of the year to allow us to start construction on the main dam.

Greg Barnes

Okay. Thank you. Can I ask a second question Paul? The costs at Tenke, it hit $1.32, the guidance from Freeport. And I know they’re assuming a lower cobalt price, but it seems a bit high given where was this year and the new asset price coming in, are they just being conservative or could you give us some color there?

Paul Conibear

Yes, well, I think if you take a look at the track record now, I guess this was the eighth year of mining and seventh year of milling at Tenke. And the track record is that to date is, Freeport, have been conservative on cost guidance. The lower cobalt price assumption is a significant contributor.

As we do get deeper into the oxide deposits, the asset getting out some consumption net goes up. So that is a contributing factor, we’re probably expecting a little bit higher power costs this year and in some of the other consumables that were subject to that we don’t get the benefit from, from exchange rate.

So, maybe we’ll come in under that but we just have to rely on the guidance that Freeport give for the time being. And I think they’ve been pretty good at readjusting guidance quarter-to-quarter where they feel it’s appropriate.

Greg Barnes

Sure, okay. That’s good. Thanks.

Paul Conibear

Yes.

Operator

Your next question comes from the line of Oscar Cabrera from Bank of America Merrill Lynch. Your line is open.

Oscar Cabrera

Thank you, operator. Good morning everyone. Paul, if I look at the, you guys have done a great job in controlling cost in different operations and perhaps except for Neves-Corvo. But as you see the depreciation of the currencies have a positive impact on the operations and as well as diesel prices or energy prices. Do you think you can have further reduction on costs and, specifically referring to the larger operations of Neves-Corvo, Candelaria?

Paul Conibear

I wouldn’t count on too much to be honest, I think we just approved new power commitments in Portugal and where in the past, they were running maybe €8 or €9, we’re lower than that now. And in a euro basis and obviously at €1.3 or €1.4 to the dollar. So, although some of these things are getting more competitive in a local currency basis, I think the low-hanging fruit of long-ago been taken already to be honest. And it’s really the currency fluctuations that will continue to have the greatest impact on our net U.S. basis costs.

We’re gradually taking over more contractor work in Portugal and in Chile. We’re actually self-performing a lot of work on the Los Diques project. These are taking some time to the 10% contract response for whatever the number is off the table. But I don’t see any quantum heaps in getting cost base across the industry down.

Our fuel costs in order only maybe 5% or so, operating cost. So you can’t take huge windfalls from some of those consumables.

Oscar Cabrera

Okay, that’s helpful. Thank you. And then, second question if I may. We like the fact that you guys are pretty conservative when you look at your M&A strategy. The price of zinc has been finally responding to a tighter market, and see it with treatment charges. Can you remind us sort of like what price levels you would feel on a sustainable basis, do you feel comfortable developing the expansion at Neves-Corvo?

Paul Conibear

Yes, sure Oscar. So, just to recap the order of magnitude, that’s about €250 million investment that’s contemplated to double zinc productions, relatively low risk from a technical basis in the assets there. Its expanding underground developments, Brownfield’s, take about two and half years.

And the study work that we’ve done shows that above $1 zinc, that has a pretty good rate of return. Obviously we’re not there yet. I think in this environment Oscar that we want to see not only an improvement in zinc price, we want to see an improvement in our stabilization and less volatility in nickel and copper because those are more influential here over the short-term to our balance sheet.

We wanted to see some improvement in the overall base metals market in the world economy. I think before we go ahead with that. There is nothing that we’ve done that sanitizes that investment so we can move forward to whenever we want, and we’re positioning it on permitting. But I would not see us making a decision this year to go ahead with that expansion.

And when we do study it again carefully, it’s going to compete favorably against the other uses of cash that we might have whether it be acquisition or distributions.

Oscar Cabrera

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Matthew Field with Bank of America. Your line is open.

Matthew Field

Hi, everyone. Just want to ask a housekeeping question first. I think I read that the reclamation cost for Aguablanca closing would be about $33 million, is that right?

Paul Conibear

No, the aggregate cost estimates to close a facility, I have another - number of components, maybe Marie, if you want to go through them?

Marie Inkster

Yes, its $32 million that’s for reclamation severance and the other closure costs online. So that’s all-in estimates. And those are gross cost estimates based on just what we know at the current time. And they’re not reduced by any potential asset sales or salvage values of plant and equipment. So salvage values are currently estimated at $9.5 million.

Paul Conibear

So I think we got how much we have accrued and set aside, note for reclamation itself?

Marie Inkster

It’s $23 million.

Matthew Field

So, you have $23 million in restricted cash?

Marie Inkster

No, we don’t, no, there is no closure fund obligation in Spain. So, any outflows would have to be funded from existing cash balances.

Matthew Field

Okay. And that’s over a period of like three or four, years right?

Paul Conibear

Two to three probably, so after care.

Matthew Field

Got it, thank you. And then, last, I just sort of want to take the M&A question from another angle. Given that it’s probably in this environment a lot cheaper for the majors to buy rather than build. What they sort of added to the selling an asset or you’ve been sort of the company as a whole?

Paul Conibear

Okay, no such plans for any of the above. We like where we are. But we’ve got five-year plan, and we’re going to advance with that. We feel, all of our operating assets are core in our view. And we’ll advance where it makes sense with incremental growth of the company and not looking for anything transformational. And certainly not looking to be taken out.

Matthew Field

Okay, thanks very much.

Operator

Your next question comes from the line of Chris Welch from Pareto Securities. Your line is open.

Chris Welch

Hi everyone. I just wondered if I could get a bit more information, a bit more detail on what’s going with Neves-Corvo. I mean, obviously you’re expecting the operating cost will come down to close to average we saw in 2015. Are we going to see a significant cost drop in Q1 this year compared to $196 million that we saw in Q4? And how you’re going to achieve the operating cost reduction?

Paul Conibear

Yes, I can’t comment on sort of operating cost quarter-to-quarter, we don’t give that kind of guidance. But I mean, the plants are operating well, we’re going to produce about the same amount of copper and would be pushing zinc. And the zinc gets credited to the copper basis of some of the C1 comes from the assumptions on the exchange rate and byproduct metals there.

Where we’ve obviously got our exploration rate down to almost zero this year or very, very little. We’ve got a lot of restraint going on there and that’s reflected in the cost that we put out. But we should expect pretty stable year representative more or less of the past on volumes and euros per ton milled.

Chris Welch

Brilliant, great. And if I could ask Marie M&A question. Regarding the sort of the small operations, are they kind of potentially short-term type operations. There was a view that potentially you could acquire some of those and then put some more high-grade ore through the mill. Have there been any decent discussions and a bit more compliance given the lower copper price? Is that a decent angle in the short-term?

Paul Conibear

Well, we’ve been approached more than once, we have a lot of people down there in the area. Our priorities is still, is to learn more about what we have. We’ve got five underground deposits that we’re drilling right now. And even though we, I had originally planned out the $35 million drilling program at Candelaria on our own assets this year, its ‘17 now with restraint.

What we saw in ‘16 rig drilling and we continue to be really pleased by the upside that we’re seeing in our own underground. So looking at anything else in the valley or any area is going to be tough to compete with just continuing investing what we have already.

Chris Welch

Great, thanks.

Operator

Our next question comes from the line of Jatinder Goel from Citigroup. Your line is open.

Jatinder Goel

Hi, good morning, a couple of questions. Firstly on M&A again, given you’re a bit reluctant to commit to €250 million multi-year deployment. How do you balance the thought between looking at an M&A externally and what size of the deal you think you can do given streaming probably has run out of steam, given big stream individual already happened. And do you think you could take a similar route to what we did with Candelaria funding?

And secondly, and second question just on, you might have the first refusal right on Tenke given Freeport have put pretty much everything on sale. Forgetting about what valuation it might come through, are you comfortable as a company operating that asset and secondly would you be comfortable increasing your exposure to Africa? Thank you.

Paul Conibear

Okay, lots of different questions there, I’ll only answer some of them. We’re comfortable with our asset base where it is right now including our stake in Tenke, it’s operated extremely well. The relationship with Freeport is super. I think it’s just right where we are right now and the mix of our other mines and locations they are at the size rep, the quality of them is good.

When we consider and reconsider the investment of doubling up at zinc production in Portugal, in this environment we also take a look at the drilling progress we’re making at Eagle East and taking a look at the concepts and the capital requirements if we find enough there to develop.

So, each one of these are on their own and quarter-by-quarter we assess and reassess where we should maybe be looking ahead at keeping reserves or keeping our powder dry. When significant operating offsets have come out to bid last year, we take a look, we do a desk study, and consider whether they would be more competitive to invest in those things or keep our powder dry for other things that are likely to come up or invest in our own assets. So we just continue to reassess and we’re not in a hurry to move on anything major.

I’m trying to answer your question, but and maybe what you’re asking is what is affordable. Again it goes to what kind of an asset that is. Candelaria, we had to reach on that one, it was close to $2 billion investment but it was cash flowing and we had great faith in the quality of that asset and that the cash flow from that asset would pay for the financing obligations.

And I think we’ve been proven right there, it’s excelled. We would only do streaming, I think under very special circumstances. We’ve done I think successfully twice in the company, we did it at Zinkgruvan and we’ve done it on Candelaria. I think it was great value-add for us. And I think for Silver Wheaton and for Franco-Nevada they have been good deals too.

So, but those are I should say the last resort means of financing if we look forward. But we’re miners in getting hold of metals tough to do. So, streaming is something that you only do under special circumstance.

On Candelaria, our financing package was a combination of debt, streaming and equity with a bought deal. We need financial certainty because we didn’t have a financial out when we signed with Freeport. So, we’re pretty confident we could get a $1 billion in debt. We pre-tendered the streaming and that we could $650 million there and then we topped up with the deals. So, that was a good package that was specific to that asset. And it helped finance it.

If we were looking at investing in something that wasn’t built yet, in our appetite for upfront acquisition cost would be dramatically less. Then a first scale operation because there is some certainty ahead, you want to keep your powder dry, CapEx, all that sort of things. So, little hard to answer what’s affordable and maybe going to where we want to keep the balance sheet, we probably want to run it at a debt ratio of maybe 2.5 to 1 or something like that and not push it above 3.

Does that help answer your question?

Jatinder Goel

Yes, it does. And on your geographical exposure, would you be happy to operate and increase exposure to Africa if Tenke was available and of interest?

Paul Conibear

Well, we’re not looking at any kind of a scenario like that right now. So I wouldn’t want to speculate. Africa is a big continent, it’s a lot of different countries, a lot of different aspects. I don’t want to speculate on one country versus another. I mean, we’re good operators and to the lending group we’ve been in lots of parts of the world, first world and developing and I think have been successful.

Jatinder Goel

Okay. And if I could ask more accounting question. Any change in depreciation guidance given the impairments we have taken at the year-end?

Marie Inkster

No, if you use 500 to 550 as a run rate going forward for 2016 that should be in the range.

Jatinder Goel

Okay, thank you.

Operator

And we’ll take two more questions. Your next question comes from the line of Christian Kopfer from Nordea Markets. Your line is open.

Christian Kopfer

Sorry for that, thanks operator. Just one follow-up, my other questions have been answered. Look at Eagle, you successfully came up on recovering ratios in the fourth quarter. Should we look at the sort of the more the average of the two or three quarters on nickel, had in 2016 or have you been able to structurally improve the recovery rates on nickel in Eagle? Thanks.

Paul Conibear

Yes, we try not to really comment on forecasting quarter-by-quarter, rely on our guidance for the year is being I think appropriate averages. And frankly, quarter-to-quarter, mother-nature can give you some small changes or we might change going to one zone compared to another depending on the rock that we find or something like that.

I mean, the plants are running extremely well, super high recoveries on copper. We’ve been pushing, trying to push our nickel concentrate grade up a little bit compared to last year just to get some freight savings. Sometimes when you’re pushing the grade up, you might lose a little bit on recovery but just relying I guess our bottom lines that we’re guiding for the year. And if we see that we’ve had particular success or otherwise after a quarter we’ll guide differently.

Christian Kopfer

Okay, that was fair enough, Paul. Thanks.

Paul Conibear

Yes, thanks.

Operator

And our last question comes from the line of Justine Fisher with Goldman Sachs. Your line is open.

Justine Fisher

Good morning.

Paul Conibear

Hello Justine.

Justine Fisher

The first question that I had was just on the Tenke distributions going forward. We have been modeling higher number going forward because of expected lower CapEx for Tenke. But it looks like in 2016 the distributions would be only I mean, on a percent basis, it’s reasonable amount but versus what we had is slightly higher than what it was in 2015.

So, can you talk to us about the trend of these distributions going forward, is CapEx at Tenke going to come down such that the net distribution to you guys should increase going forward or is it not really going to get above the $50 million per year range?

Paul Conibear

That’s really a matter of copper price.

Justine Fisher

Assuming flat copper prices let’s say.

Paul Conibear

Flat copper price, this year and next year, there is a capital restraint. I think despite the metal price environment, Freeport has always had I think a very balanced investment strategy which is necessity to be at least medium-term sometimes long-term. We continue to do some exploration there every year, we continue to do some test work on sulfides and mixed ores, we have two shops that have gone down, one at the Fungurume and one at the Tenke end, big bulks of apples that have been taken out.

So, we continue to reinvest in relocation of villagers in areas that we’re going to be mined in a few years from now. So, there is ongoing investment there maybe a little bit more this year than some expected. But it’s really a function of copper price, an extra $0.05 or $0.10, really pushes that cash distribution to both companies up significantly.

Justine Fisher

Okay. So, there are no changes in other cash items at Tenke that might lead the net distribution to go up if we don’t see a change in copper prices, it’s going to be more flattish?

Paul Conibear

Yes, I think so. Year-upon-year, this year and next year I don’t see any no drama in the change of sustaining capital or like tailings raises or anything. We invested a lot last year, the asset plants up and running. Maybe there will be some surprises on the positive, there on the distributions.

Usually, what Freeport don’t guide on cash distributions, we feel it’s appropriate because it’s a significant part of our asset base but those are, our guesses, our estimates is not theirs. And we’re usually conservative on those.

Justine Fisher

Okay, thanks. And then, my second question is on the CapEx at Candelaria. I think the last set schedule we saw of the overall CapEx was in the presentation from your Candelaria trip in September when you went over ‘16, ‘17, ‘18, ‘19 and the full CapEx schedule including mine mill tailings etcetera. And so, based on the presentation today, there is $325 million total, $70 spend in ‘16 so $255 million or so in ‘17 and ‘18. So that budget looks pretty similar to what it was in that September presentation.

And so, the first part of the question is, are we still going to see the budget be larger in ‘17, there was $180 million on tailings in ‘17 and then $75 million in ‘18 in that presentation. So, is ‘17 still going to be the humpier? And then second, is there any more ability to reduce those capital requirements in ‘17 and ‘18?

Paul Conibear

I don’t know if we have all the numbers in front of us from that past presentation. But in aggregate on the Los Diques, the budgets and forecasts haven’t changed. And next year I think is a peak year.

Marie Inkster

2017 is the peak year, it’s over $200 million. Now those estimates were done mid-year last year at a Chilean Peso rate of 625. So, we do expect to see some reductions if the peso remains where it is now, just on that and not on any efficiencies. But we obviously are targeting to have that as cost efficient as possible.

Paul Conibear

Yes, we’re going to update the CapEx on the Los Diques tailings plan kind of mid-year this year. We’re trending really well on that. But just rely on the numbers we gave in, they are the same numbers in aggregate but we’ve put out just now as to what we gave in September.

Justine Fisher

Thank you so much.

Paul Conibear

Yes, thank you.

Operator

And that brings us to the end of the Q&A session. I’ll turn the call back over to the presenters.

Paul Conibear

Okay. Thank you very much everybody for your support of the company. And last year was challenging for everybody in the industry. We got to keep our belts tight this year as well. But we’re happy with our asset base. And thank you for your support. Goodbye.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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