First Quantum Minerals Ltd. (OTCPK:FQVLF) Q4 2015 Earnings Conference Call February 19, 2016 9:00 AM ET
Clive Newall – President
Hannes Meyer – Chief Financial Officer
Phillip Pascall – Chairman and Chief Executive Officer
Alain Gabriel – Morgan Stanley
Matt Murphy – UBS
Ian Rossouw – Barclays
Orest Wowkodaw – Scotia Bank
Greg Barnes – TD Securities
Alex Terentiew – Raymond James
Oscar Cabrera – Bank of America
Kevin Cohen – Imperial Capital
Justine Fisher – Goldman Sachs
Ladies and gentlemen, and thank you for standing by. Welcome to the First Quantum Minerals Fourth Quarter 2015 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, February 19, 2016.
I would now like to turn the meeting over to Mr. Clive Newall, President. Please go ahead, Mr. Newall.
Thanks very much operator. And thank you all for joining us here today. On the First Quantum, side we have our Chairman and CEO, Philip Pascall; Hannes Meyer, our CFO; Juliet Wall, General Manager, Finance.
As usual, before we proceed, I would draw your attention to the fact that, over the course of this conference call, we will be making several forward-looking statements. And, as such, I encourage you to read the cautionary note for the company's our 2015 MD&A and the related results news release, as well as the risk factors particular to our company, which are detailed in our Annual Information Form and available on our website at www.first-quantum.com and on www.sedar.com.
Following my opening remarks, Hannes will go through the financial results, which were published yesterday after the close of markets. And after that, we will open the lines to take your questions. A reminder that there's a presentation, which accompanies this conference call and it's available on our website and can be accessed either on the Events section or on the year 2015 Results Conference Call button under the News section of the homepage.
Now to get started on the review. As you would have seen, comparative earnings and cash flow from operations for the fourth quarter amounted to a $190 million, and $765 million respectively. On a full year basis, these totaled $267 million for comparative earnings, and almost $1.2 billion in cash flows from operations. These strong results were achieved despite what can only be called miserable metal prices. Strong performance at all of our operations held, the increasing realization benefits from operating our own smelter in Zambia, and the ongoing companywide cost reduction program and our copper sales hedge program were all contributed during the period.
I do however, single out two of our operations that have had exceptional performances. The first being Kansanshi, which is many as you know is a complex operation that deals with challenges on a daily basis. And what I believe is C1 cost metric does not fully show the true cost of production. It's worth noting that Kansanshi's C1 cost has been reduced for an average of a $1.63 a pound of copper in 2014, to a $1.09 by the end of 2015.
Similarly Guelb Moghrein, which operates in a very severe environment, has quietly and steadily reduced its C1 and cost to an average of a $1.67 in 2014, to a $0.83 a pound by the end of 2015, both of these achievements are very significant.
So on the operational and cost run, so our efforts are yielding good results. And as we've disclosed previously, we are working on several more initiatives to better position the company to whether an extended period of low commodity prices. Many of those initiatives are on track to finalize various times over the next several months. Obviously there are limits to how much detail we can actually disclose at this time, but it's fair to say that, while the market seems to be focused almost exclusively on an asset sale, we are working on several other initiatives but on our own we'll accomplish our goals, with a lower debt position, with the capital structure, better suited to the development and start up time table of our Cobre Panama project. And a reduced risk of a breach of the net debt to EBITDA covenant ratio for our debt financing agreements.
So, we are fully focused on continuing to progress all initiatives, while making sure that operations are performing optimally under the circumstances. And in the mean time, it is important for you to member that our secured lenders remains supportive and encouraged by the actions we are taking. The other issue that is a market concern, with regard to first quantum is the power supply in Zambia and particularly supply to our operations.
We have kept all stakeholders a abreast to the situation on a timely basis, with news releases on any substantive changes. We recognized and however be alarming and confusing, when news organizations publish old news, as they do quite often, out of context information. To summarize where it stands, the Kariba dam supplies the majority of Zambia's electricity is at low levels, there is no question about that.
However, shortly after the initial power disruption to our operations in July 2015, the situation was stabilized. The state run provider is importing power from neighboring countries and our combined operations are consistently being provided a total of approximately 285 megawatts. This allows the normal operations at Kansanshi mine and smelter complex and for Sentinel to operate at above nameplate capacity throughput for periods.
First, filtered concentrate was produced at Sentinel in January 2015, and production ramped up over the cost of the year, with higher copper production achieved in each successive quarter of 2015. The ramp up was slower than anticipated due to these temporary powers restrictions and softer transitional material that is presented in the all a permanent solution to address the flotation challenges presented by this transition all was implemented in the fourth quarter.
Even though the second power line connecting the operation is still not energized, the grid voltages through the one connected line are getting much more stable. So, it's been substantial improvement over the past few months. With the onset of the rainy season, the catchment area feeds the Kariba dam is being recharged, this would anomaly makes its way into the dam over a period of several months and through till June of each year. So the regular recharge is taking place.
In the mean time recent comments by the country's Deputy Energy Minister confirm what they are previously advised industry, they are intend just to increase the power supply to the mines over the second and third quarters of this year to almost full requirements. Obviously this requires them to continue to import power and they are doing that through additional imports of up to 300 megawatts from another state owned utility in the region and the further 200 megawatts from an independent power producer.
Recently both Sentinel and Kansanshi were advised ZESCO intends to raise the power tarrif to $10.35 per kilowatt hour, effective from January 1 of year. This matter is complicated by historical power agreements and it will take us sometime to resolve.
Separately, we are evaluating options to independently to secure power for our own operations both in the near term and long-term. Continuing with developments in Zambia, we received $18 million in VAT refunds for Kansanshi, while this is a relatively small amount, it is a positive development since it has been over two years since any refunds we received. There is still a further $204 million of VAT claims outstanding for Kansanshi.
On Wednesday of this week, cabinet's approved a new mining taxation code, with the limited information we have at the moment, it looks like the royalty reduces from the current 9%, that is applicable to both Kansanshi and Sentinel to a sliding scale related to the copper price details of which are not yet clear. Some reports suggests that it might be around 5% of current copper price of the current copper price.
Additionally, the variable profits tax, which is currently up to 15% is being removed on the export levy on else and concentrates for which there are no processing facilities in countries being suspended, while the corporate tax of 30% is being retained. Obviously, we need much more detail around the changes before being able to comment substantially on them, but the first blush does appear to be a positive development considering the increase in royalty in 2015 from 6% in 2014 to 20% for the first six months of 2015 and 9% for the second six months added an extra $124 million in costs in a year of low metal prices. The lower royalty would also reduce the cost guidance we've published on Wednesday of this week, which use a 9% that is currently in place. Continuing with the guidance issued, you would have noticed that we included a new metric for us, the all-in sustaining cost of production.
As we have mentioned in the last quarter's conference call, we strongly believe this better reflects the true cost of production, as it includes royalties, administration, capitalized stripping, and sustaining capital, all elements in mining operations that are non-discretionary. Our production forecasts for the year were unmistakably conservative, which we believe is a prudent approach, given metal prices and other factors beyond our control.
Also in the guidance is a further downward revision in estimated CapEx for our Cobre Panama project of up to $5.48 billion, from the already reduced $5.95 billion. This brings our total reduction to 15% from our original estimate of $6.42 billion. The savings are mostly from efficiencies achieved to-date in the critical earth works, concrete and construction phases of the project, better pricing for equipment, and materials, plus some cumulative savings, a small savings in some other areas.
Again, to put this in perspective, is current CapEx is a full $407 million below the project. [indiscernible] majority owned estimated capital of $6.2 billion, and that was a 17% lower installed capacity.
All right. To give a quick summary of the progress on site, the workforce now stands at just about 4,500. The power station associated infrastructure continues to receive priority for early completion, taking advantage of virtually all required materials being available on site. First commercial power is expected from the power station in 2017, which will then initiate a revenue stream from the project. The bonds of the project is scheduled for a phased commissioning and ramp up over 2018, achieving commercial production, throughput levels by the end of 2018.
Key construction contracts are well underway for the concentrate and export coal, import jetty, for the 230 kilovolts transmission line and for the tailings dam, decant tunnel and the power station boiler erection.
Earthworks at the process plant are over 90% complete and port earthworks have been completed. Pre-stripping of the first open pit mine started during the third quarter of last year and has progressed very well, taking advantage of a large fleet and the availability of large scale mining techniques.
Total project concrete placement is now almost 60% complete with 140,00 cubic meters of concrete placed. All seven mill foundations are complete as well as the concrete for three, the three stockpile volts, structural steel erection continues at both the port and plant site, with a total of 11,000 tonnes of structural steel erected to-date, representing about 25% of the project total.
Mechanically, erection of the first mill has now also commenced, which is another major milestone. The port is fully operational and continues to receive international shipments of construction materials and equipment. The tailings management facility earthworks, including starter dams, quarry and waste dump is almost 50% completion and is progressing well.
So, we're very pleased with how our project is moving along and are looking forward to showing it our visitors in a couple of weeks time.
To summarize, the past 12 months it is been an eventful time for First Quantum and indeed for the industry. We want over the first out of the gate [ph] making changes and adjusting to what we believe is going to be a challenging conditions ahead. We made changes throughout the company to ensure the profitability and cash flow from our operations are maximized and protected, and we completed several transactions to strengthened the balance sheet within rapidly shifting market conditions.
We aggressively cut the work force, paid back salaries by up to 20%. We limited cash out flow to essential and economically attractive projects, and carried out an equity issue. I have to say the issue was not a decision we took lightly, is basically all employees and our shareholders in this company. However, in home site it certainly was the right move. And importantly, we kept the attractive Cobre Panama project development going because when in operation, we believe it will be a significant earnings and cash generator.
After much deliberation, we elected to declare a modest final dividend in respect of the 2015 financial year, while a good argument can be made for going when all together in light of the prevailing market conditions. We recognized that several of our longest and most supportive shareholders do require a dividend no matter how small to keep our investment. While the payout is the reduction from the 14.3% of comparative net earnings last year, the gesture is recognition of the value replace in our core shareholder base.
As I said earlier in my remarks, we still have some work ahead of us over the next few months, with initiatives that are aimed further strengthening of the balance sheet. But we are confident that First Quantum will emerge at the end of this market volatility, a stronger company and with a platform of assets will be among the best in the industry.
And with that, I will hand over to Hannes to take us through the financial review.
Thanks, Clive, and good day, everyone. I'd like to take you through a presentation, and you can find it on the bottom left hand side of our website. And once you have paged through the various pictures, you reach page seven, and that's got a heading 2015 Highlights. So production guidance issued in Q3 was made for all metals, and the second half of the year exceeded the first half production for all metals, with increased production at Kansanshi, and higher production at Sentinel.
Recall that projection was deliberately limited at Kansanshi in the first half of the year, in order to match asset consumption with smelter production. Nickel production also increased in the second half of the year, as Ravensthorpe recovered from a failure in the Atmospheric Leach Circuit that occurred in December 2014.
Now, turning to the successes of our Kansanshi smelter. The smelter declared commercial production on July 1, 2015, and processed 709,000 tonnes of concentrate in the year. We produced 150,000 tonnes of copper, and 645,000 tonnes of sulfuric acid, and achieved an overall copper recovery of 98%. So, this translated to significant asset cost savings in TCRCs and freight, as well as alleviate those problems experienced with previously limited Zambian smelter capacity.
Copper C1 of a $1.21 per pound for the year was well below the original guidance given, driven by cost saving initiatives implemented throughout the year, and favorable exchange movement. Nickel C1 of $4.50 per pound was below guidance, as costs savings were partly offset by reduced production at Ravensthorpe. Comparative results year-on-year have been impacted by lower metal prices, primarily copper accounting for $431 million and nickel at $217 million.
Turning to next slide, slide 11, which has got significant cost reductions. I'd love to focus on the cost reduction efforts that we went through in the year. Savings generated from our cost saving initiatives in the fourth quarter of $113 million and that's compared to the fourth quarter of last year. We're quite sure analyzed cost savings of $452 million. As previously highlighted, this smelter has given a significant driver in reductions at Kansanshi, with annualized net saving of $134 million in smelter costs.
Reduction in oil prices as well as fuel consumption efficiency, has led to, to an annualized benefit of $55 million for fuel across the group. The most significant benefit being at Guelb Moghrein in diesel cost to run the power plant. Corporate and exploration cost reductions contributed $80 million on a Q4, compared to Q4 annualized basis and this excludes FX benefits, which are expected to continue throughout 2016. Savings are predominantly being realized through salary, headcount reductions, as well as lower exploration budgets across the group.
Turning to slide 12, and it's $1.74 billion reduction in capital estimates. The $1.7 billion reduction is re-sizing of future capital expenditure as compared to our view a year ago.
It includes $940 million reduction in estimated cost at Cobre Panama from the initial $6.42 billion to $5.48 billion, which represents a further $470 million reduction from our previous update in Q3 2015. Further detailed review of the project economics and additional detail cost analysis as identified additional savings around earthwork efficiency, equipment and material purchasing, which have reduced the estimate total spend by the $940 million to 15% saving on our original estimates. The table on the slide provides further detail of the timeline of the reductions in estimates spend and the reasons for these.
We should also not forget the $800 million of re-saving and reduction of other CapEx notified to the market in Q3 2015. This primarily relates to Kansanshi, its 2.5 deferral and associated deferral of capitalized stripping. The deferral of the several other small projects also contributed and reduction of all discretionary and non-essential capital across all sides.
Turning to the next slide, slide 13, which is headed Q4 2015 highlights. Compared to Q3 2015, copper production increased by 13,000 tonnes reflecting Sentinel pre-commercial production and higher Kansanshi as the power situation stabilized. Sentinel contributed 15,000 tonnes pre-commercial production in the quarter and increase of 4,000 tonnes on Q3, as the ramp up towards commercial production levels continued.
Copper sales volume increased 19% on Q3, but 23,000 tonnes increasing Kansanshi sales as the sell down of the anode inventory balances continued. A note inventory was 62,000 tonnes at 31st of December, a decrease of 10,000 tonnes compared to the end of Q3. The expectation is that this will be sold down to an approximate level of 22,000 tonnes by the middle of 2016. Nickel production was about -both Q4 2015 and Q3 2015.
Copper C1 cost of $1.7 per tonne was $0.28 lower than Q4 2014 as focused on cost reductions and efficiency of cost goods, together with favorable exchange rates, resulted in reduced mining and processing cost. Nickel C1 cost of $4.31 per pound is $0.25 lower than Q3 2015 driven by lower mining and processing cost and higher production.
Turning to the next slide on slide 14, financial overview. Q3 2015 gross profit was $7 million higher due to higher sales volumes and favorable foreign exchange rates, partly offset by lower realized prices. Gross profit of $110 million for the quarter was $73 million lower than Q4 2014 and comparative EBITDA of $230 million was $52 million lower due to lower metal prices, partly offset by cost reductions, higher sales volumes and appreciation of the U.S. dollar.
Excluding the relevant stock insurance prices received in Q3 2015, the Q4 comparative EBITDA was $18 million higher than Q3 2015 as a result of increased sales volumes and cost savings. Net debt decreased by $360 million on Q3 with the Franco-Nevada received an favorable working capital movements, partly offset by capital expenditure at Cobre Panama.
Comparative earnings and EPS of $0.28 per share in Q4, benefited from tax credits in relation to hedging gains, and a widening of tax smoothing adjustments for the actualization of the full year tax.
Turning to slide 15, which is a C1 cost. As Clive mentioned, introduced a change of our cost reporting, designed to provide readers of the financial statements with additional visibility of our total cost of production for the publication of the all-in sustaining cost metric. In addition to the C1 cost, we are now providing guidance on this metric, and with sort of supporting against this from Q1 2016 onwards.
Overall group C1 cost of a $1.07 per pound was three times below Q4 2014, with a focus on cost reduction efficiency, as well as favorable exchange rate. Specifically, Kansanshi Copper C1 cost reduced $0.59 against Q4 2014, due to the benefit of the low cost asset, produced by Kansanshi smelter, along with lower fuel costs, and cost saving initiatives. The C3 cost including royalties and depreciation was $0.35 lower in Q4 2015. As the C1 cost improvement was partly offset by an increased depreciation, after the commissioning of the smelter, and increased royalty rates. Guelb Moghrein C1 cost was $0.48 lower than Q4 2014, reflecting field saving, and ongoing cost reduction optimization initiatives, together with higher production. Group Nickel C1 cost of $4.31 per pound was $0.18 lower than Q4 2014.
Turning to the next slide, slide 16, just Q4 gross -- Q4, 2015 gross profit versus Q4, 2015 – 2014. The order fall short – chart, details the gross profit for 2014 -- Q4, 2015 compared to the prior year quarter. We've touched on the drivers behind this movement early in this presentation our slide demonstrate the impact of the improve cost performance and include sales volumes to serve to dampen the significant impact of lower realized major process.
Lower cash cost including lowest asset cost at Kansanshi ongoing cost initiatives across the group and favorable U.S dollar movements across most operations.
And into slide 17, that long-term debt profile. At Q4, 2015 the company had $1.8 billion of undrawn credit facility, and $365 million of unrestricted cash. 2016 to 2018 include repayments on the corporate term loan and the Kansanshi term loan for the first repayment of the bond that will occur in 2019, at which point all major project CapEx spend on the Cobre Panama is expected to be complete.
If we move to slide 18, the capital expenditure, firstly focusing on 2015, our net capital of $1.2 billion in the year included $370 million at Cobre Panama, $450 million at Trident including pre-commercial spend and stripping, and $310 million of Kansanshi including $36 million in capitalize stripping cost. As part of the ongoing working capital and cash flow management initiatives additional scrutiny has been placed in all projects as well as sustaining capital expenditure. Capital expenditures now focused on the project key to ensuring the company's long-term operational objectives are met. While also giving due consideration to the challenging market environment and the need to protect cash flow.
This is resulted n $1.74 billion reduction in the future capital expenditure already highlighted. In terms of the three-year guidance that we now present if you can see, capital expenditures now essentially limited to essential sustaining CapEx due to the pre-stripping and the Cobre Panama project.
Total price at the remaining CapEx spent between First Quantum share and the third-party's share. As you can see the estimated remaining First Quantum spend is $1.66 billion with 2016 forecast of $390 million and $480 million in 2017 and 2018 respectively.
Turning to slide 19 on market guidance. Copper production estimate, excluding the Sentinel production is 400,000 tonnes in 2016 and the same in 2017, increasing to 407,000 tonnes in 2018. Sentinel is expected to produce between 135,000 and 155,000 in 2016, as ramp up continues with expected production, increasing to a 230,000 tonnes to 260,000 tonnes by 2018. Gold production is expected to be 215,000 ounces into 2016. Nickel production is expected to be between 40,000 tonnes – expected to be 40,000 tonnes for 2016.
In addition to see one cash cost, we now also presenting all in sustaining cost guidance. 2016 C1 cost excluding the Sentinel is expected to average between $1.13 and a $1.35 per pound. Including Sentinel, this is expected to average between a $1.25 and a $1.45 per tonne, as the ramp up of Sentinel progress through the year.
All-in sustaining costs, excluding Sentinel is expected to average between a $1.70 and a $1.90 per pound. Including Sentinel, this is expected to average between a $1.75 and a $1.95 per pound. Including Sentinel, 2017 and 2018's C1 and all-in sustaining costs are expected to average between a $1.20 and a $1.40 per pound and a $1.70 and a $1.90 on all-in sustaining cost. Nickel is expected to average between $4 and $4.40 per pound for 2016 to 2018. The nickel all-in sustaining cost is expected to average between $4.80 and $5.10 per pound.
Thank you, and I'll now hand back over to Clive.
Well, thank you very much, Hannes. Operator, could we now open the lines for questions, please?
Thank you. [Operator Instructions] Thank you. Our first question comes from Alain Gabriel of Morgan Stanley. Please go ahead.
Yes. Hi. Good morning ladies and gentlemen and good afternoon. Just two questions from my end. The first question is on the Kansanshi S2.5. You don't seem to be provisioning for this project anymore in your budget. So my question is how will this tie into the production post 2018 would we see a production decline at Kansanshi? And the second question is on the Sentinel commercial production which you're guiding for Q2, what's the criteria that you used to define commercial production and where do we stand now? Thank you.
In terms of Kansanshi its 2.5 production we're not planning on the capital. And what we expect is that, we've given the guidance in terms of Kansanshi for the next three years. It will be a modest decline going to 2020, probably not more than 20% decline. And probably we maintained that sort of label, that's without S2.5 expansion.
At Sentinel we evaluate various measures and Juliet do you want to may be expand on exactly the measures that we'll use.
Yes. So, when we look at determining commercial production, we improved retrospectively but we look at a number of measures but that will consider sustained operating performance and throughput of operating levels, reaching at certain percentage which we can out something like around a percentage of designed capacity around about 60% to 70%. But it's really the ability to sustain ongoing production, completion of the testing and the quality of the produces well.
And I think we want to see a sustained level of that sort of operation before we declare that commercial production.
Thank you. Our next question comes from Matt Murphy of UBS. Please go ahead.
Hi. Good afternoon. Good morning. I was wondering, if you could elaborate a little bit on how things stand with your lenders, if you get to hear they're supportive, but as you said, your risk of covering a bridge, but there are options as you mentioned to renegotiate covenant. So I'm just wondering if renegotiation is predicated on asset sales or getting project financed or on Cobre Panama, or is that something that can happen on its own?
And I'm just wondering in your talks with vendors, are they encouraging you to look at asset sales differently, or more action on CapEx, or equity or other alternatives? Or is this pretty much everything we're seeing so far on what being decided on your own with a view to preserving long-term equity value. And is that a part of that reason why you – Clive sort of emphasizing alternatives to asset sales?
We're keeping our lending group fully embraced of developments, and initiatives within the company. And we've had maybe discussion with them during the past in few months, and they are working alongside us than to understand the requirement from the company, and they're also patient in terms of benefit. If you get an asset sale, that's another scenario. And they're patient in terms of that, and so we work on various initiatives [indiscernible]. There wasn't an sale, but they have initiatives that we're looking at as well.
At the end of Q4, our net debt to EBITDA level was at 5.8% compared to the 7.5% measurement. So well in compliance. And in the next two quarters that will step down to 5.5%, and then, it steps down to 4.5% in Q3, Q4. So we still have plenty of time before you see that step down and I mean, we are working on the various strategic initiatives.
So it's not just I think the implication of your question was, are we just relying on cost savings and capital cost deferrals and alike, no. We are looking at a number of other strategic initiatives including an asset sale. We're not trying to deflect from an asset that we're doing in an asset sale is just part of a package.
Thank you. [Operator Instructions] And our next question comes from Ian Rossouw of Barclays. Please go ahead.
Thank you. Hi, guys. Just two questions, first of all, just a bit of – a bit more focus on Sentinel and the sort of 2017 and 2018 guidance you've given. The ramp up appears to be quite a bit slower than what you have previously anticipated. Can you maybe just elaborate a little bit on that, is it due to the recovery issues or maybe just explain. And then the second question on Ravensthorpe. Your EBITDA was negative 8 in the quarter and then you spend some other $20 million. So it's clearly quite cash flow negative. Just what the plans are for the operation at this stage and if you can't cut costs further, how long are you willing to run this at a cash negative basis before you shut it? Thanks.
Philip, would you like to take that one, or those two.
To answer the second question first, which is Ravensthorpe, I mean we're acutely conscious of what difficult circumstance are for nickel at the moment. Ravensthorpe is very well run and you probably know, it's possibly in the last, the last 25% all across producers, which means a lot, a great deal of nickel production is in Nevada. And so, we are definitely mindful that we need to watch that carefully and come to some decisions, depending on how things develop.
On the question, on Sentinel, yes we have, we have encountered recovery difficulties with the transitional material at top. But there have been a number of other factors, one of which it is right now, as you would understand, we've been quite happy that has been raining a lot. And that pitches in its early stages like only more weathered areas of Zambia, take a while to get established so, that they can do as Kansanshi does and just tangle through the wet period.
But I think also one of the constraints you have as you – and particularly in the last few months is that, we run up against that limit of 70% of power capacity. And it's taken as a while to handle that well. And it's not just that we have to careful or not to exceed it, because we use to kind of sales although we now came to a slightly different arrangement. It's because we got a number of blips and like down the line, but with a cause of considerable disruption is once trying to improve and stabilize and optimize the flotation and other processes.
And earlier on, we took a lot of time, I mean to recover from each one of those because, it's such a huge throughput in capacity. But again that's been getting much more steady and in any event by the end of this first quarter, we expect the power to be greater in terms of what we have available, but we're already seeing considerably improved stability as we work with [indiscernible] . So, it's distracting our time.
But the – I mean, in 2017, there shouldn't be an issue with the power line, right, and you then all should be in majority of primary ore. So, is that just being conservative in the ramp up or do you still expect the issues to take longer?
It is, but it's also, because mindful that between Kansanshi and Sentinel, the total amount of concentrate produced will have to go through our own smelter and through the other smelters in the Cobre. And it doesn't take a lot either in terms of lower grade concentrate from either those production or of limitations in other smelters before it would impact on this as well. We didn't want to run into a situation of we had concentrate in stock with them.
Cool. Okay. Thank you.
Thank you. Our next question comes from Orest Wowkodaw of Scotia Bank. Please go ahead.
Hi, good morning. A couple of questions. First of all, on the debt covenant, last quarter, I mean your disclosure talked about being in compliance with your net debt EBITDA covenant all the way up to the third quarter of 2016. Just curious kind of what's changed between now and then? And it's whether just reflects your anticipation of tripping the covenant in Q4 of this year or is it more of metal price related, is the first question. Thank you.
Yeah. I got asked this question last quarter as well, what makes us make that statement, at the time last quarter when me make that assessment, we use $2.40 going forward, what we've applied now is a $2.15 copper price, and we look forward and we say what is it look like at the price. So, it is make of price related.
Okay. And the – your net debt-to-EBITDA on your calculations I think you said was 5.8 at year-end. There is obviously some differences in that calculation versus what we can calculate based on your financials, which I calculate to be around 6. Is that a reasonable kind of difference between your formula and kind of what we can going from looking at the financials about our 200 basis points difference?
It’s probably about accurate yet.
Okay. And then just on Kansanshi, in terms of the guidance of 235,000 tonnes or so moving forward. When we are there in October on the site you had that the company had talked about sort of run-rate guidance of more or like 260,000 tonnes. And I'm just curious whether you've consciously decided to bring down production in order to reduce the cost or sort of what's kind of change in your game plans since we are there? Thank you.
Would you like to, yeah.
I mean I think my answer earlier on Sentinel applies here as well, and that was – we have a certain amount of capacity to handle our own concentrates to smelter and we have although material will go elsewhere. And I guess it was been conservative on that, and deliberately so that we didn't plan and then ultimately end up with concentrate stock piled particular time when extra copper in the market that you can't even get to market, whether particularly desirable.
But given that you've – your guidance for Sentinel from a production perspective has been lower, doesn't that actually give you increased room to put through Kansanshi or [indiscernible] ?
It does. And so I mean the – but it's a combination of the amount of concentrate on what grade it might be and we were just taking a more conservative view as to the grades. And what I mean by that is that Kansanshi produces at times, quite a lot of power out on the concentrate. Sentinel has covered in the concentrate and both of those things have some impact on smelters in terms of the amount of heat they generate. The power that is desirable winning multiple asset, and the carbon is desirable if it doesn't get too much because it save you putting culture, we happened to get both of those conditions together which occurs at times, then you have to reduce the throughput through the smelter itself.
Okay. Thank you very much for the color.
Thank you. Our next question comes from Greg Barnes, TD Securities. Please go ahead.
Yes. Thank you. So if I want to go back and revisit the S2.5 expansion. I believe you need to do it at some point to handle the higher sulfide or volumes coming out of the pit. And I believe when we were there again last [ph] season to do that not to impact the longer term issues in the pit two. So I'm wondering when does that S2.5 or S3 kick-in that in your view?
We went back and reviewed that for a variety of reasons, which should be fairly obvious, and we came to the conclusion that we didn't need to do anything for at least four years without actually even with the construction period having any significant impact, I just – I think kind of says, it would start to make some minor impact on Kansanshi that we have brought ourselves probably an extra, right in total probably five years to six years before, we have that done. So, I think the answer to your question, yes we will have to do it, but we don't have to do it within, we don't have to have it operating within the next five year plan.
So, do you guys straight to S3.0 then?
No, it will be S2.5. The difficulty with S3 which is now have a question is that, we then do need extra smelting capacity because, there is nothing, I would handle that, that will and then we definitely need duplication of our own smelter.
So, should we anticipate then the 235,000 tonnes from Kansanshi is what we should building at to the next five years to six years?
Yeah, next five years. We've got modest reduction there, Hannes Otto if you had the figure there or Alain...
Yeah, it was sort of to meet 210 or so kind of probably 215 or so in five years time.
Okay. Good. Thank you.
Thank you. Our next question comes from Alex Terentiew of Raymond James. Please go ahead.
Hi, guys. Excuse me, just got a couple of follow up questions here. Average cash cost over the past three quarters have been about $1.16 a pound, you've implemented a bunch of cost savings measures in the smelter, you're getting, contributing fully and your guidance to cost for this year 115 to 125, are you just being conservative as you've mentioned some items there on Zambia or do you see cost, is there something else going on perhaps at other operations that we use, you're getting costs higher? And the second question, you've got about $390 million from the KPMC loan that you as you see is now been moved from debt into other liabilities. I know this is not part of the net debt calculation recovering the purposes, but is there an offsetting line item here that cancels this out upon consolidation or does this loan have to be repaid by First Quantum in the coming years. I just want to make sure I've got my cash flow expectations correct?
I think that bill was – maybe that KPMC loan. So that is the contribution by our Korean partners to Cobre Panama, we've got a similar loan going into a shield loan going into Cobre Panama, the entity or the entity Cobre Minera Panama. And so there is no portion is eliminated on consolidation even our partners portion remains, there is no recourse to First Quantum on that portion and that's why we strip it out of the net debt because we just found that out of the debt we put it in other liabilities just for ease of the user of the financial statement. I think on the C1 cost which needs to be conservative on the guidance, because you got so many variables and exchange rate did have an impact of about $0.10 or so I think.
...for the full year. If you get for some reason a weaker dollar, that marked move against to you again so I think you should probably look at the sort of lower end of the guidance. But we just put a range because we've got so many factors influencing the C1 costs maybe at grade or exchange rates or at a commodity prices as well.
There also is the cost incremental cost of power that comes in from I think...
That's correct. We've...
Factored that in.
We factor that increase in cost of power in Zambia and as well in the C1 costs.
Okay. And I assume given the Zambian royalty news is so new you've not factored that into your assessment?
That's correct. We've used the 9% in our assessment of that. The royalty that will come in C1...
It's in the all-in sustaining type.
But so for the new metric will be in that, so it will impact that.
Okay. All right. Thank you.
Thank you. Our next question comes from Oscar Cabrera of Bank of America. Please go ahead.
Thank you, operator. Good morning, everyone. I wanted to get back to Greg's question in terms of the – it sounds like the bottleneck that you see in both Sentinel and Kansanshi in Zambia has to do with smelting capacity. In Clive's remarks you mentioned that the government might be removing the export tax. So if that were the case, what you think your total production in the Sentinel would be in 2019?
I think the transporting concentrate of ours is quite expensive. I think so, I don't think exporting the concentrate is particularly attractive economic solution. So you probably need to find a smelting capacity within country. Transporting it I think will probably add about a $500 a tonne, to get it to a port so you immediately eliminate about a $500 of margin. So probably [indiscernible] in the is the most economic solution.
Historically, we've done it when TCRCs in China are all very low. So but I don't think that's going to happen anytime soon.
Okay. Great. Thank you. And then second question, would you be able to segment the sustaining and stripping CapEx as you shown, we've had seen 2015 about $430 million and the guidance for the next three years is like a $100 million less. So, I was just wondering what that's coming from?
In terms of production of our sustaining CapEx, about 50% of that will come from Kansanshi. So and the other half, we would have had some additional CapEx in this year around lefkosa [ph] and also the trucks Guelb Moghrein. So, those pulled away and we get down to sort of more of a hardcore sustaining underlying number.
So, then in terms of Kansanshi that means that this is, I believe that Philip said that 2.5 not on until like five years. And so we can think about that going back on then, when the project starts or when you start construction there?
I think the expectation...
That CapEx starts within the five years to get productions something just after the five years. You got those timeframes there Hannes.
Yeah. I think we probably need to start to – follow was about two years to sort before we bring it on. So, probably at the time when we saw the capital spend.
But the sustaining CapEx does allow to some increased inflation inside that over the period, that we've guided.
But if we've done the additional stripping in that – in the event, but if we do make that decision to proceed with as 2.5. So that will be attempt to decision. So, sustaining CapEx is as that's what it is, is a sustaining operations.
I understand that, but the stripping you have to strip like should based on what you talk right you need to stress, you need to strip two years ahead of that. Is that right?
Yeah, it should be in those figures therefore I mean, certainly the three years it doesn't start and then it will start after a very late end of the five year plan.
We delivered that about...
We've only guided on three years of guidance of 200 per annum for 2016, 2017 and 2018.
Okay. Thanks very much.
Thank you. One moment please for our next question. And it comes from [indiscernible] of Bernstein.
Hello, good morning. Sorry, you just mentioned that that you could actually renegotiate you net debt to EBITDA with your lenders. So I was just wondering if the process has already started?
Look we are in regular discussions with the bankers and some of the discussions I can't disclose, but we are talking to our lenders about covenant label quite a bit. But I mean, we put other strategic initiatives on the go. So it's probably pre-mature now.
Okay. Thank you.
Thank you. Our next question comes from Kevin Cohen of Imperial Capital. Please go ahead.
Good morning, thanks for taking the questions. I guess in terms of the potential $1 billion debt reduction can you give us just a little bit more clarity on maybe how you approach that just given the market backdrop with the lot of sellers of assets out there and the general tone that will be the first question? Thanks.
I mean, we initiated our sales process quite a while ago. I think, we announced, I don't know, about October, we had the press release around that and we commenced for around strategic initiatives. So, we've got the process underway, but we've also got some other indicatives undergo as well.
It is fair to say there is a lot of other guys announcing that at the moment. Guy, I can't really comment on their processes, but I mean, we're on track in terms of our process that we've announced.
And then, I guess in terms of Sentinel and thinking about the economics, is there a particular copper price that the company underwriters to where it would be a cash flow generative asset or how do you guys kind of think about that sort of a little more medium-term on copper like maybe a year to two years out?
So, I don't understand, I don't follow that question. Is that on Sentinel and what copper price ...
Around Sentinel, yeah. Yeah, what type of commodity price tag is the company underwriting to in terms of that potentially being the cash flow generative asset, if it does impact ramp up for the projections that were given out on volume?
Look at the current cash process, should generate cost or cash, it's a metal ramping it up to the designs production levels.
All right. Thanks. Good luck.
Thank you. Our next question comes from Justine Fisher of Goldman Sachs. Please go ahead.
Good morning. I just wanted to follow-up on the Sentinel cost issue, because the costs are still a bit higher than what we had expected. Can you talk – can you call it how much of the cost there is related to higher power costs and I would have thought that this would be temporary given that it's a weather related issue in dam, but it doesn't look like the Sentinel expected costs are coming down over the next couple of years. And so is the company just assuming that the power costs stay high there, and does the power problem isn't resolvable or what's the reason for the Sentinel cost staying high for the next few years?
I think Sentinel costs for 2017 and 2018 largely where we've been planning. I don't think there is much change coming through. What we have seen and have factored into the guidance is a higher price in 2016 as it ramps up and have moved into commercial production. But would then expect that to step down over the following two years, and we haven't actually changed our plan in that respect.
And Sentinel would be by nature be more expensive than Kansanshi due to the lack of fire product greatest that we do receive from gold at Kansanshi, and the oxidized material that we treat with free asset at the moment. So you should think of Sentinel as being as probably $0.30 or so higher than $0.30 to $0.40 higher than the Kansanshi or probably $0.30 higher than Kansanshi.
So the unit costs will fall as the volumes increase...
Yeah. There we haven't check – we haven't our changed our thoughts on C1 for 2017 and 2018. So it's only for 2016 as a turnaround time.
Okay. Thanks. And then the second question is on Cobre, just looking at the CapEx guidance there for 2017 and 2018. It's the same number in 2017 and 2018 in this quarter's slide presentation. So I was wondering if that adjust at all the startup date, so when that Cobre Panama production should be expected. I know a lot of us are kind of modeling in a massive – aggressive relief in the numbers if you will in 2018 as that production comes online, but if you're spending the same amount in 2018, does that mean that we're actually going to see production in or is it much delayed?
In the original anticipated program for Cobre Panama, we would start commissioning by the end of 2017 and then, ramp up very slowly through the year and right through to the third quarter of 2018. Program now has a slightly more compacted ramp up in the back half of 2018. So, it's probably that and achieving the full capacity, but it is more intensely later on.
Okay. But so, we won't – so, we really won't see that much production from Cobre in 2018 and that will be much, much more loaded towards 2019.
Thank you. At this time, I'd like to turn the call back over to our speakers for any closing remarks.
Well, thank you very much everybody for coming on the call today. I'm sure there'll be some further questions you want to ask people. I'm sure there are people who had questions, who won't – didn't get an opportunity – an opportunity to ask them. Please feel free to either get in touch with myself or Sharon Loung, and we will endeavor to deal with them over the next couple of days or actually next, at least. Anyway, thanks again and see you in another quarter.
Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.
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