First Quantum Minerals (FQVLF) on Q2 2016 Results - Earnings Call Transcript

| About: First Quantum (FQVLF)

First Quantum Minerals Ltd. (OTCPK:FQVLF) Q2 2016 Earnings Conference Call July 28, 2016 9:00 AM ET

Executives

Clive Newall - President & Director

Juliet Wall - General Manager, Finance

Zenon Wozniak - Head, Projects

Hannes Meyer - CFO

Libby Senez - Group Reporting Controller

Analysts

Arjun Chandar - JP Morgan

Matthew Fields - Bank of America

Brett Levy - Loop Capital Markets, LLC

Ian Rossouw - Barclays

Ralph Profiti - Credit Suisse Securities

Daniel Lerch - Exane BNP Paribas

Greg Barnes - TD Securities

Alex Terentiew - Raymond James

Orest Wowkodaw - Scotia Capital

Sasha Bukacheva - BMO Capital Markets

Fraser Phillips - RBC Capital Markets

John Tumazos - John Tumazos Very Independent Research, LLC

Operator

Good morning ladies and gentlemen, and welcome to First Quantum Minerals Second Quarter 2016 Financial Results Conference Call. [Operator Instructions]. Please note that this call is being recorded today, Thursday, July 28th, 2016, at 9:00 a.m., Eastern Daylight Time.

I would now like to turn the meeting over to Clive Newall, President and Director of First Quantum Minerals. Please go ahead, Mr. Newall.

Clive Newall

Thank you very much, Operator. And thanks everyone for joining in today. On the First Quantum side we have Hannes Meyer, CFO; Juliet Wall, General Manager, Finance; and Libby Senez, Group Reporting Controller, as well as Zenon Wozniak, our Head of Projects.

Before we proceed, I will draw your attention to the fact that over the course of this conference call we'll be making several forward-looking statements and as such, I encourage you to read the cautionary note that accompanies our second quarter MD&A and the related results, news release, as well as the risk factors particular to our company which are detailed in our most recent annual information form and are available on our Web site and on www.SEDAR.com.

Following my opening remarks, Hannes will take us through the financial results which were published yesterday after the close of markets. After that, we'll open the line to take your questions. A reminder that the presentation which accompanies this conference call, is available on our Web site and can be accessed either on the Events section or on the Q2 2016 Results Conference Call button under the News section of the home page.

So to get us started, we’re very pleased with the quarter's results across all aspects of the Company. We completed two main initiatives in our strategy to protect First Quantum and its ability to continue to develop the Cobre Panama project amid volatile market conditions and the sustained period of lower commodity prices.

These being the financing and replacement of the $3 billion corporate facility with a new $1.8 billion one with improved covenants and amortization, together with the completion of the sale of Kevitsa.

Following these transactions, credit ratings agencies responded positively. S&P upgraded the Company's current B- credit rating outlook to stable from negative. Moody's upgraded from CAA1 to B-, with negative outlook, while Fitch revised our outlook to stable from negative and reaffirmed our B rating.

Importantly, the new amortization schedule dovetails well with the anticipated completion of project financing for Cobre Panama, as does the facility's maturity with the operation of the project. While on the subject of project financing, that process is moving along well through the various required phases. We expect to have it all completed by the second quarter of next year.

As a reminder, we're looking to secure up to $2.5 billion for the project. This type of financing is long-term, cost competitive and ideally suited to the long -- a long life project like Cobre Panama.

In summary, regarding the Company's financial position, we’re pleased with what has been accomplished and are confident that we will achieve the target project financing completion. Operationally, it was a strong quarter with record copper production and sales.

Lower copper C1 cash costs of production approaching 2009 levels is reflective of cost reductions and operating efficiencies across all of our operations. Much of this was attributable to the operation of our Kansanshi smelter, which is allowing the Kansanshi mine to operate without the constraints of inadequate local smelting capacity and wildly fluctuating sulfuric acid prices.

Sentinel, even though it is not yet been deemed in commercial production, was also a major part of the record production and sales. This is reflective of the -- our higher competence in effectively processing the transitional ore, more run of mine harder becoming available and increased and more stable power supply through the one power line through which Sentinel is now receiving close to 80% of its total power requirement.

The energization of the second power line is now promised for the third quarter of this year. Encouragingly, Zambia's President officially opened the first unit of the Maamba coal-fired power station in Zambia, which represents over half of the total 300 megawatt capacity. So, as we said before, we’re confident that commercial production can be achieved soon after the second power line is energized.

In terms of Sentinel's production guidance from the -- for the year, we did set a conservative range and remain comfortable with it, given the developments both operationally and on the power supply. At Ravensthorpe, efforts continue to adjust and minimize cash outflow as best possible, to this unsustainable low nickel price environment.

In the mean time, there are positive developments for the operation. Most immediately the price of sulfur, which is a material cost for the operation, continue to soften this quarter. But looking further out, there is a lot of interest in our particular mixed hydroxide products for use in the electrification boom that’s going on. Car companies are scrambling to catch up with the latest battery technology and are concerned about long-term supply and pricing for the essential components in batteries, which includes nickel and cobalt. It's fair to say that we’re getting a lot of incoming inquiries about Ravensthorpe's mixed hydroxide product. Of course these are commercially sensitive discussion, so we can't say a lot more at this point.

Our copper sales hedge program made valuable contribution again this quarter of the $0.08 a pound, the realized price. Since we started the program its yielded good results, so we continue to be active by adding to it whenever we think appropriate. Positive developments in Zambia were headlined by the changes to the mining tax regime, which came into effect on June 1.

Pertinent to first -- the First Quantum operations of the change in royalty from 9% to a sliding scale of between 4% and 6% depending on the monthly average LME copper trading price. The removal of the variable profits tax, and the suspension of the 10% export for nickel ores and concentrates, for which there is no in-country processing facility. I also want to mention that while VAT claims prior to February 2015 remain outstanding claims post 2015 are being received monthly.

Turning to our most advanced major project, Cobre Panama, which is making good steady progress, very pleasingly, the critical earthworks component continues at impressive results and significant focus is now on the more mechanical aspects of the project construction as equipment installation gets underway.

As witnessed firsthand during the various stakeholder visits to sites in Q1, and mentioned in our last call, the earthworks are well under control. The process plant earthwork is now essentially complete with the exception of the overland [ph] conveyor corridor, the mining pre-strip earthworks 30% complete than we’ve actually eased back on the tailings management facility earthworks which would otherwise have been finished too early.

Overall, 92 million BCMs of earthworks have been carried out. And the main [indiscernible] earthworks remaining, going forward, is the continuation of the mining pre-strip. The power station and its associated infrastructure continue as a priority and we expect first power production in the second half of 2017. We are prioritizing the operation of one of the 150 megawatt units ahead of the operation of the second unit.

In other areas of the project, the overall concrete progress is 69%, structural steel with 37%, and mills installation is progressing well with the installation of the fourth milling -- the fourth mill commenced. You may recall there are seven mills in total being erected.

Our project procurement activities are synchronized to our construction needs, and we continue to take advantage of the current subdued market environment, where shorter equipment deliveries and reduced pricing opportunities are being realized for equipment in both commodities. The project estimated capital cost of $5.48 billion remains very much intact.

We’re targeting commissioning and ramp up in 2018 with an objective of achieving an equivalent 60 million ton per annum throughput rate by -- in December of 2018. As I said at the beginning of the comments, we’re pleased with the strong results and progress across all aspects of the Company. The execution of important initiatives from our cost improvement program to the strengthening of our financial position through the refinancing and Kevitsa sale and the advancement of Cobre Panama are producing the desired results.

We’ve had some assists along the way, as well as such as the enactment of the change in the mining tax regime in Zambia, the provision of sufficient power to Kansanshi to enable normal operations, and the improvements in power supply to Sentinel. Nevertheless we remain vigilant to changes and opportunities in the industry to make sure we remain well-positioned to benefit from improved market conditions, which we’re confident are not far off.

So, Hannes, if you could just take us through the financial review?

Hannes Meyer

Thanks, Clive, and good day to everyone. So I will be talking to slides that we’ve loaded on the Web site and the first slide is on Slide 11 and its headed 2016 Q2 highlights. It's worth highlighting that these figures presented in this presentation are stated on a continuing basis, operating basis, and therefore exclude Kevitsa in both current and comparative period. The -- this follows the sale of Kevitsa to Boliden, which completed on the 1 June 2016.

Copper production reached record level for the second quarter running and totaled 131,000 tonnes. Production was 31% higher than Q2 2015 with higher production at the majority of our operations and additional contribution from Sentinel.

Nickel production was 2,000 tonnes below Q2 2015, due to lower grades as anticipated in Ravensthorpe's mine plan. Copper sales also reached a new record level for the second quarter running with sales totaling 132,000 tonnes. Copper sales were 65% higher than Q2 '15, on higher production and continued anode sell down at Kansanshi.

Anode inventory at Kansanshi was 33,000 tonnes at 30 June, a decrease of 13,000 tonnes from the Q1 2016 level. Copper C1 of $0.98 per pound for the quarter was $0.24 below the comparative quarter last year and $0.05 below Q1 of this year. This is driven by continued focus on cost-saving initiatives and operating efficiencies across the Group with all operations seeing a decrease in C1 from Q2 the last year.

Copper all-in sustaining costs of $1.32 per pound was significantly below the Q2 2015 level of $2.02 per pound. That’s on lower C1 cost, reduced Zambian royalties, lower sustaining CapEx and lower expiration and general and administrative expense.

I will turn to the Slide 12. Record copper production was 31% or 31,000 tonnes above Q2 '15, reflecting Sentinel pre-commercial production and higher production to almost all other operations. Sentinel contributed 32,000 pre-commercial production in the quarter, an increase of 11,000 tonnes on Q1 this year, as the ramp up towards commercial production levels continued.

Kansanshi production of 62,000 tonnes was 9% above Q2 last year, on higher sulfide milling volumes and improved recoveries on the mixed and oxide circuits. All other operations saw an increase in copper against Q2 '15 with the exception of Guelb, which was lower on reduced grades.

In Q2 2016, Kansanshi smelter produced 309,000 tonnes of concentrate, an increase of 27% against Q1 in 2016. The smelter achieved an overall copper recovery of 97% and produced 69,000 tonnes of copper anode and 309,000 tonnes of sulfuric acid. This has translated into cost-savings on acid, the TCRCs and freight against Q2 2015.

Nickel production was 2,000 tonnes below Q2 '15 due to lower grades as expected from Ravensthorpe's mine plan and lower recoveries, as a high pressure acid leach circuit was offline for an extended maintenance period. Coal production of 51,000 ounces was 6% below Q2 2015, due to lower grades and throughput at Guelb Moghrein.

Turning to the next slide, Slide 13, which is headed financial overview, spot continued market pressures Q2 2016s gross profit of $102 million for the quarter was $48 million higher than Q2 '15, as lower realized prices and higher depreciation were offset by increased sales volumes, cost savings, and lower royalties.

Net debt of $4.1 billion was $700 million lower than Q2 -- sorry, Q1 2016, driven by the $700 million sale and the receipt of part of the sales proceeds from Kevitsa, along with comparative EBITDA of $257 million. Comparative EPS of $0.06 per share in Q2 2016 were $0.03 above Q2 2015 on the back of stronger operating results.

Turning to the next slide, Slide 14, that covers cash costs. Copper C1 cost of $0.98 per pound was $0.20 -- 20% below Q2 2015. And this was achieved from continued focus on cost reduction, operating efficiencies across all operations, and asset cost savings at Kansanshi. Specifically, Kansanshi copper C1 cost reduced 30% or 22 -- sorry, $0.30 or 22%, against Q2 '15 due to the benefit of lower asset produced by the smelter, lower fuel costs and cost-saving initiatives along with improved recovery rates.

Group all-in sustaining costs of $1.32 per pound was $0.70 or 35% below Q2 '15 on lower C1 cost, the reduced royalties, lower sustaining CapEx and reduction in general and administrative and exploration costs.

The next slide, turn to Slide 15, gross profit, we touched on the drivers beyond this movement early in the presentation. However, this slide demonstrates the impact of our improved cost performance and increased sales volumes, which have served to more than offset the significant impact of lower market process. In addition, the sales hedges in place have mitigated some of the impact of lower market process.

Turning to Slide 16, on cost savings. So, savings generated from our cost reductions in 2015 continue to be evident with Q2 2016 cash cost being $119 million lower than Q2 2015 and all of this exclude the favorable impact of any foreign exchange movements. So as previously highlighted, the smelter has been a significant driver in the reductions at Kansanshi with a net saving of $39 million in smelter cost over Q2 2015. This increase from Q1 2016 versus Q1 2015, saving of $28 million in line with the increase in concentrate, treated, and acid produced during the current quarter. Employee contract and maintenance costs have contributed a $34 million savings, driven by reduced use of contractors headcount reductions and other cost-saving initiatives.

Slide also shows the impact of fuel, power, and freight savings, as well as reduction in general and administrative and exploration cost. In addition, the Zambia royalty expense of $38 million was -- sorry, it was $38 million lower than the prior year quarter, as Zambia royalties rights were reduced 20% from the 20% last year to 9%, which was in effect until end of May and it was 5% for the month of June.

The next slide on capital and it's Slide 17, production and control of capital expenditure remains a real focus at all operations and our net capital expenditure for the quarter was $194 million. This included $112 million net spend on Cobre Panama and $26 million spend on Trident or the Sentinel.

The lower table on the slide breaks out the remaining project spend between First Quantum's share and third-party share and that’s at the Cobre Panama project. Estimated remaining First Quantum share of spend is $1.32 billion, with $185 million forecasted to be spent over the remainder of 2016. 2017 and '18 remain forecasted at about $480 million per annum, net to First Quantum.

On the next slide, Slide 18, during the quarter we completed a new term loan and revolving credit facility to replace the previous facility. This accompanied with the receipt of the initial Kevitsa sales proceed, made the Company ended the quarter with $600 million of undrawn facilities and $900 million of unrestricted cash. At Q2 2016, net debt to EBITDA ratio of 4x was country within the 5.5x covenant set in the new facility.

Turning to Slide 19, on Zambia developments, the proposed mineral royalty changes were touched on the last quarter's presentation and that’s been enacted during the quarter. From the 1st of June, the copper mineral royalty right has been reduced to between 4% and 6% on a stepped scale based on the monthly average LME price, with the corporation tax retained at 30%.

At June's copper prices, this resulted in a 5% royalty compared to the previous 9%. If the royalty rate had been in place for the entire Q2, then royalty expense would have been further $10 million lower. The amount of VAT accrued by the Company's Zambia operations at 30th June 2016 was $241 million, of which $217 million relate to -- related to Kansanshi.

During the period, March '15 to June '16, Kansanshi made VAT claims and accruals of $120 million, of which $74 million has been received and $46 million remains outstanding. We’re on regular discussions with the relevant government authorities and continue to [technical difficulty] outstanding VAT claims recoverable.

As we mentioned in our MD&A, our Zambia operations were notified in December by ZESCO that power tariffs would be increased starting 1st January in 2016. These increases are being disputed and discussions with ZESCO are ongoing.

The next slide, Slide 20, which deals with the market guidance for this year. All guidance is shown for continuing operations and therefore exclude Kevitsa. Overall, group production guidance remain -- for all metals remains unchanged. C1 and all-in sustaining costs per copper both including and excluding Sentinel, has been reduced further from our previous guidance to reflect the embedded cost savings throughout the Company.

2016 C1 cost, excluding Sentinel, is expected to be between $1.05 and $1.15 per pound, down from the previous guidance of $1.10 and $1.25 per pound. All-in sustaining costs excluding Sentinel is expected to be between $1.40 and $1.60 per pound, down from the previous range of a $1.52 and $1.70. Nickel C1 guidance has been increased to between $4.50 and $4.70 per pound and all-in sustaining guidance increased to between $5 and $5.50 per pound, respectively.

Full-year total net capital guidance, which includes spend at Kevitsa until the date of sale is also unchanged, and broadly consists of $390 million of Cobre Panama, $160 million on capitalized stripping, and $160 million on other projects and sustaining CapEx. Thank you.

And I will now hand back to Clive.

Clive Newall

Thank you, Hannes. So, operator, could you open the lines for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Arjun Chandar of JP Morgan. Please go ahead.

Arjun Chandar

Hi, good morning. Thanks for taking the questions. First, do you have any comments on how proceeds from a potential project finance facility at Cobre Panama would be deployed? And would you consider refinancing the recently amended corporate credit facility?

Hannes Meyer

Yes, but we’re working on the project finance facility and that is anticipated to take quite a while. So we've indicated sort of first half of next year that to be completed. So I think proceeds from that facility we can drawn down and fund future ongoing capital spend. I mean, we can also use that -- the excess in -- on that facility that is above the future capital requirements, probably to return some cash to the group, if need be.

Arjun Chandar

Thanks. And then, second question, as you ramp up copper production in the coming years, what are your future thoughts around hedging and when do the existing hedges that you’ve put in place roll off?

Hannes Meyer

The existing hedges are in place until about June -- sorry January and some roll into February next year. So you can basically assume we -- the $2.20 or thereabout hedges cover us for the rest of the year and a little bit for next year. We continue to manage the financial risk of the Company and look at the pricing scenarios. So we can always introduce more hedges as we fit. So, we'll manage the FA [ph] such that we ensure that we cover the covenants and the liquidity of the Company.

Arjun Chandar

Great. Thank you.

Operator

Your next question comes from the line of Matthew Fields of Bank of America. Please go ahead.

Matthew Fields

Hey, guys. Just wanted to follow-up on Arjun's question about hedging. Thanks for the detail in the release about the extra tonnes hedged after the quarter end. Were those 20,000 or so tonnes hedged beyond January of '17? Essentially like keeping the nine months rolling forward that you’ve been doing.

Hannes Meyer

Yes, I think it's about January and February some of those hedges, yes.

Matthew Fields

And should we continue to expect hedging in this price context to ensure that Sentinel will ramp up and Cobre Panama construction goes smoothly?

Clive Newall

Yes, you can assume that. If we see process that we like to lock in, we will continue to do so.

Matthew Fields

Great. And then, my second question, just thinking about bond refinancing timing with the 2019 sort of getting closer and closer, in your decision making, do you feel like you’ve to wait for Cobre Panama to get to a certain stage or is that not relevant in your decision making?

Hannes Meyer

So if we look at the project finance facility that will push out some of that requirements. We do the project finance facility not that there is a need to that. It provides us with additional liquidity. So once that is completed, it buys additional time for us and additional cash flow and liquidity that can be applied against that 2019. But I think the closer you get to Cobre Panama ramping up, I mean, it also increases then the benefits associated with the refinancing closer to that time.

Matthew Fields

All right. Great. Thanks very much.

Operator

Your next question comes from the line of Brett Levy of Loop Capital. Please go ahead.

Brett Levy

Hey, Clive. Hey, Hannes. Why is the financing going to take this long and does it have something to do with securitizing assets in Panama? Or just give a little flavor as to what this financing is going to look like. Is it going to have a payback schedule or is it going to give you a lot of flexibility? Is it going to be expensive? Will it be above everything else in the capital structure? Just whenever someone says it's going to take nine months to get a financing done, I think it starts to sound a little complicated. And maybe if you guys could give some color around why it's going to take that long.

Hannes Meyer

Sure, Fred. The project financing only takes a while. So you go through a process and maybe it's useful to explain some of the process. So there are sort of advisors appointed, you go and see various export credit agencies. So we’ve been through that phase. We get a indication of interest in sort of providing that export backed guarantees. Post that, we assess that and we went into a -- what we call a Phase 2 of the project financing, and this is the Phase we currently in. In this we’ve to appoint various technical advisors on the environmental side and then on the technical, on the feasibility side. So we’re just about -- through that process. Now we’ve interviewed the guy, so we will appoint various advisors shortly. And they then essentially work for the banks on this process. So there is also quite a bit of time involved in that . post that, you go back -- you circle back to the export credit agencies and you continued completing this. So, unfortunately it is sort of tedious process and you're also sort of down by various elements. US XM as well as sort of part of that and then depending on what happens in terms of U.S politics that might be delayed, as well. So it's just a long process that you just work through and -- that’s why we just give us also a bit of time to get through. Its more involved and more complicated than be a corporate facility.

Brett Levy

And then any update in terms of what you think sort of the all-in costs and the C1 cash costs will be for Cobre Panama, sort of in the first year of ramp, the second year of ramp? I'm not asking for a forecast, I'm asking for sort of what you guys are targeting in terms of where this mine will sit on the world cost curve.

Clive Newall

We’ve used the original Inmet [ph] numbers up to now, which I think were -- these are now what three, four years old, but I think was $0.93 for the first year, assuming there is some escalation. I mean, effectively we’re targeting around the dollar just either, just a little more on the dollar or just little under.

Brett Levy

And that's for C1 or all-in?

Clive Newall

About C1. That’s we -- until we’ve done all the preproduction drilling of the -- or what else -- the really detailed work, we won't have a hard number until then.

Brett Levy

All right. Thanks very much, guys.

Operator

Your next question comes from the line of Ian Rossouw of Barclays. Please go ahead.

Ian Rossouw

Thank you. Hi, guys. Just a question on Sentinel. I see the sales are still quite a bit below production. Just wanted to get if you can maybe just give me an update on sort of throughput rates and the recoveries during the quarter, and also if there was a specific reason for this sale. I’m just wondering if there is still off-spec concentrate being produced.

Hannes Meyer

Our concentrate is good. I mean, there is no quality issue in terms of the quality of the off-spec concentrate. I think that was probably an issue about a year-ago, about end of last year. But I mean, we well passed all of that. So we’ve got good quality concentrate. No issue in terms of that. You typically see it, but over delayed. So our June production month was actually pretty good. I think we had about 15,000 tonnes or something like that in June. And that production will typically get sold in sort of July, August. And I think that’s sort of the major part of the explanation between the disconnect in the production and sales that the ramp up really happened to a large extend, end of June. And those -- that production will only be sold in Q3.

Clive Newall

In terms of recovery, Ian, it depends on the date. It varies on a day-to-day basis, depending on the proportion of the weathered or the fresh material. So in the fresh, when you’re mining a big day of first rock, see the recoveries in the sort of 80% to 90% range. Whereas if you’re in soft materials its around 60%.

Ian Rossouw

I mean, do you’ve the actual average for this period?

Clive Newall

I’m sure we do somewhat. I’m looking.

Ian Rossouw

I can get it later, if you don’t have it.

Juliet Wall

The forecast average is around about 83% for recoveries and for grade round about just over 50%.

Clive Newall

Yes. So, did you hear that? So [multiple speakers]. Yes, so around 80% and that just reflects that we’re still mining a mixture of hard and soft material.

Ian Rossouw

Okay.

Clive Newall

But with every day that goes by, the proportion of harder material gets bigger.

Ian Rossouw

Thanks. And just a second question on -- I see there was a slight shift in CapEx from $40 million less stripping, and then some $40 million going into sustaining and projects. Can you maybe just give a bit of details where that’s coming from?

Juliet Wall

Yes, I think when we spoke about this maybe last quarter, we always said there is a bit of contingency in capitalized stripping and also with Kevitsa not being there in the second half of the year. So that’s the reduction in capitalized stripping. And then that’s myriad [ph] by some increase in spend -- project spend on Sentinel and some other smaller projects as well. So, our overall CapEx guidance remains unchanged. It's just a slight reallocation from capitalized stripping to other projects.

Ian Rossouw

All right. Thanks, guys. I will leave it there.

Operator

Your next question comes from the line of Ralph Profiti of Credit Suisse. Please go ahead.

Ralph Profiti

Thanks, operator. Clive, of the $2.4 billion remaining CapEx at Cobre Panama, could you remind me how much is remaining in contingency? Where do you stand on that number as a potential savings, given the progress you've made on [indiscernible]?

Clive Newall

You got a hard number or …?

Hannes Meyer

Contingency was at [indiscernible].

Zenon Wozniak

Yes, the contingency in the estimates about 300 million at the moment and that's still all intact.

Ralph Profiti

Okay, great. Clive, I’m wondering if you can discuss what proportion of the Zambia power is being offered at this $0.1035. Is it equivalent to the 30% power rationing that we saw last year at Kansanshi and Sentinel? And how will this -- and how will the commissioning of the Maamba plant impact that number? Thanks.

Clive Newall

No, that number is for all of our power. That’s the blended cost of the power, if you like, and it will remain at that level until it changes.

Hannes Meyer

Until we reach some resolution. So that is the asked for 200% of the power.

Ralph Profiti

Got it. Okay. Thank you for that clarification.

Operator

Your next question comes from the line of Daniel Lerch of Exane. Please go ahead.

Daniel Lerch

Hi. This is Daniel Lerch speaking from Exane. Thanks. Thanks so much for taking my question. Just two quick questions. First one on your cost guidance, C1 cost, you had quite some cost improvement in the quarter. Excluding Sentinel, you’re at midpoint of your guidance at $1.10, whereas, when you’re standing in the second quarter at $0.98. Where is this increase, maybe you can clarify where the increase in your guidance comes from when looking at the full-year guidance? And the second question, just quickly on the royalty regime in Zambia. There will be elections in August. Do you see any risk to these new rules following the elections or are you quite confident on that account? Thanks.

Clive Newall

Do you want to deal with the cost one?

Juliet Wall

Yes, in terms of our guidance, I think we have always said that that we do give relatively cautious guidance. There are obviously some uncontrollables within C1 cost, which can be around FX rates and also metal prices for byproducts as well, and any changes in production, we obviously, our production is ahead of plan. So, we allow to take account of those fluctuation.

Hannes Meyer

I think to deal with your question on the royalty in Zambia regime, so we saw the royalty rates at 20% early last year. When President Lungu became president, that moved to 9% pretty quickly. And there are changes enacted now to dealing with it from 4% to 6%. So I think within the current government there is certainly a desire to work with the industry and make sure that it is sustainable in the long run. And I don’t see this changing quickly post the election. I think the copper industry is quite important in Zambia and I think in a sense we will prevail in the setup. So, we’ve worked hard and it's been a tough ride in the last year and half, than I think we’ve now got to a basis where there is understand of the impact of such high royalty rates on mining and that you need to nurture this industry.

Daniel Lerch

Thanks so much. That’s very helpful. Maybe a quick follow-up on the cost question, if I may, just to confirm, so basically if you’re saying you’re quite conservative on your guidance, does it mean that at the moment, for example, for byproducts, you are not assuming spot commodity prices for the rest of the year? Is that a fair assumption?

Juliet Wall

Our focus, for example, on gold is slightly below current spot, it's all about 1200 -- to 1200, for example, we use for gold and just slightly using [indiscernible] just come down a little bit, it was about a dollar recently, but we’d have had that in $0.90. So we do -- we’re relatively conservative on that.

Daniel Lerch

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Greg Barnes of TD Securities. Please go ahead.

Greg Barnes

Thank you. Just wanted to go back to Sentinel again. You produced about 70 million pounds in the quarter, and it looks like you capitalized commissioning costs and other costs of about $70 million, implying pretty good cost performance or am I missing something in the numbers there?

Hannes Meyer

I mean, the capitalized is -- it's post revenue as well.

Greg Barnes

Okay.

Juliet Wall

Post revenue of $60 million.

Hannes Meyer

Yes.

Greg Barnes

So $130 million really, on 70 million pounds basically is what we are talking about of costs?

Juliet Wall

Okay. So we disclosed capital expenditure of $70 million in the quarter. And then on our presentation we’ve given you the project spend of $26 million.

Greg Barnes

Okay. So, $70 million plus $26 million then?

Juliet Wall

Less $26 million.

Hannes Meyer

So the $70 million was total capitalized, of which $26 million relate to sort of capital bits and the rest relates to operating losses whilst you in ramp up.

Greg Barnes

And that’s net of revenue received from the copper sold?

Hannes Meyer

That’s correct.

Juliet Wall

Yes.

Greg Barnes

Okay. Got you. I will back calculate the numbers from there then. Thank you.

Operator

Your next question comes from the line of Alex Terentiew of Raymond James. Please go ahead.

Alex Terentiew

Yes, I just want to go back to Sentinel here. What measure are you using to declare commercial production? And when could we expect that to happen?

Clive Newall

We look at various measures. So it is throughput, it is recoveries. I think we’re basically getting to those numbers now pretty close to it. We also look at the -- that second power line and the energizing of that, because we do require in the long run and in our mine design we’re going to hit harder or later in the year on a more consistent basis and we'd require that second line to be energized in order for the mine to operate as designed. So I think it is sort of closely tied into that power line. We probably expect that to be now in sort of Q3 to hit that commercial production sort of triggers.

Alex Terentiew

Okay, great. Thanks. And that kind of leads into my next question. It's on power. It looks like the Kariba water levels have peaked and maybe even started to drift back down a bit, and relative to last year, they are below the levels that we saw in the dam at this point. So, my question then is, with the new sources of power being supplied to the Zambian grid this year, do you see the risk to power supply reductions later in the year being lower than last year? And perhaps you can remind me that what new incremental sources of supply or expected supply are coming onto the grid.

Clive Newall

Of course the Maamba power station will ultimately be a 300 megawatt of new supply.

Hannes Meyer

And Itezhi Tezhi, 120 megawatt at Itezhi Tezhi which is hydro.

Clive Newall

Yes, and these are all coming in over the next few months and will certainly make up for any losses at Kariba.

Alex Terentiew

Okay. And the imported power, is that -- does that have flexibility to go higher? Is there capacity on the grid to import more power if needed?

Zenon Wozniak

There is certainly [ph] capacity on the grid too. I mean, the power moves around Southern Africa quite a lot, that whole grid is sort of interconnected. So there is certainly capacity to import more.

Alex Terentiew

Okay.

Clive Newall

I think there is very little risk, Alex, now with -- that mix of the availability of brought in power, new coal fired power and whatever, however much it rains this year. So we don’t see a risk there.

Alex Terentiew

Okay. That’s good. Thank you.

Operator

Your next question comes from the line of Orest Wowkodaw of Scotiabank. Please go ahead.

Orest Wowkodaw

Hi. Its Orest Wowkodaw. Just a question again about Cobre Panama. Did I hear correct that the project financing has slipped, I guess from late this year into the first half of next year? And when you do get that, can we assume that you are going to or you are going to have the ability to turn around and wipe out your corporate credit facilities in order to take out kind of any net debt to EBITDA type covenants or just curious how to think about that?

Hannes Meyer

Orest, yes, we have -- the project finance, I mean, it was sort of the indication we gave early. I think now that we’ve further advanced in the process and dealing with this, we sort of -- that’s why we give you a date and say, sort of second half next year. Probably its sort of around mid next year, second quarter next year. And I think in terms of how we should think about it, I mean, I think we will have to assess the position at that time if we retire the corporate facility or not. We’ve got production ramping up at Sentinel. We feel comfortable with those covenants in place. So I don’t think it’s a -- there would be a need to retire this facility.

Orest Wowkodaw

Would the project financing allow you to retire facilities the way they’re structured -- way it would be structured?

Hannes Meyer

I mean, to the extent that you have -- if we draw some of that cash up to the corporate level and to retire some capital at the Cobre Panama level, of course you can use that into to do something else.

Orest Wowkodaw

Okay.

Hannes Meyer

But, I mean, that’s not our thinking at the moment. I mean, we will look at that when we get there next year.

Orest Wowkodaw

Okay. And in terms of just the Cobre Panama CapEx, I’m just wondering if you see further opportunity to reduce the CapEx number just based on the fact that the earthworks are now largely behind us.

Zenon Wozniak

I will comment, if you like, Clive. Look, we keep working on that all the time, obviously. We’ve got contingency which remains intact. We’ve taken about a $1 billion out of it so far. So we’re not anticipating major savings going forward. I think we’ve identified pretty well all of those, but we continue to be very efficient in the field. So that’s good. And there will be bits and pieces perhaps and we will see how the contingency holds in as we go, which is at about $300 million at the moment. But we still got two more years of construction thereabouts. So we will keep working at it, but I think we’ve been able to identify the largest savings and realized lot of the efficiencies in what we’ve reported so far. But we will obviously keep working at every bit and pieces we can.

Orest Wowkodaw

Great. Thank you very much.

Operator

Your next question comes from the line of Sasha Bukacheva of Capital Markets. Please go ahead.

Sasha Bukacheva

Thank you. Yes, that’s Sasha with BMO. Quick question to clarify, if your cash cost guidance based on assumption that you are paying the new power tariff or the old power tariff? So $0.10 or lower?

Juliet Wall

Well, in terms of our forecast and budget, I think we said this last quarter, we’ve included what we deem to be an appropriate charge within our forecast such, but we don’t expect to have to revise those offsets in terms of cost.

Sasha Bukacheva

But just -- so just to understand the sensitivity, if you were to pay the new tariff, how would that affect your cash cost or how could that affect your cash cost?

Hannes Meyer

It wouldn’t change our guidance.

Juliet Wall

Yes, it wouldn’t change our guidance.

Sasha Bukacheva

Okay, excellent. And then, the second question I had, there was a note sort of that said that the Board has approved, but not yet committed to additional capital expenditure. So could you clarify if there is -- the other capital expenditures being contemplated outside your guidance? And, if so, what’s the scope and nature of those?

Clive Newall

We are all looking slightly confused there, Sasha.

Hannes Meyer

I’m just going to have her look at the MD&A then quickly …

Sasha Bukacheva

Yes, that would be page 24. There was like a note on page 24 of the MD&A in the liquidity outlook.

Clive Newall

We will just check that and we will tell you in a minute.

Juliet Wall

Yes, because our CapEx guidance remains unchanged.

Sasha Bukacheva

Okay. And so there are no other costs or there are no other projects that you are sort of contemplating that might be added to it? [Indiscernible]?

Juliet Wall

Yes, I think when you’re looking at note 24, that’s just total commitment. So its talking about the total commitments in place.

Hannes Meyer

Yes, it's not new projects.

Juliet Wall

Yes.

Hannes Meyer

We don’t have new projects that we’re planning or that we’ve got approved.

Sasha Bukacheva

Okay. Thank you. And then my last question is on Ravensthorpe. So it sounds like there is some opportunities there to realize higher revenues, but the mine is still burning cash. So how do you think about it? Is there a timeline in mind where you might consider putting it on care and maintenance if it doesn’t begin generating positive cash, or how should we think about the future of Ravensthorpe if nickel price doesn’t improve?

Clive Newall

Maybe I will deal with a bit of it and -- so in terms of the revenue, we’ve hedged about six months of sort of production from Ravensthorpe in early July. So we’ve got cover on the nickel side, which helps us, I think, from a EBITDA perspective, at least sort of breakeven at Ravensthorpe while we’re evaluating the other opportunities and I will let Clive deal with that.

Clive Newall

No, I wasn’t really going to add to anything about the other opportunities, because it's very sensitive commercial discussion. So -- but we’re hopeful, we'd be able to put something together in the near future and -- but its fair to say that all of or any operations are always under review in times of low metal prices. So it will remain that way.

Sasha Bukacheva

Okay. Thank you. That’s it for me.

Operator

Your next question comes from the line of Fraser Phillips of RBC Capital Markets. Please go ahead.

Fraser Phillips

Thanks. Clive, I’m sorry, I may have missed some of what was discussed about power in Zambia. Could you just repeat for me your expectations about when you are thinking you might get full power later on this year?

Clive Newall

So, the first generator, 150 megawatts at the new Maamba power station is already started up and is delivering power into the grid. At the moment it's delivering southwards to alleviate the power shortages in Lusaka and elsewhere, whilst they just finish a couple little things on the northern line and they have announced that the opening ceremony I think it was that they were going to switch on the northern power line that is to connect us in at the end of this month.

Fraser Phillips

Okay. And so that …

Clive Newall

To quote them.

Fraser Phillips

And that leaves you to build a -- or gives you the confidence you can get up to commercial production at Sentinel as a result in the third quarter?

Clive Newall

Soon afterwards, yes. As soon as we get that power in, we can really start focusing on that.

Fraser Phillips

Okay. That’s great. Thank you.

Operator

Your next question comes from the line of John Tumazos of John Tumazos Very Independent Research. Please go ahead.

John Tumazos

Very much. Thank you. If we were to look forward to July 2019 or January 2020, and Cobre Panama has been commissioned, everything is rosy. What do you think your next priorities would be? You have development properties in Argentina, in Peru. There is still a little debt to pay down. I’m ecstatic at the dividend announcement and the progress at hand, and looking forward to after you’ve slayed these dragons.

Clive Newall

I think it's fair to say, John, that we will continue to review the commodity markets and other factors before we make any decisions about what we do next. I think the project in Argentina has clearly got more attractive of recently as with improvements in politics in that country. But for the time being, we're just focusing on what we’re building at the moment and will let you know in 2020.

John Tumazos

Thank you.

Clive Newall

And I’m glad you’re happy with the dividend.

Operator

Your last question comes from the line of Ian Rossouw of Barclays. Please go ahead.

Ian Rossouw

Hi, guys. I just wanted to follow-up again on Sentinel. Just, I mean, you haven't given any details on that, but whether you’re happy with cost performance, because if you do strip out the CapEx and see what’s actually been capitalized, it looked like the asset was burning about $44 million of cash in Q2 and $43 million in Q1. I mean, is that fact -- is that just because it's not fully ramped up yet, so -- yes, maybe just a comment on that side?

Hannes Meyer

Yes, Ian, I think if you look at that production levels, I mean, it was quite low in the early bit of the -- this year. I think in June we really got better numbers, but I think we need that to be more consistent and we probably see that more consistent numbers coming through and the more volume will obviously drive down your unit cost then.

Ian Rossouw

When do you actually expect to breakeven in terms of, I mean, in Q3 or Q4?

Hannes Meyer

I mean, various factors going into that, Ian, including copper price and the like, but I mean …

Ian Rossouw

Yes.

Hannes Meyer

… we should be getting very shortly.

Ian Rossouw

Okay, cool. Thanks a lot.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Clive Newall

Thank you, operator, and thanks everybody for your participation on the call today. If there is any follow-up questions, please contact myself or Sharon Long and we will do our best to get back to you. Thanks for listening. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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