Lundin Mining's (LUNMF) CEO Paul Conibear on Q2 2016 Results - Earnings Call Transcript

| About: Lundin Mining (LUNMF)

Lundin Mining Corp. (OTCPK:LUNMF) Q2 2016 Earnings Conference Call July 28, 2016 8:00 AM ET

Executives

Paul Conibear - President & CEO

Marie Inkster - SVP & CFO

Peter Quinn - COO

Analysts

Alain Gabriel - Morgan Stanley

Matthew Fields - Bank of America Merrill Lynch

Orest Wowkodaw - Scotiabank

Stefan Ioannou - Haywood Securities

Alex Terentiew - Raymond James

Joseph Gallucci - Dundee

John Tumazos - John Tumazos Very Independent Research

Operator

Good morning my name is Melissa and I would be your conference operator today. At this time I would like to welcome everyone to the Lundin Mining Second Quarter 2016 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. [Operator Instructions]

Mr. Paul Conibear, President & CEO, you may begin your conference.

Paul Conibear

Thank you very much operator and thanks everybody for joining us today for Lundin Mining's second quarter earnings call. I naturally point you towards our cautionary notes while obviously making some forward looking statements during the course of the presentation and the Q&A and after that. Joining me today to assist in answering questions at the end of the presentation are Marie Inkster, our Senior Vice President and Chief Financial Officer and Peter Quinn, our Chief Operating Officer for the company.

We are pretty pleased with how the company has performed year-to-date in Q2. Our operations continue to perform well and position us to meet and exceed full year guidance on metal production, capital spending and cash costs. All mines were cash flow positive during the quarter contributing to additional balance sheet strengths. Corporate production guidance has increased to reflect above time production primarily on greater throughput at Candelaria and full year cash costs at Never-Corvo and Candelaria on a corporate basis have lowered given the results to date and ongoing success of our cost savings programs.

Strong Nickel production once again Eagle was due to improved head grades and particularity of sanding of Nickel. Neves-Corvo Zinc plan operations exceeded expectations year-to-date with stable throughput and good Zinc recoveries. Zinc production at Zinkgruvan was lowered in Q2 due to some hardware that we are getting in the Zinc stokes and also due to the processing of copper ore and both lines with the copper and zinc lines processed a large stockpile at Detroit that we had of copper ore during the quarter and which has now reverted back to primary Zinc processing.

Majority of our sales as you can see were through Candelaria with good contributions with each of Neves-Corvo, Eagle and Zinkgruvan. 64% of our sales are derived from copper and you can see there is an increasing contribution n quarter by quarter from Zinc revenues and we would expect that to continue and improve. The Zinc markets are quite a bit stronger and we think the future of Zinc is going to be outstanding.

I will turn the next few slides over to Marie Inkster and she will give some financial statistics to quarter and year-to-date.

Marie Inkster

Thank you, Paul. The operating earnings we see are down are $108.5 million compared to last year's Q2. The biggest factor in the production was the decline in the metal prices. Sales volumes were also large factor and this mainly relates to copper sales which were down 13,000 compared to last year.

We also had no contribution from Eagle mine this year whereas last year in the second quarter Eagle mine had just over $11 million of operating earnings. So offsetting these were some smaller benefits from our cost improvements from our foreign exchange and other items but not enough to definitely offset that large difference from the price and volume.

On this next slide you can see that the detail driving that reduction related to the metal prices. You can see the impact on the revenue this year as well as operating earnings and the revenues were down a $159 million compared to last year's Q2. The operations generated over a $150 million from operating cash flow again down from last year but great results from the mines despite the challenging low price environment.

Our net earnings were impacted by the Tenke write-down during the quarter. During the quarter lean outs from the other sales by Freeport from their Tenke interest resulted in impairment indicator for Lundin Mining. So Lundin Mining's Tenke value was about $1.9 billion and the implied price from the announced transaction is much less.

We therefore had to reassess our assumptions for Tenke. We have previously included assumptions for the future expansions and resource conversions for a much bigger mine license value for Tenke. Given the potential change in operator ship for Tenke we have changed our assumptions and taken any expansion scenarios out of our base model resulting in a significantly shorter license mine and a resultant reduction in our carrying value.

On Slide 8, we see the typical anomalist matter that people typically look for when they normalize the earnings. The impairment is here and he only other thing I have noted here is the tax valuation adjustments. We are not recognizing the future tax benefits of the losses at Eagle at this time because our current price tax and our mine plan don't give us the desired level of certainty that we will be able to use those losses.

This could reverse in the future if we have positive decisions on Eagle East project or a more favorable price to look for Nickel. And so this leaves us to our balance sheet position so you can see that our financial position continues to improve steadily. Our net debt decreased to $342 million at the quarter end and we can expect continuing improvements in our balance sheet position and we currently have about a billion dollars of available liquidity. So turn it back to you Paul.

Paul Conibear

Thanks, Marie. As noted we have been able to improve our corporate guidance from Candelaria up so it improves the range there. Expect a little bit of production for the full year. These are the 80% numbers taking twenty. We have improved the cash cost guidance from a $1.45 down to $1.35 down to Candelaria. We have improved the dollar guidance from $1.60 down to a $1.55 in Neves-Corvo and Freeport has confirmed a forecast of the $1.28 per pound of copper at Tenke.

And finally, due to performance year-to-date by product credit expectations, Zinkgruvan and cash cost guidance system has been improved $0.40 per pound of Zinc. Capital expenditures, we have excellent discipline in our operating teams as they have gone through cost deferrals, cost reduction program. We have been able to knock off additional $35 million from our projected spend this year.

Our most recent guidance was $220 million in CapEx for the year and now we are down to $185 million and in our press release we have given some additional detail of how that's broken down between expansionary product and sustaining capital and deferred stripping.

We have increased our exploration spend, we have very good success drilling at Eagle East. We have continued to have good success at Candelaria so we have improved our budgets from $40 million to $50 million and we have additional success, we have increased those budgets once again and looing to take advantage of really effective drilling campaigns and low drilling costs in this low price environment.

Moving to a few comments on each of the operations starting obviously from Candelaria, we have had excellent production year-to-date really led by some software ores and very high throughputs to the mill and good recovery from the lower grades. Really our total mine and milk costs have been consistent with Q2 last year but affected overall by lower grade and lower metal sales prices.

So, the unit costs went up from last year but still very competitive. Very major milestone, we achieved on the Los Diques project that's the new tailings facility that's been under permitting and we have advanced very well with those works relocating state highways and power lines and the big milestones in the quarter, two that we achieved were on a construction permits in particular to reduce the free board in the existing dam which gives us a year of capacity there and so Sernageomin who is the mine's department and literally responsible for dam approvals just recently gave us the construction permits for the Los Diques dam. That was a major milestone, important one for us.

We have got one other critical permit to get which we believe will be important matter of course now that Sernageomin has approved the dam, the water board which is DGA, we expect to get their approval Shortly and we will be able to mobilize heavy equipment in the very near term on the big dam giving us ample time to get that constructed before the existing facility is full. We continue to progress with conceptual level studies, feasibility studies on many different options to enhance the longer term value of Candelaria. We are currently mining out of three underground deposits between 12,000 and 14,000 tons a day form those deposits as compared to about anywhere to 60,000 to 75,000 tons a day that comes out of the pit.

We have a total of 5 underground deposits. All of them have exploration upside. We continue with the major exploration program on those to increase the resource space and the reserve base and the feasibility studies look at a lot of different options between trucking and conveying and different tonnage scenarios from the underground mines to feed their higher grade 1% ore as compared to the 0.5% ore from the pit. And some of those scenarios include the concepts of expanding debottlenecking the mill from anywhere from 15% to 30%, debottlenecking. So we will progress and hopefully reach some milestones internally on those studies shortlisting in Q4 this year and progressing the decision making on what to do with underground enhanced production scenarios.

As noted in the Q1 call we do plan to put a life of mine out and improved life of mine for both the pit and underground operations and production profile. That would be later this year when we come out with that.

Eagle mine another great quarter and another great half year here. Its second year of operations produced just under 7,000 thousand tons of nickel and 5,500 thousand tons of copper and concentrate with very high quality concentrates, very good recovery, very good concentrate traits. Cash offering costs and extremely competitive. $1.75 per pound of nickel. That's lower than the year-on-year but we have continued to be very competitive with excellent margins here.

The big milestone for the Eagle asset in Q2 was the publishing of both our first inferred resource for the Eagle deposit, 1.2 million tons of 5.2% and 4.3% copper so extremely high grades and we have put together a preliminary economic assessment which we also publish the results of. We will be filing the technical report in the next couple of weeks so the analysts could see some additional detail there.

We have been optimistic enough about the exploration success we have there that we have started to drive the access ramp which is a spiraling ramp which goes down directly below the Eagle deposits. So I just turn to Slide 17 and saw a small print there but the large baseball time and looking facility in the middle is really the access to the mine and the surface so the outer goes down and the blue line that you see and over to the west or the left to the Eagle mine deposit.

That's where we are mining now and the green are the spiraling ramps that go down below that and we plan to probably take a twin ramp across to minimize any additional ventilation raises to the surface across to the Eagle East deposit. You will see that to the right of the mine surface area. So, it's in relatively close proximity to all the facilities. It's relatively low risk technically accessing the Eagle East. We will be completing a feasibility study by the end of the year just to tighten up our estimates on our resource and the access costs and given us a basis for full approvals and we will be progressing with all the environment approvals and amendments to existing permits which we think should be pretty straight forward.

Our attempt is subject to feasibility and requisite approvals just to have Eagle East contributing significantly to Mil feed by about 2020. So really 3 years or 4 years between proving and underground development to access Eagle East and once we get that into production we will expect material value add to this [indiscernible]. So very pleased with that. We have expanded our drill and investment program by initial $10 million and Eagle for the balance of this year keeping more drill rigs on site other deeper targets and on Eagle East area.

Moving to Neves-Corvo, copper was a little bit lower year-upon-year and this was according to plan. We have expected to get into some of the more source that we get from time to time on copper in deposit particular the grades are good but the metallurgy is complex so we can lower recoveries. We normally try to make up for that with throughput, we are mining basically for plan in aggregate for copper to meet our guidance of 50,000 to 55,000 for the year. We had an excellent quarter and excellent year-to-date on Zinc production. It's going particularly well with very stable recoveries and sort of the 76% to 77% zinc recoveries.

Cash cost was a $1.49 for the quarter and we are confident enough in the progress there that we have improved our C1 guidance for the year as I previously mentioned. Zinc expansion project is a big upside at the Portuguese operations there. We have previously published feasibility results that increased annual zinc production results by 80,000 tons per year of zinc so that's pretty substantial.

Doubling of zinc production at this facility. We are currently in the permitting phase of that investment consideration. We have the Portuguese government approval on the scope of the expansion. We are now submitting the EIA which is a pretty straight forward document and we are hoping in the best case scenario to have the EIA approved by year end although there is a not a lot of mining that goes on in Portugal so we will be little bit pioneering an approval process for this kind of expansion.

And I would hope we would be able to write to the board at year-end, management's recommendations on going ahead on the zinc expansions so obviously more favorable zinc environment. I have been pretty open to the marketplace that this is a relatively low risk technical and investment decision to make here with an excellent zinc ore body. We are making some modernization and improvements. At the Neves-Corvo achieving some of those improvements is the pre-requisite to this investment. I think a steady dollar and better zinc prices is the pre-requisite. In particular we want to see the EIA approved before we go ahead with about 250 million euro investment in the zinc expansion.

Zinkgruvan, really good production year-to-date pretty much as expected. We maintain our guidance on production from this facility and it improves the cash cost guidance and improves the guidance as I mentioned. We have a modest expansion going on there, improving the overall mill facility housing by 10% and also improves the reliability of the upfront end of plant in the crushing and grinding and it's a really low cost, less than $20 million investment here with a very good return as expected.

Moving from Tenke Fungurume, really good quarter, very steady quarter and a very good year-to-date. Copper production of 55,000 tons of count load on a 100% basis and significant amount of cobalt. I would say this would be a record year for cobalt production. For Tenke, this is the seventh full year of production and each year Freeport has been able to achieve some record of some type. Cash operating costs for Fungurume in the best quartile in the industry, $1.34 per pound of copper cap load produced versus the Q2 results. That is lower than year-upon-year or higher cost year-upon-year due to lower cobalt by product cut price, but cobalt prices have since improved. We have achieved about $22 million of net cash back to lending mines from Tenke including the distributions year-to-date and we continue to guide $50 million to $60 million as Lundin Mining's expectation of cash back to us from Tenke this year.

As believed, most of the callers are aware that Freeport announced on May 9, their intention to sell their interest in Tenke to China Moly. Lundin Mining has a right of first offer on that sale. Recently it was announced that the offer period was extended to the 15 September. As Lundin Mining is in process of considering all options in regards to its Tenke, we are unable to take any questions on Freeport sales announcement or Lundin's intentions regarding our 24% interest in the right of first offer called. Naturally, when decisions are made, of course we will inform the market.

So operator, I would like to turn the call over to Q&A. We believe we are performing very well year-to-date. We expect a very good year for Lundin Mining, especially on our cash flows despite a continuing tough and volatile metals price environment. Both the operations are performing as expected and turn it over to questions. Thank you.

Question-and-Answer Session

Operator

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

Alain Gabriel

Yes good morning ladies and gentlemen. Just two short questions from my end, firstly on the impairment that you have taken on Tenke, will there be any packed assets that's off balance sheet associated with that and can you tell lies at a later date? And the second question, policy not undermining us of the timeline of the -- and the Candelaria, how much more time do you still have for the existing tailings dam including the new Freeport approval that you have obtained and how much time do you expect to spend constructing those, just to see how much buffer you have on that, thank you.

Paul Conibear

Marie?

Marie Inkster

Yes, on the tax question, there are no tax impacts from the impairment. We invested mainly through loans down through and anything coming back would have been loans coming back without a tax effect so there's no tax impact on that.

Paul Conibear

Maybe Alain will have Peter respond on Los Diques?

Peter Quinn

Well, Los Diques, the current situation of the existing dam is we have to pass it to the middle of 2019, Freeport reduction on that facility gives us another 6 to 9 months with useable capacity with the existing dam. Currently the situation with [ph] permitting, we really expect to see that permit shortly. That would facilitate construction starting within the next couple of months at the latest. That thing indicates still about 4 months to 6 months ahead of the original schedule which was to start construction January 1, 2017 so I think we are in excellent condition to get Los Diques, have sufficient capacity in the existing dam and to manage all those activities you need to do the swap from one facility to the other.

Paul Conibear

Yes, so with that time line Alain we have got about a six month buffer roughly. We have some contingency plans that would give us a bit more over and above that but that's our base plan.

Alain Gabriel

Okay. Thank you.

Operator

Your next question comes from the line of Matthew Fields from Bank of America Merrill Lynch. Your line is open.

Matthew Fields

Hey, everyone thanks very much. Obviously not going to ask about the right of first offer but the expansion projects that you mentioned you took out of Tenke in your model to cause the write-down, what kind of expansions were you considering or sort were considered and what kind of CapEx was associated with those?

Paul Conibear

Yes, I probably won't comment on specifically on the CapEx here, Freeport are operator but in Lundin Mining's models we have looked ahead to the potential of Tenke, currently the nameplate capacity of the facilities is sort of 200 or 220. Actually the back end of the plant has plating capacity of 270 or greater as there was some installed spare capacity when they had the phase II projects. So, Lundin Mining and I can speak for Freeport, have run in our models a Phase III oxide expansion that takes it up to 270,000 to 300,000 tons of cap load and I would imagine, probably used the capital intensity of about probably $10,000 of annual ton of copper production for that, some order magnitude like that, 500 million or 600 million, I don't recall the exact numbers there.

And then when we look further to maximizing the value of the asset, there's mixed and Sulphide ores and particular Sulphide ores and so Lundin Mining has always contemplated that it will go to a phase IV which would involve crushed lime float, probably roast and then over to solvent type extraction and electro winning plant to produce cap load from sulphides from taking enough significantly over 400,000 tons a year of production of copper and associated cobalt. So, those last two things would trickle phase III and phase IV were taken out of this model for the impairment task to get the base case.

Matthew Fields

Okay, thanks very much. And then can you remind us maybe it hasn't been sort of officially published yet but what's the work that has to take place in Candelaria down the road beyond the $250 million Los Diques project? Anything on the pit walls or of that nature?

Peter Quinn

No, there is no additional works beyond Los Diques.

Paul Conibear

Just briefly Matthew, obviously there is stripping and that sort of thing but that's all covered off in the normal mine plan but the basis for you to see that detail will be, I think it was last September we published an update on the 43101 technical report there so that will give you a like for mine strip ratios, push backs, underground and open pits sustaining capital, that sort of thing is all in there.

Matthew Fields

Okay, and then lastly your cash balance is obviously grown very heartily over the last year and a half or so and I know you started to go after the projects in Serbia and didn't want to comment on Tenke, but what's the sort of plan for using that cash for Lundin growth or for other means?

Paul Conibear

Yes, our net debt's obviously pretty healthy now. We have obviously got it under $400 million in a tough metal environment so we are really pleased with that. But I have to remind callers that we did borrow $1 billion in high yield and we have no call period on each of those two tranches that made up the billion dollars and that comes, opens up at the end of next year. We have to start buying down that debt so we are obviously want to keep the cash on hand to make sure that debt is extinguished in the form of time. We have got growth potential in each one of our mines between modest and significant where debottlenecking improvement by 10%, we have got Eagle East which I think will be pretty interesting investment, we're doing a significant amount of feasibility study at Candelaria to improve copper production there and we have the zinc expansion and obviously be great finance those with a little bit of debt but using out cash for those as well.

We remain positive to starting a dividend in the company when the time is right, hopefully the volatility of the metal prices that we have had over the last 8 or 10 months. Dividend, commencing the dividend would not have been prudent but the strengthening environment in the metal sector as this year progresses that will definitely come back on the table.

Matthew Fields

All right, thanks very much.

Operator

Your next question comes from the line of Orest Wowkodaw from Scotiabank. Your line is open.

Orest Wowkodaw

Hi good morning. Given zinc prices have picked up, I was wondering if you could share some more details around the potential expansion of zinc production at Neves-Corvo. If you can remind us sort of what that project looks like from a timing CapEx perspective? Thank you very much.

Paul Conibear

Yes, sure so the feasibility study we did, we summarized results about a year ago I guess, with 250 million euros was the CapEx to get the expanded facilities into production. The scope of the project is extending underground development down in the Lombador deposit predominantly, getting significantly deeper there, coming up by ramps to the existing shafts with conveyors. We also looked at trucking and will re-assess that before we pull the trigger on the thing. Trucking is more flexible but conveyors I think a little better long term solution. We did a lot of extra study on the bottlenecking of the shaft capacity.

Looking at all the different scenarios and actually the CapEx for that ended up being pretty modest. So we extend Lombador deeper. We put ramps up to the existing shaft, we bottleneck the shaft. We had already bought sag mill, a good sized new one which has been sitting in storage for a couple of years now. So we have the Sag mill for that expansion and we would be taking the Zinc plant capacity from its current throughput limitations of about 1.1 million or 1.2 million tons per year up to about 2.5 million tons per year.

And then associated tailing expansion, water treatment and pace back to that so scope of these ZEP, the Zinc Expansion Project, which takes us to increased capacity of additional 80,000 tons per year. I think in the mine plan we had for that and the study peaked at 150,000 or 160,000 tons of zinc in concentrates. There is no offsite infrastructure required there. The rail capacity of the port is already there. The port capacity, concentrated storage is all sufficient for that expansion, so it's pretty straight-forward onsite and reasonable CapEx. It would take somewhere between 24 to 26 months from the time we say start having the expanded concentrator in operation.

Orest Wowkodaw

Okay. Did I hear you earlier that you were in the midst of permitting and you were hoping to bring this project to the board around year end?

Paul Conibear

I would like to. I would like to see the EIA approved before I do that or at least some extremely positive signs because there's relatively new permitting process in Portugal with the current government so we are kind of pioneering out there. There's rarely any mining development in the country. So this is end of topic for them. We have had very good support from the government in all the meetings we had so I don't expect a problem but we need to go through the due process.

Orest Wowkodaw

Okay, so conceptually we should think about this as ramping up, starting in or beginning in 2019?

Paul Conibear

Yes, I would be really delighted if we are doing that. Yes.

Orest Wowkodaw

Okay, thanks very much.

Operator

Your next question comes from the line of Stefan Ioannou from Haywood Securities. Your line is open.

Stefan Ioannou

Great, thanks very much. Sorry I joined the call little bit late. But just a few quick housekeeping questions. Good looking quarter overall through guys. Just that Eagle driving the ramp, starting already, the CapEx guidance to remain unchanged for the operation of $10 million, is the ramp in addition to that because I think the press release originally talked about $12 million being spent on the ramp this year. Is that right still?

Paul Conibear

Yes, we have taken our exploration budget from $40 million to $50 million and the additional drilling and supporting the ramp is in there.

Stefan Ioannou

Oh I see, okay so it's technically an exploration ramp the way you are dealing with, okay great. And just to follow up on Orest's question on Neves-Corvo, just looking at the slides so, is the idea that you are going to submit the EIA now or by year-end? When do you actually expect to have the approval, is the approval coming later or is it expected by year end?

Paul Conibear

I am hoping to get the EIA in August or September. There's some uncertainty on how long it will take, the various regulators to go through that but there is very straight forward. And at least at the bureaucratic level of the Portuguese government, we have been communicating with them on zinc expansion for a long time and bureaucratic level hey know the asset really well so we would hope that the permitting process goes through fairly straight forward.

Stefan Ioannou

Okay, great. That's it from me guys, thanks again.

Paul Conibear

Thank you.

Operator

Your next question comes from the line of Dolson Borado [ph] from Canaccord. Your line is open.

Unidentified Analyst

Good morning guys and congratulations on a great quarter. Just a couple of quick questions from me. Firstly on the cost of Eagle, you have given that you have averaged above 68 for the first half of the year. Can you maybe comment on what is driving cost up in the back half of the year and why you maintain the $2 [ph] guidance?

Paul Conibear

We have been a bit conservative on that, on grades.

Marie Inkster

The costs are expectedly higher in the second half of the year and not just driven by the grading and throughput and various other things. Q3 does a maintenance job, there are some other things that are going on that will lead to bit higher in the second half.

Unidentified Analyst

Okay, great. And I see the same rationale at Zinkgruvan as well?

Marie Inkster

Yes, Zinkgruvan we actually brought the cash cost down and yes I mean August typically is not to the most productive month and July and August are not as productive months as the other months of the year so. We expect Q3 is bit of trough in the year for us in terms of our performance in cash flow generation and we usually have a strong Q4 so, I would expect our trend to continue.

Unidentified Analyst

Okay, great. And just in terms of volume some of these CapEx reductions, can you maybe comment on how much of that is an actual reduction versus deferred and when you expect to realize those deferrals?

Paul Conibear

Yes, I think we have made very good progress at Candelaria and Neves-Corvo and reducing the sustaining cost of keeping production up but a lot of the numbers that we have talked about over the last year and a half are going down for various estimates or deferrals so we won't come out of our guidance until late November, early December for 2017, CapEx is expected to go up. It will go up not only because of Los Diques which is a big project which will be ramping up but increased stripping, increased underground development and rejuvenation of our exploration programs.

Unidentified Analyst

Okay, that's great. Thank you. And just one last question. Just piggy back on your previous question. You talked about your capital priorities but I noticed that M&A wasn't there, as you keep an eye out for the assets available on the market. Is it fair to say that you are prepping for the lean towards zinc now or are you still looking for copper assets in particular?

Paul Conibear

No, our preference is not zinc. We've recovered pretty bare, as far as I mean our overall criteria for third-party investment, unfortunately in the industry we are just pointing off to get team [ph] but our criteria on commodity is quality copper or quality zinc. It would be highly unlikely we would get a nickel sulphide. I can't see anything out in the horizon that would fit where we would want to be on the cost curve in nickel, never say never. But there is nothing we have seen on the horizon there so you know we are less focused on the acquisition of a particular commodity. We are much more focused on what the quality of that asset would be to make sure it's in our search quartile that's preferably in best half.

Unidentified Analyst

Okay, that's great. That's all from me guys, congrats again.

Paul Conibear

Thank you.

Operator

Your next question comes from the line of Alex Terentiew from Raymond James. Your line is open.

Alex Terentiew

Good morning guys, just one quick question. This is about regarding your guidance in Candelaria. Are you guys doing already doing some debottlenecking that are going to get your throughput a bit higher there or is it a higher number due to continuation of softer rock? I guess the question is the improved performance, is there something we could see that would carry into 2017 and beyond?

Peter Quinn

This year's milling rights really predominantly a result of softer rock which we had forecast but in conjunction with that we have seen improvements in Mill efficiencies and productivities is ongoing about continuous improvements but next year we would expect the rock to firm up a little bit as we get deeper into the phase 9.

Alex Terentiew

Okay great, thanks.

Operator

Your next question comes from the line Joseph Gallucci from Dundee. Your line is open.

Joseph Gallucci

Thanks, good morning guys, great quarter. Just the question on the zinc expansion. Can you just give me macro perspectives, where you see prices going and what do you guys use to model to make that decision your expansion and what sort of return, what zinc pricing you need to get a decent return on that expansion project?

Paul Conibear

I will, I mean we assess in the cusp of ball of where the metal prices would go in the decision making and record it, it's a bit of moving target here. I think if you assume the strength of the euros an important factor so assuming 1.15 euro to the US Dollar, I would like to see lot of confidence we're at $1 per pound of zinc or better in which case we would expect a very favorable rate of return on that investment. Moving forward you can almost pick any number and argue on what zinc might do as the continues to tighten, you can usually run $1.20 in your model, you can spike it up to $1.50 but that in our view if zinc hits a $1.50 you are going to have a lot of artisanal zinc coming out of the Chinese mines in all periods of time which will attenuate that or shorten the spike.

There are no significant large scale western zinc expansions that are anywhere near production. We got Dugald River forecast and they are going to continue to progress but here and there a few other de-bottlenecking and expansions here but there is very little zinc coming on into the industry. So, but that also means some unpredictability of when the price is going to drop and to what level. For ups we just try to, first of when we look at the zinc expansion in Nevese-Corvo we say what we need to break even. You know so that obviously sets the floor. And, then what do we need to make a 12% to 15% rate of return. The second number is a $1 zinc.

Joseph Gallucci

Perfect, thanks for that Paul and maybe just one quick housekeeping question. When you talked about the dividend policy that you are going to review, is the share buy-back also going to be considered as well or not?

Paul Conibear

Each quarter there's an opportunity to have enough optimism to consider a return distribution to shareholders, we look at all options. When we have looked at share buy-backs in the past, we have probably looked at dozen or 15 examples in the mining industry, it's rare that that has been valuable to shareholders. There is a lot of nice tries that were not successful and really destroying value. I liked that a regular simple dividend starting modestly and increasing as company's capability to pay increases is a more likely waiting to go but we have assessed that in every quarter.

Joseph Gallucci

Perfect, that's it from me thanks guys.

Operator

[Operator Instructions] Your next question comes from the line of John Tumazos form John Tumazos Very Independent Research. Your line is open.

John Tumazos

Thank you very much. Couple of the things you said Paul made me a little curious. First to have an exploration expense in Eagle East must be beyond what you already classified as a resource because then you would be capitalizing with materialize to successful. Could you talk a little bit about the Eagle East, East of East trends which was in the press release a few weeks ago? And second could you the carrying value of Candelaria just to refresh us. I am picking up my job from the floor on the Tenke write-off and just wanted to be comfortable that there isn't another one coming?

Paul Conibear

Okay, I will start with Eagle East. So, when we were owners of the project they put about 30 holes into mineralization to pit [ph] surface and it was sort of a big wedge that they were drilling that started at surface that went down maybe 300 to 500 meters which is something and what they were drilling, take a look at the drill results. They called it Eagle East 0.6 nickel 0.6 copper and most of their drilling was vertical on that trying to find the feeder pipe that contributed to that low grade mineralization. We did some 3D Seismic which showed us that there was at the bottom of wedge they were drilling that showed that there was a horizontal anomaly so we started to step out starting to drilling to the east and we had some high grade and that's become Eagle East. So there was quite a different change in the geometry of the Dike that fed that mineralization.

As we continued to drill over the east end of the Eagle east closet that dike goes vertical again or appears to go vertical and also gets larger. So, we are drilling down that and have hit few strips of mineralization. We think more or less we have defined the shape and the tonnage of Eagle East. Some more drilling may get a little bit more as we better defined the mineralization which is pushed out of the sills but I think what you see is what you get more or less. But because the dike had changed geometry again and goes down towards the basement, what we are seeing in 3D Seismic again is another anomaly, at the base bed we see a bulge and below the base bed rocks we are hoping the dike comes up there seeing other anomalies. So, we are going to be drilling deep continuing on with that investment for the balance of the year in prepare all to drive the exploration ramp below the existing deposit.

So I hope that answers it, its' really early days, honestly John it's a blue sky. We have geo-physics anomaly there which hit a little trace of mineralization own that dike so that's a good sign but these things are needle in a haystack. However, if we do hit high grade down below it could be very significant. Maybe on -- we have no intentions of taking any other write-downs. I don't know Marie if you want to comment on Candelaria?

Marie Inkster

On Candelaria being written down? No.

John Tumazos

Could you review the process of Candelaria and support it how it is supported by either current production assumed reserved extensions, evaluation to the prior owner, historical cost, and the different methodologies of Candelaria carrying value?

Marie Inkster

Yes, we did that at year end and there was a small write-down in Candelaria at year-end. That was clearly driven by the metal pricing because if you think about all the other things that you have just mentioned we have actually improved on that since the acquisition. We improved the resource and reserve base, we have improved the production profile and the cash flow profile from where we assumed it be acquisition. So, all indicators for the positive other than the metal prices did not support us and continue to decrease after acquisition so we don't anticipate any further write-down in Candelaria unless we have a significant decline in the copper price outlook.

John Tumazos

Thank you.

Paul Conibear

Okay, well I know there is a lot of people reporting today so cell sites are extremely busy so I will terminate the call. Thank you very much for your attendance today and we look forward to speaking to you at the end of Q2. Thank you.

Operator

Ladies and Gentlemen this concludes today's conference call. You may now disconnect.

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