Nyrstar NV (OTC:NYRSF) H1 2016 Earnings Conference Call August 8, 2016 3:00 AM ET
Anthony Simms - Head of IR
Bill Scotting - CEO
Chris Eger - CFO
Michael Morley - SVP, Metals Processing
Alain Gabriel - Morgan Stanley
Franck Nganou - Deutsche Bank
Wouter Vanderhaeghen - KBC Securities
Ioannis Masvoulas - RBC
Philip Ngotho - ABN Amro
Jatinder Goel - Citi
Daniel Lurch - Exane BNP Paribas
Alon Olsha - Macquarie
Junior Cuigniez - Degroof Petercam
Good day, and welcome to First Half 2016 Results. Today's conference is being recorded. At this time, I would like to turn the conference over to Anthony Simms. Please go ahead.
Thank you, operator. Good morning everyone and welcome to Nyrstar's Half Year 2016 Results presentation. My name is Anthony Simms and I’m the Head of Investor Relations at Nyrstar. Joining me on this call to discuss the details of the first half results is Bill Scotting, CEO; and Chris Eger, our CFO. Today’s presentation will conclude with a question-and-answer session. I would now like to hand over the call to Bill.
Thank you, Anthony, and good morning to everyone. In addition to Anthony and Chris, I'm also joined here today by Michael Morley, Head of Metals Processing; and Willie Smit, Head of Corporate Services.
On Page 2, we have the usual disclaimer, the usual cautionary note which you should have all familiarized yourselves with, particularly as we’d be maybe making forward-looking statements.
So turning to the agenda. I'll first run through an overview of the first half performance, developments in the macroeconomic environment. Provide an update on progress of two key strategic initiatives; the Mining divestment process and progress on the Port Pirie Redevelopment. I'll then hand over to Chris to walk you through the financials, and then I'll provide an update of the priorities for the next half, and then we'll be happy to take your questions.
So turning to Page 4. Last November shortly after joining Nyrstar, I announced the plan to turn around and transform the business. This plan targeted balance sheet strengthening and a portfolio restructuring with an exit from Mining and a refocus of the company on its core Metal Processing segments. Today, I'm pleased to report that we've made considerable progress against the plan we laid out.
The balance sheet strengthening has been well advanced with completion of the rights offering in February; the working capital facility added; repayment of the €415 million retail bond in May; and more recently, the issuance of €115 million convertible bond.
The Mining divestment process is advancing with the sale of the El Toqui mine already announced in June and further divestments expected in the second half. Most importantly, while the sales process continues, we have significantly reduced the cash consumption of the Mining segment net current prices, it is approaching cash neutral.
Our Group cost reductions are ahead of plan both in Metal Processing and in Corporate. And like I said further progress once the Mining exit is completed. As yet, this progress is not reflected in the year-on-year comparison of results. The EBITDA of €84 million is around half of what it was a year ago, primarily due to the reduction in the zinc price and reduced TCs. You should note that the positive results from El Toqui have been excluded from this figure as it is now an asset held-for-sale. However quarter-on-quarter, the progress is visible.
Net debt is flat year-on-year at €668 million, while we again reported net loss on the back of further impairments in Mining. The Port Pirie Redevelopment remains on track and on budget with early commissioning commencing towards the end of first half as expected.
Turning to Page 5. Operational performance in the Metal Processing segment was impacted by a combination of planned shutdowns at the Auby and Balen smelters, reduced production at Clarksville in the U.S. following the suspension of Mid Tennessee mines and unplanned outages at Hobart due to cellhouse maintenance and also electricity supply constraints. As a result, zinc production of 507,000 tonnes was at the lower end of guidance and down 9% year-on-year. We anticipate better production in half-two in line with guidance as there were fewer planned shuts with production impacts. It is not shown here that Port Pirie had a strong half with market-led production up 12% year-on-year.
Year-on-year, mining production is down 39%, primarily due to the actions taken to sustain production at Myra Falls and Mid Tennessee mines. Whilst impacting production, these decisions contributed significantly to the reduction in cash burn of the Mining segment.
Production in half-one has also been impacted by lower ore throughput and mill head grades at El Mochito, as well as from production outages taken in the wake of the fatalities there in January and February.
As per the earnings on the previous slide, we have also excluded El Toqui production from these numbers, as it is now held-for-sale. Looking at the Mining guidance, this will be somewhat impacted by further divestments as that process proceeds.
Turning to Page 6. You can see here the movement in zinc prices in the top chart and the euro/dollar exchange rate in the lower chart. Zinc prices in half-one were an average $335 per tonne or 16% lower than a year ago, which is the main driver of the lower year-on-year EBITDA. However you can see that over the course of the year-to-date, there has been a marked improvement in zinc pricing since the lows of early January.
Market sentiment is improving on the back of improving supply/demand fundamentals. This can also be seen in the settlements of 2016 benchmark TC terms at around 17% lower than the 2015. So while the decline in TCs has negatively hit us in Q2, we didn't get the benefit from the rising zinc prices in the half-one results, which will subsequently come through.
On forex, year-on-year the euro/dollar has been flat, although it can be seen with some volatility. The majority of market observers expect some weakening of the euro relative to the dollar over the course of the year, which would have a positive impact on these tough earnings.
On Page 7, the increase in zinc prices over the recent weeks is on the back of improving supply/demand fundamentals. On the supply side, significant zinc mining operations reached the end of their life in the latter part of last year, for example Century and Lisheen. Furthermore mine production reductions announced in the second half of last year have become evident, including Glencore’s cuts and the reductions that Nyrstar made.
The lowest spot TCs and the reduction in zinc benchmark TCs settled in March, a real evidence of the growing concentrate tightness. The growing tightness is reflected in the continuing reduction in reported stocks at both concentrate and zinc metal. On the demand side, there was positive news out of China with the previously flagged indications of stronger activity in property and industrial production apparent in the positive change in Chinese fixed asset investment numbers, as you can see in the bottom chart. This should support momentum in the coming months. Galvanized steel production is moving higher again in China, in part supported by the expansion in Chinese car sales which reported to be up 16% year-on-year. Global car sales also had a strong June being up 5% year-on-year.
Turning to Page 8. As reported during our last interim management statement call, while safety performance overall has continued to improve across the majority of our operations, sadly we had three fatalities in quarter one of this year. Two at El Mochito mine in Honduras and one at the Langlois mine in Quebec. At that time, we initiated a production stand-down across the mines and an extended shutdown at El Mochito to review operational oversight, safety policies and procedures, and conduct additional training with the workforce.
This has supported record safety performance in second quarter of this year with a number of milestones being reached at number of sites across the Group. Sadly despite this apparent improvement, we've had a further fatality two days ago at El Mochito in Honduras. The circumstances are currently under investigation. So we continue to drive forward behavioral-safety improvement across Nyrstar.
Turning to Page 9. I'm pleased to report that we’ve made considerable progress against the plan we laid out last November. The balance sheet strengthening has been well advanced with the completion of the rights offering; the introduction of an uncommitted US$150 million result in working capital facility in Trafigura; repayment of the euro retail bond in May, and more recently, the issuance of the euro convertible bond.
The most recent initiatives have been opportunistically pursued and increased the liquidity headroom and maturity profile of the company. I believe this remains a prudent approach given the macroeconomic environment remains somewhat volatile and uncertain, while we progress other actions. The Mining divestment process, as already mentioned, is advancing with the sale of El Toqui mine already announced and we are in advanced discussions with counterparties and further divestments are expected in the second half.
Most importantly, while the sale process continues, we have reduced the cash consumption of the Mining segment. The annualized cash burn in Mining in Q2 is now more than €120 million lower than it was in the second half of last year as we have achieved double the targeted reduction. Further cost reductions are also ahead head of plan both in Metal Processing and in Corporate, and I expect further progress once Mining exit is completed.
As mentioned, Port Pirie remains on track and on budget. Early commissioning commence in the latter part of half-one. Remaining funding to complete is now coming from the Australian government-backed perpetual notes and we still target full guided earnings uplift run rate by the backend of 2017.
So if we turn to Page 11. While the mind divestment process is progressing, it is clearly taking somewhat longer than we had hoped for a variety of reasons. Nevertheless I stress there is no change of strategy and we remain committed to the exit from Mining. The process has taken longer-than-expected as with the increasing zinc prices, new potential buyers entered the process late and the time for their due diligence and also the complexity of transactions with some buyers interested in multiple assets, but not while overlapping assets.
As you know, El Toqui sale was announced in June already. We’re in advanced negotiations with counterparties on the majority of other mines and we do expect to announce further sales in this half. While the process may be taking longer, the increasing zinc prices is helping both to encourage buyers but also to reduce the cash burn. It is possible that a minority of mines may still be on the book at the year-end, if so, we may spend some limited CapEx to prove out after additional reserves and strengthen mine plan to facilitate their sale.
On Page 12, we provide a mine-by-mine update on the divestment process. As you can see, three of the four remaining operating mines are now free cash flow positive at current prices and at various stages of negotiation on sale. East Tennessee and Mid Tennessee are linked to Clarksville as a complex and some buyers have an interest in the complex.
As previously mentioned, El Mochito’s performance is currently impacted by a drop of ore grade impacting its financial performance and with the negotiations continue with interested parties.
Turning to Page 13. You can see the improvement in Mining cash burn over the course of half one. This was a major focus of effort internally while the sales process progressed as the cash burn of last year was clearly not sustainable. The actions taken to suspend Myra Falls and Mid Tennessee have had a major contribution to reducing the cash burn thus have tighter control at the cost and CapEx at the remaining mines. At current prices, we would anticipate the segment being cash flow neutral at worst.
Turning to page 14. The Port Pirie Redevelopment continues to move forward and it is in line with the budget of AUD563 million. The remaining spend of completion is funded by the perpetual notes backed by the Australian authorities. During the first half, all major engineering, civil and piling works were completed. The modular off-site fabrication of the acid plant and furnace buildings has progressed, with work on these critical modules ramping up significantly throughout the half.
Shipping activities for the modular components will continue throughout Q3 2016 with the large 532 tonnes Electro Static Precipitator module having been shipped to site in m-d July 2016. As anticipated the project commenced early-stage cold and no-load commissioning during the first half and the project is expected to achieve its full run rate during the latter half of 2017.
So with that, I'll turn it over to Chris now to walk you through the financials. Chris?
Thank you, Bill. Now I'd like to walk you through some of the key figures from our first-half results. So first, Group underlying EBITDA of €84 million was reduced by approximately half from H1 ‘15. As previously stated by Bill, the decrease in EBITDA was primarily due to a 16% decrease in the average zinc price, a 17% decrease in benchmark TCs and lower metal production. However a more detailed explanation of the EBITDA year-over-year change would be provided on the next slide.
It is also worth noting that EBITDA results excludes the positive EBITDA contribution of El Toqui of €6 million in H1 ‘16 as it has been remained as a discontinued operation. Second, as part of the half-year process, the Mining assets carrying values were tested, which resulted in a non-cash impairment loss of €106 million being recognized. The impairment relates to write-downs and the carrying values for El Mochito, Mid Tennessee mine and Myra Falls.
Next, the total CapEx in H1 of ‘16 of €134 million was down 21% on H1 ‘15 with Port Pirie Redevelopment CapEx being comparable in those periods. However the growth pipeline investments in Metals Processing segment decreased €10 million versus €22 million.
Sustaining CapEx in Metals Processing in H1 ‘16 of €42 million was up 24% on H1 ‘15 as a result of scheduled maintenance shuts, mainly in Europe and Hobart. For example during H1 ‘16, in Auby, we carried out a scheduled maintenance on the roaster, leaching and cellhouse facilities. In addition, at Balen, we carried out scheduled maintenance also on the cellhouse, roaster and leaching circuits. Sustaining CapEx in Mining in H1 ‘16 of €15 million, which excludes exploration and development spend, was down 59% on prior year due to postponement and/or cancellation of non-essential sustaining CapEx across all mining operations and due to a suspension of the Mid Tennessee mine.
We expect total CapEx for the full-year to be in line with guidance between €280 million and €215 million, albeit at the lower end of our CapEx guidance, as we continue to look to proactively manage costs in this continuing volatile commodity and FX environment.
Net debt at the end of June ‘16 was €668 million, roughly flat year-over-year. However further details on the net debt evolution will also be provided in the upcoming slides.
So moving to the next Slide on 17, this graph provides a waterfall bridge of our H1 ‘15 Group EBITDA of €167 million through to our H1 ‘16 EBITDA of €84 million. Starting with the macro factors which negatively impacted EBITDA result by €89 million, we see year-over-year the €335 million reduction in zinc price from $2,134 per tonne in H1 ‘15 to $1,799 per tonne in H1 ‘16 reduced EBITDA by €54 million.
Declines in other commodity prices including gold, lead, copper and silver, also reduced EBITDA by a further €11 million. These weaker commodity prices negatively impacted EBITDA by total of €65 million, slightly compensating for the weaker commodity prices with the favorable foreign exchange rate movements which contributed €8 million to EBITDA. The euro against the USD was neutral for the results, maintaining an average of approximately 1.12, with movements in other foreign exchange rates such as the euro to Australian dollar, the dollar to the Canadian dollar, contributed positively to the H1 ‘16 EBITDA results.
In late March 2016, benchmark same TCs were settled at $203 per dry metric tonne base of $2,000, representing a decrease of approximately 17% over the ‘15 terms. This decrease impacted our H1 ‘16 figures by €24 million year-over-year and will continue to impact our financials for the rest of the year.
Moving to the right and looking at Metals Processing first starting with volumes. Metals Processing experienced lower zinc production of 9% year-over-year from 560,000 tonnes produced to 507,000 tonnes. The impact of lower production volumes in Metals Processing was due to the planned maintenance at Auby and Balen, reduced cost of production due to the Mid Tennessee suspension, and finally unplanned repairs in Hobart. These volume reductions were partially offset by reductions in operating costs that were primarily driven by lower energy consumption comprising of a volume effect and materially lower energy rates across all sites. The net impact on Metals Processing was a negative impact on EBITDA of €7 million.
Moving further to the right with Mining. Negative volume and positive cost variances were primarily driven by the suspension of operations at Myra Falls and Mid Tennessee and reduced grade and throughput experience at the El Mochito mine. The reduced output was more than compensated by operating cost reductions and resulted in a positive €9 million on EBITDA from Mining.
With the exception of the El Mochito mine, the operating mines are performing well with stable operations, lower operating cost and improved cash flows versus last year.
Lastly, corporate costs were €4 million, lower year-over-year, benefiting from the ongoing streamlining of corporate functions, reduction in external services and reduced IT spent.
Moving to Slide 18. I will now walk you through our net debt evolution from the December 31, ‘15 to the end of June ‘16. We started ‘16 with a net debt of €761 million, which then Group EBITDA for the first half contributed €84 million. This was then offset by sustaining CapEx of €57 million and interest and tax payments of €74 million for the half. These interest and tax payments are similar to year-on-year due to the timing of twice yearly coupon payments on our bonds.
Growth CapEx, net of receipt of the cash from the drawdown of the reported period perpetual notes, resulted in cash outflow of €29 million. This consisted of cash outflow of €11 million from those processing growth pipeline projects, €62 million of cash outflow for the Port Pirie Redevelopment, less cash received of €45 million from the perpetual notes drawn during the half. The difference between the cash outflows and the cash received for the Port Pirie Redevelopment is purely driven by timing of payments.
Moving across working capital outflow of €120 million comprised primarily of an increase in inventory balance of also €120 million, which was largely due to increased prices for zinc and silver over the period. In Q1 ‘16, we show that inventory levels were adversely affected due to timing of zinc concentrate shipments with an atypical high level of wet stocks due to the unplanned blast furnace outrage at Port Pirie, as well as finished goods inventory across the business.
In Q2 ‘16, we were able to reduce the volume of zinc concentrates to more normalized levels, however this was partially offset by increased lead concentrates due to larger shipments from Latin American mines during the quarter. The inventory outflow therefore of €120 million was attributed to; firstly, negative €132 million price increase due to the fact that the price increased roughly 30% from the end of 2015 to the end of H1 ‘16. We had a positive €8 million decrease due to decrease in concentrate volumes, with the rest related to FX and storage charges. However were further detail of the inventory movements in H1 ‘16 is illustrated in the appendix of this slide pack.
In April ‘16, we completed a $75 million short-term silver prepay that will be amortized at the end of 2016. As such, deferred income increased €54 million over the period.
Finally, the rights offering was concluded at the end of February for a total of €262 million net of cost. We concluded the first half with cash of €98 million; gross debt of €766 million, resulting in net debt of €668 million.
Moving to the next Slide Page 19. As we move into H2 and considering the various events in H1, I wanted to give you the opportunity to provide an update on our financing activities as well as a summary of our current liquidity profile. Starting with the left side of the page, in ‘16, we have completed a number of financings and repayments, including; first, €274 million rights offering in February. Second, €75 million short-term silver prepay in April. In May, we repaid a €415 million retail bond and introduced an uncommitted $150 million revolving working capital facility to Trafigura. Finally, in July ‘16, the company issued a €115 million convertible bond due in 2022, and also we've upsized the US$150 million zinc prepay completed in December of to US$175 million.
These recent financing transactions have been on opportunistically pursued. They've increased both the liquidity headroom and balance sheet maturity profile of the company in a macro environment which remains volatile and at times of uncertain. Based on these financings and we are looking at our current liquidity, we’ll see at the end of H1 on a pro forma basis we had in excess liquidity of €500 million. This liquidity is based on the availability of the €400 million structured commodity trade finance visibility and the €50 million KBC bilateral facility which was fully undrawn at the end of H1.
In addition, the company at half end had drawn €103 million against the $115 million working capital facility provided by Trafigura and had cash of €98 million. On a pro forma basis, the cash balance has been increased further in July to €236 million with the upsize of the zinc metal prepay by $25 million and a successful completion of the $150 million convertible bond offer.
The available liquidity provides a strong level of headroom to fund the business for the foreseeable future. However we should note that the business at current macros generally has intra-month liquidity needs of approximately 150 million required to fund working capital. In addition, our current liquidity includes uncommitted facilities. And finally, we believe a surplus liquidity may be required to cover negative operating cash flows in the event that zinc prices were to again fall to the levels experienced at the beginning of the year.
We finally believe that it's prudent to continue to assess and analyze opportunistic financing options that will either further extend the maturity profile and/or complete the balance sheet strengthening measures announced in November 2015 in order to operate sensibly in these volatile commodity and FX markets.
So moving to Slide 20. As part of our half-year financial review, we conducted an impairment testing across the business using the most recent macroeconomic assumptions and updated operating plans. As result of the impairment testing, a non-cash pre-tax impairment loss of €106 billion was recognized in H1 ‘16. And as you can see in the bottom left, this loss was related to the write-down of the carrying value for the three mines; El Mochito, Mid Tennessee and Myra Falls. You can also see in the right-hand side of the graph, the carrying value of the Mining segment was €533 billion to the beginning of ‘16 and that this was then reduced to €420 million due to the CapEx spend of €16 million, depreciation of €46 million, movement in other non-current assets and liabilities of €13 million and impairment of El Toqui of €18 million with revised book value of discontinued operations at El Toqui at €33 million and forex impacts of €11 million.
The €106 million impairment of the mining assets therefore reduces the book value of the Mining segment to €322 million. In order to help, we've also provided a supplementary slide in the appendix, which illustrates these changes.
And finally, it is worth noting that Nyrstar remains compliant with all the financial covenants and all its existing loan agreements.
So with that, I'll now turn it back for his concluding remarks.
Thank you, Chris. If we go to Page 22. So to conclude, we laid out a plan to turnaround and transformed Nyrstar last November and we had our advancing will against that plan. Looking at the priorities for the second half, clearly given the fatalities this year, the operations have a strong drive to improve behavioral safety awareness with a special focus on El Mochito in Honduras.
Second, we remain committed to the divestments of the Mining assets and will progress this in the coming months. Thirdly, we will work to ensure progress on the redevelopment of Port Pirie. Fourth, we continue to drive for cash preservation in the current environment, as well as progress on making sustainable cost reduction, while assessing other financing options to complete our balance sheet strengthening.
So with that, I conclude. Thank you for your attention and we'll now open for questions.
Thank you. [Operator Instructions]. We will pause for just a moment to allow everyone to signal. We will now take our first question from Alain Gabriel from Morgan Stanley. Please go ahead. Your line is open.
Good morning, ladies and gentlemen. Just two questions, if I may. Firstly, for Chris on the capital structure. Clearly the prepaid agreements and the [indiscernible] is not a long-term capital structure that you are looking for and given that the credit market is a bit challenging at the moment, how are you thinking about the capital structure by year-end, and what are the options that are available for you? And the second question is probably for Bill. What's your take on the current spot zinc TCs? Are you worried when you look at the charts, and how do you think that would impact the - or what would be the implications for the benchmark discussions at year-end? Thank you.
You want to go first, Chris?
Yes, sure. So good morning, Alain. So look, when I think about our capital structure by the end of the year, I guess breaking up the two components, I'm quite happy to continue to use our structured trade finance facility to fund the working capital needs of the business. So I think that's a very attractive facility and in the past has been potentially being underutilized, so I anticipate to use that quite a while as it’s committed to 2019. But when you look at our current liquidity, there is a mix of committed and uncommitted facilities. I think what will be the right approach for the business will to put in the set of committed facilities for the foreseeable future.
So as we look to our priorities in H2 on the balance sheet side, I think as we highlighted, we’ll be very opportunistic. And should additional financings present an opportunity to put something in the place at cheap rates, we may do that, but with the intent to extend the maturity profile but really it will be - the focus will be to turn uncommitted facilities into committed facilities in order to, like I said, have ample liquidity to manage the business and potential for volatile markets.
Yes, And Alain on the spot TCs, clearly they are indicative of the tightening market. I mean, we flagged and I think the industry has flagged for some time the dual deficits, you see that first with the TCs. There has been a number of closures of mines, as I mentioned. The negotiation this year was quite a steep drop again history. You can see the spot going down, that's again further indication of tightening. The demand is there. It's probably too early to say what will happen in negotiations coming forward, but I think it's also reflected in the way zinc prices have been moving up at the same time and that's good for the business ultimately.
Okay. Thank you, Bill.
We will now take our next question from Franck Nganou from Deutsche Bank. Please go ahead. Your line is open.
Good morning, gents. Thanks for taking my questions. I've got three please. The first one is on your Metals Processing production. So you’ve said that you expect the production to increase for the second half of the year but the guidance you provided on the Slide 5 is quite wide. So I was just wondering what you eventually drive the production to be at the lower end of the guidance during the second half. And the second question is just a quick follow-up on the treatment charges. So I suppose you’ve - have you started to see an impact of the escalator on the treatment charges you agree on with the buyers and would you expect it to go further in the year? And the third question, I think, is I guess is for Chris. Could you remind us of the covenants you have under the debt? Thank you.
Thank you. Michael, if you want to just comment on the…
Sure. Good morning, Franck. I think your first question was, on what basis do we expect to see second half production exceeding first half production in Metals Processing so that we would be comfortably within guidance? So I think, Bill mentioned that earlier, the first half has seen us with a number of quite significant planned shuts across the segment which won't repeat themselves in the second half and they’ve had a significant impact on production. Balen for example had one roaster down for most of one month, so a significant impact on production. And in addition to that, we had a period at Hobart where we were on reduced production because of local energy restrictions in the local energy market. We took advantage of that with very hard spot market reduced production and were effectively able to sell in fact some [ph] power to the Group. We don’t expect that to repeat itself in the second half either. So we would expect to see the second half zinc production more in line with what we saw in the first half of 2015.
Thank you, Michael. And Franck, on the TCs, simple answer is yes. We will get the impact of the escalator. For example, it’s 9% in the range of $2,000 to $2,500. And in the appendix Page 24, we show the sensitivity of the business to plus or minus 10% change in the zinc price and the TCs, so you can model your assumptions on that.
Good morning, Franck. And then finally I guess on the covenants. So we have two balance sheet covenants. There is a net tangible worth and net debt to equity. As a policy, we cannot disclose the exact metric of those covenants, but I guess what I can say is that at the end of H1 ‘16 relative to the end of 2015, both those metrics were more favorable. And so, look, as we see today, we feel very comfortable with our covenant headroom that exist in business.
Okay. Thank you. That’s very clear.
We will now take our next question from Wouter Vanderhaeghen from KBC Securities. Please go ahead. Your line is open.
Yes, hello gentlemen. Good morning. I thought the slide on the divestment stages of mines roaster was very helpful, but still a couple of questions there. It's of course very difficult to model given that we have no idea on which mine will be sold when. Can you give us some indication that based upon your own expectations for the disposal process, what kind of EBITDA we might expect for the second half from the mines, and then based upon current external parameters?
Yes, good morning, Wouter. I’ll take a stab on answering your question. So look, on the sales process, we’re still working with various buyers on various options across all the assets and it’s key for us that we maximize values that we can maximize value back to shareholders in the process. So unfortunately there is not much more that we can give on timing except that. Look, we’re obviously prioritizing and trying to sell the mines as fast as possible. We’ll put out getting up value.
And then around the second half EBITDA, look, what we can say is that based off of current macro prices, the entire segment is cash flow positive and I’d have to take a look at the sensitivities that we’ve provided in back to provide a view, but it’s probably more important to say that at the current macros, the entire segment is cash flow positive.
But in the case that - let's just assume that by the end of the year, you only retain Myra Falls and Langlois, then actually almost everything will be put into the discontinued operations.
Yes, I think - look, the policy is once we look to have SPA signed, as we did in Toqui that’s when we move the asset into discontinued operations. So until that point in time, it’s hard to predict what the future will look like but that is a possibility.
Okay. Then maybe some more follow-up questions here. But is it fair to say that by holding on all your assets a little bit longer that today you would achieve significantly higher sale prices than compared to some first indicative offers in April? And then given that you indicate that most likely you will retain Myra Falls and Langlois into 2017, can you indicate a little bit on how that is going, on which assets you’re more inclined to hold on a little bit longer first as modest where [ph] you’re more inclined to let them go a bit easier? And then finally because for some it might be new but what is the likelihood that also Clarksville will be sold on block together than with the Tennessee mines? Thank you.
Yes, go ahead.
Yes. Well, look, I think the thing that higher prices - certainly with higher prices its generated more interest, and as mentioned, we’ve got new incoming, so people later in the process now doing due diligence. That’s good. I wouldn’t necessarily quite higher prices to necessarily higher exist price for the asset because one of the reasons we’re selling these assets is they do need CapEx, and it’s a capital allocation issue, so one needs to look at the valuation of the asset as well.
As probably, as Chris said, it’s a bit early to speculate on what we still have at the end of the year. But for example you raised Myra and Langlois. Look, if you’re still there, we’d have the cash from Langlois. We’d probably be cash neutral there or quite cash positive, and one thing we do is just to look to firm up the resource base to aid the - facilitate selling the assets.
What is clear is that we’re not holding these assets longer because we’re waiting for zinc price to go up. It’s just the time the process is taking, the strategy hasn’t changed.
On Clarksville, look, clearly there is a link between Clarksville and East Tennessee and Mid Tennessee. We have always said we’re selling mines, not smelters. However we’re still cognizant of the link there. Some of the purchasers have raised that they are interested in that complex and that’s part of the discussion that is ongoing with those parties at this point.
Okay. So it’s maybe an impossible question, but how big is the likelihood that Clarksville will be sold as well. Is that over 50%?
It’s too early to speculate.
Okay, understood. Thank you.
Thank you, Wouter.
Our next question comes from Ioannis Masvoulas from RBC. Please go ahead. Your line is open.
Hi. Good morning, gentlemen. Thank you for taking my questions. I had a few questions from the Mining business. What’s the nature of late commerce into bidding process at the Langlois and Myra Falls? Are we - are you guys looking at speaking to private equity firms or is it mostly mining companies? And also you took another impairment book values at €322 million. Would that be closer to the value you think you can realize on those assets? And also again on Mining. You spent €15 million in CapEx in the first half and your gap implies step-up in the second half. Do you basically think that the business is free cash flow positive at spot prices even with the higher CapEx? And I will leave it there, if that’s alright.
Do you want to go…
Yes, so good morning, Ioannis. Just on new entrants around both Langlois, Myra Falls as well as the other mines frankly is, look, we’ve seen renewed interest from I’d say the three types of parties that we’ve been talking to; private equity, also entrepreneurs that have interest in owning assets but need funding, and then lastly, strategic mining companies, both small and big. So we’ve seen the broad spectrum of interest of not only on those two mines but other mines. And so look, we’re working with them as we stated before to try and maximize value and it’s just taking longer on process.
Do you want to take the second?
I’ll do the impairment. So on impairment which related to sustaining CapEx for the H2, I think I stated that we anticipated that will be at the bottom end of the guidance and I stated before about being cash flow positive was based off the guidance assumptions that we’ve laid out. So based off the increasing sustaining CapEx spend for H2 based off of macro assumptions, we will be cash flow positive.
Thank you. And if I can just follow-up with a couple of more questions in terms of the balance sheet and your opportunistic funding options that you may consider as you highlighted, given that your high yield bond is yielding around 7%, would that actually be the preferred funding method in the second half and would you rule out an additional equity like instruments at this stage?
Yes, so I would probably answer the second part of the question first is probably no. We won't look to do any more equity linked or equity type financing this year. On other opportunistic financings, high-yield bond is a possibility. We’ve seen our yields come down quite a lot. But I think it’s a balance of putting the right amount of leverage on our business through the priorities extending the maturities as well as increasing the liquidity.
I think while the cost of capital for high yield is interesting, there are other instruments that exist in the marketplace such as working capital financings, more potential prepayments, silver prepays or zinc prepays that could attract a lower cost of capital with albeit potentially a shorter maturity profile. So we’ll continue to assess and review all the financing options and it’s probably too early to tell out of the spectrum which is our priority.
Thanks very much.
We will now take our next question from Philip Ngotho from ABN Amro. Please go ahead. Your line is open.
Hi, good morning. It’s Philip Ngotho from ABN Amro. I have few questions left. First it’s a question of just asking for given that the remaining book values, the €330 million, how does it compare to what you expect or what you might possibly fetch? I mean, I think you have a better view on what these mines are worth. You have received some binding number in offers, and so I was just wondering if you could share your views on that and comment on that? And then also I’m wondering did you receive non-binding offers on all the mines that are up for sale, or are there mines that haven't had any offers at all? My second question is on the realized TC. It’s at - so I saw that you can get it, it’s $197 per tonne in the first half of the year. It’s a bit below what I would expect based on the industry benchmark TC. So I’m just wondering how much of your concentrates do you buy at spot TCs, so if you could indicate - give an indication on that. And then my last question is, you indicated Port Pirie, it should be fully operational in 2018 or the end of 2017. I’m just wondering what - in terms of earnings, how much uplift, EBITDA uplift, do you expect in 2017 from the total, I think you commented would be around €80 million to €100 million once its fully operation. So how much can we expect in 2017? Those are my questions for now.
Okay, let me - I’ll answer the first - good morning, Philip - on the mining side, and then hand over to Bill. So just quickly, so yes, we received non-binding offers for all the assets. And then relating to the book value and our priced expectations, look, this will be similar to the statements we’ve made at core Q1 results which we won't provide guidance on the expectation of price. We were actually very pleased with the price that we received on Toqui. But at this stage it’s too early to tell what the price expectations will be on the rest of the assets, and like I said, we continue to look to maximize the shareholders on those assets.
Michael, do you want to mention the…
Philip on your TC questions, we are more - if you compare year-on-year, we are more exposed to spot or spotlight TCs than in the past. The Century phase was a benchmark phase and that phase applies to a spot or spotlight TC. So you could then, in simple terms, where probably in the first half more like 50-50 as far as on benchmark and spot will be at somewhat more complex. And that I’m sure Anthony can walk you through it offline but certainly we’re more exposed to spot TCs year-on-year.
Yes, I think the other thing, Philip, is if you take the $203 million at $2,000 half one average, I think just under $1,800, there is a de-escalator effect of 3%, so there is around $6, so that brings that down to $197 as well. I think your fourth question, while I’ve got the floor here, on Port Pirie. Look, the uplift we’re anticipated €80 million annualized, and as we said, we expect full run rate to be achieved at the latter part of next year and I think that’s the best I can say today.
Okay. Fair enough. Then one final question. The impact of the fire in Balen. Could you just remind us what’s - in terms of production and maybe else in terms of earnings, what the impact will be in the second half of the year?
So Philip, it’s Michael. I’ll answer that. The fire impacted production in the cellhouse for about a week. So we lost in the order of 5,000 tonnes of production. The cost to rectify the damage was less than €0.5 million plus the €3,000, so not a particularly expensive thing to repair, but somewhat time consuming but the production impact is in the order of 5000 tonnes for that.
Okay. Thanks a lot.
[Operator Instructions]. Our next question comes from Jatinder Goel from Citi. Please go ahead. Your line is open.
Good morning. Just a quick one on maintenance shutdowns. Looks like there were 11 days lost on Clarksville on unplanned maintenance as well, and then there is another two weeks to go in 3Q. Two parts within that. What was the reason for unplanned shutdown that Clarksville in first half, and was there no chance to overlay the 3Q maintenance, which also needs roaster while the first half repair also suggests there was a roaster maintenance done? Thank you.
Jatinder, I’ll answer that. There is a number, like any other half, actually we have a number of unplanned production issues across the business ranging from issues in roaster through to issues [indiscernible] as well. And I would say that first half was certainly particularly challenging year particularly as we had a change in - fairly significant change in the feedbook across the business. That said production levels were all sound on the first half of last year was too broadly in line with what we had actually anticipated. And Clarksville had its own challenges across the first half. We always look at opportunities to accelerate planned shuts in the event that we have early unplanned shuts, and sometimes we can be quite successful of that depending on the scope of the work and the timing of the work. Sometimes it’s just not possible, and certainly with Clarksville, who have a planned shut in September of this year, that was just not possible.
Okay. And if I could just quickly follow-up, have you got much visibility into the feedbook grade or quality now that the sustainability of Clarksville remain more reliable going forward?
Yes, we have reasonably good visibility into our feedbook, as we did throughout most of the first half of this year. I think you just need to understand that first half of this year was quite a significant change for the business as we move from Century feed to post-century is something we’ve discussed on these calls for quite some time. So that certainly was a characteristic of the first half of this year. But to answer your question, we have good visibility into the feedbook for the second half of next year.
Good. Thank you.
Our next question comes from Daniel Lurch from Exane BNP Paribas. Please go ahead. Your line is open.
Hi. Many thanks for taking my question. Just two quick questions on my side. First one on working capital. A large part of your inventory increase was, as you highlighted in the slide, was due to higher prices. What is your working capital outlook in H2? Is it fair to assume that there has been not much of the working capital release unless prices would move lower? And the second question is on Mid Tennessee mine. You mentioned that there is a potential for restart at current prices. Would you consider a resale of mine ahead of a potential sale in H2 already? Thanks.
Good morning, Daniel. So look, I would say on the working capital forecast, it’s very much price-linked. So if prices were to remain flat, I would expect working capital to be fairly neutral through the H2. If we saw prices decrease, I would expect to release as well [ph]. So I mean we’ve seen a big increase in H1 due to price and I would expect the reversal prices were to come down.
And then, look, on Mid Tennessee, our perspectives to maximize the value of our asset both us and potential future owners. And as we look at today basis, all of our capital cost allocations, there is a viable case to restart the asset. It’s just a matter of time and just doing a bit more analysis on the funding for that restart.
And maybe ask - thanks so much for that. As a follow-up, what would be the required time and potential restart CapEx for that?
It’s something that - it’s not a lot of CapEx to restart it but it’s something that will take potentially six, nine months to work through. So as Chris said, we’re working through different scenarios on that and clearly we want to see that the zinc prices are sustaining where we are to make that worthwhile given the time it takes to do it.
Okay, great. Thank you very much.
Our next question comes from Alon Olsha from Macquarie. Please go ahead. Your line is open.
Hi, good morning. I just had three questions. Firstly, I suppose the question has already been partly asked, but it’s with respect to Port Pirie Redevelopment and the smelter investment. I’m not sure if it’s possible if you can provide any guidance to the timing of the earnings uplifted from both of those projects which cumulatively should add €150 million in EBITDA as you said by the end of 2017, but is there any way you can provide kind of first half, second half split for that, and particularly a bit more color around the €50 million uplift from the revolving upgrade program? And then my second question is on the Mining asset. You’ve recognized an impairment loss of €106 million across the assets but three assets; Contanga, East Tennessee and Langlois have all been spared any impairment. Now the sales process there obviously most advanced, but can you explain why you haven't impaired those assets as well? And then just finally on funding. You said you look opportunistically after carrying additional funding at the right price in the second half. Can you give some color as to the top of instruments you’re looking at with another high yield bond of convertible or retail bond and what indications you’re getting at this point on pricing on those instruments? Thanks.
Yes, thanks, Alon. Look, on Port Pirie and the uplift, as said, it’s on schedule to hit the run rate at the backend of next year and that’s where the €80 million uplift comes. Some of the €50 million additional assets are uplift is linked to and follows on from that. I think Michael can give some more color to that. But at this stage, I think we stick to the backend of next year. As you know, you go into commissioning and then you go into ramp-up. You’ve got to get stabilization and it will depend how fast the ramp-up goes in terms of what the timing is. But at the moment, at this point in time, we’re still targeting the backend of next year to hit that run rate. Do you want to - anything on the asset side, Michael?
Good morning, Alon. So look, on the Mining assets, we’ve highlighted a note in our financial statements Section 06 that talks about the methodology and the process we would undergone in the testing for impairment. Look, we used IFRS standards to look at the fair value less cost of disposals in understanding what the current carrying values are relative to these fair values. To the extent that signed SPAs have been executed, that plays a part into the carrying values. If that’s not the case, then we utilize our models in order to assess the values of the mines throughout what they set on the books for. And so we went through that process. We clearly see based off of the estimated future cash flows discounted that the values for those three assets do not need to be impaired.
And then maybe just moving to your last question around financings. Yes, we will look and continue to analyze opportunistic financings. I think I highlighted before it’s going to be a combination of bonds, working capital and prepays. We obviously we talked to the investment banks as to the various options that exist. We saw the market opening for bond and obviously the convertible bond a month ago. As we moved into August, things have quite it down. And look, we’ll continue to talk to the banks around all three of those options in H2, and if again, one presents itself to be attractive from a price and maturity standpoint, we may look to execute. If we don’t see something that we’d find interesting, then we won't do anything.
We don’t need to do financing in H2 this year but we always look to be opportunistic as we have been to-date.
Thank you, Alon.
[Operator Instructions]. Our next question comes from Junior Cuigniez from Degroof Petercam. Please go ahead. Your line is open.
Hi there. I understand that you’re not really willing to provide details on the proceeds you’re expecting from the Mining divestments and that is not the policy to disclose on your covenants, but can you maybe help us understand how much the minimum proceed you have to fetch in order for you not to breach your covenants assuming that all things remain equal? Thank you.
Hello Junior, good morning. Look, that’s a tough one because obviously we just highlighted the two policies that we won't disclose. What I will say which is what I said similarly at the beginning of the year around our 2015 end results. If we were to sell our assets for zero and have to take a further impairment of €322 million, then we would be breaching our covenants. As I think I’ve stated in the past, today we feel very comfortable with our covenants as they sit. Should the world change dramatically, we could have a problem but we’d have to have a substantial core, sell the assets less than the book values in order to cause an issue on our covenants.
Maybe as a follow-up, if I may. It’s more of a yes or a no question. Would you breach it if you say your portfolio further consideration of €100 million?
Just doing the math.
Depends on timing.
Yes, it depends on timing and it would be close, but I don’t want to answer that question.
I think it little bit depends on timing there and then what happens with the macros and performances as well.
Understood. Thank you.
We will now take a follow-up question from the line of Masvoulas from RBC. Please go ahead. Your line is open.
Thanks very much. Just a couple of follow-up questions on my side. First on the structure credit refund facility. What’s the available under the facility now? Is it full €400 million given the improvement in commodity prices? And secondly in terms of the timing of potential shareholder approval on the convertible bond regarding the potentially shares and the Trafigura facility being converted from uncommitted to committed, can you give any sort of timing around these two events? Thank you.
Yes, so the first one on the borrowing base is, yes, it is fully available at €400 million with the increase in zinc and also silver prices. Around the timing for the convert…
It will happen - Ioannis, it’s Anthony. The timing for that we’ve got until January in which there will be [indiscernible] capital. It will be held within now and in January most likely this side of the year.
And then the last question around Trafigura, working to [indiscernible] for month committed, will kick off those conversations later August, early September.
Thank you very much. That’s clear.
As there are no further questions, I’ll now turn the call back to your hosts for any additional or closing remarks.
Okay. Well, thank you operator and thank you everyone for joining today’s call. We appreciate you joining us. We look forward to speaking to you next time. Thank you.
That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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