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Executives

Paula Myson - MD, IR and External Communications

Mike Robins - CFO

Dave Pathe - President & CEO

Analysts

Matt Murphy - UBS Securities

Robin Kozar - RBC Capital Markets

John Hughes - Desjardins Securities

Alec Kodatsky - CIBC

Johannes Faul - BMO Capital Markets

Anoop Prihar - GMP Securities

Terry Ortslan - TSO

Sherritt International Corporation (OTCPK:SHERF) Q1 2012 Earnings Call April 25, 2012 2:00 PM ET

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Sherritt International first quarter 2012 analyst and investor conference call. At this time all lines are in a listen-only mode. Later we will conduct a question-and-answer session with instructions provided. (Operator Instructions) I would like to remind everyone this conference is being recorded today Wednesday April 25, 2012 at 2:00 PM Eastern Time. And I would now like to turn the conference over to Paula Myson, Managing Director for Investor Relations and External Communications. Please go ahead.

Paula Myson

Thank you Luke and good afternoon everyone. Our results were released this morning and a copy of the release along with the MD&A and full financial statements are available on our website, www.sherritt.com. Today’s conference call is being broadcast live on the Internet. Anyone may listen to the call by accessing our website homepage and clicking the webcast link. A replay of the webcast will be available later today.

So before we begin our comments I’d like to remind everybody that today’s press release and certain of our comments on the call will include certain forward-looking statements. We’d like to refer everyone to the cautionary language in the press release and to the risk factors described in the CEDAR filings. On the call today are David Pathe, our President and CEO and Mike Robins, our Chief Financial Officer. I will start the call today with Mike Robbins' comments who will briefly summarizing our financial results followed by David Pathe who will review our performance and outlook. So to begin I will turn the call over to Mike.

Mike Robins

Thanks Paula. Let me start off with some highlights. Overall our earnings were $32.3 million or $0.11 a share. And this had an impact to some non-operational expense items and as a result does not reflect the fact that it was frankly a decent quarter operationally. I will get to those non-operational items shortly. But to finish the highlights of our headline number, on a quarter-over-quarter basis revenue is not materially different.

The softening of the nickel prices largely offset by the strength of the pricing in oil and our sales volume were quite steady. So in the aggregate our operating cash flows remain quite strong at over $120 million and that was higher than the first quarter of 2011 by $15 million.

And that was due to some improvements in our working capital. Now let me drill down into some of the changes over our last year particularly the non-operational changes. A big part of the earnings reduction was related to higher net financing expense, which was mainly non-operational. This caused a $27 million reduction in earnings when compared to last year and only $3 million of that an increase in interest expense.

The biggest driver with an $11.8 million loss on an option that we have to acquire half of SNC's 5% equity interest in Ambatovy. This is a non-cash item and it's all based on Black-Scholes calculations and is subject to a myriad of assumption including volatility, cash flow estimates, interest rate projections and timing.

On the adoption of IFRS, we recognized the theoretical value of the option and have updated for changes in the assumption each quarter. In fact we recognized a gain in the first quarter of 2011 and as late as last quarter. But due to major changes, the impact of volatility on the model, the value dropped from $37 million at the end of the year down to $25.6 million and that's almost $0.05 a share.

And I was saying earlier our EPS does not reflect the operational reality of the quarter. If we adjusted EPS for just as one non-operational item, EPS would have been $0.16. Now we expect that the value of this option will be steadily declining at a rate of about $2 million a quarter, we get closer to the expiration date. So you should take that into consideration.

Now let’s talk about the operations of the business. I will talk a little bit about sales volume first. They were stable for the quarter except for one large difference in volume in our fertilizer sales. While they have benefited from a beautiful early spring in Alberta and as a result of that the shipments of fertilizers began earlier than usual. And on top of that, we also received significant advance payment for fertilizer shipments that we expect to get in the second quarter.

Our growth production from oil properties were down only slightly because we had two rigs coming on line during the quarter. Our sales volume in the mine metals business in the Prairie organization was down by about 5% from the previous quarter, since one of our customers was down during middle of the quarter. However production is back to capacity again.

Now sales in our export coal business would have been right on target had it not been for the congestion at the port at the end of the quarter. We had a ship that was carrying about 200,000 tons and this delay dropped our revenues by close to $20 million for the quarter. Now the ship did sail during the second quarter and rail and port congestion is an issue facing all the Canadian bulk shippers and it is a focus for coal management.

Let me talk a little bit about pricing now. The pricing in our oil business offset some softening in the nickel sector and I will talk a little bit more about each of those. Our oil business continued its robust pace with reference prices continuing to rise up and they went up about 25% this quarter over the same quarter last year.

In addition to the oil business, our Mountain business for the export market experienced some good pricing during this particular quarter and in fact it offset more than half of the revenue impact of the shipping delays during this quarter. Now there has been some softening recently in the export pricings, but we were able to experience some good pricing during that first quarter of 2012.

Now our realized pricing in the Prairie business was also up despite sales volumes dipping and our revenue increase in the mine metals business for the quarter. Now all of these good news stories were not necessarily felt in our nickel and our metals business where the nickel prices were down 26% and the cobalt prices dropped another 20%.

So as a result of this, let me talk about the bottom line a little bit. Our tax rate declined from 31%, down to 27% and that's mainly as a result of earnings decline in predominantly high tax rate jurisdictions and so our earnings will decline in predominantly high rate tax jurisdiction. So as a result the tax rate went down now. Now if nickel prices rebound from the existing prices we expect that the tax rate should come closer to historical levels.

So as noted earlier our operating cash flows were higher than 2011 in the first quarter by about 14% due to improvements in our working capital and the largest driver to the working capital changes were the cash advances in the fertilizer business that I referred to earlier. And these good cash performance enabled us to maintain a cash balance that was close to what it was at the end of the year at $594 million. And the reductions that we saw were as a result of payment of some of our senior credit facility, investing in some capital and to a large extent the largest portion was our investment in the Ambatovy project which is about $93 million.

So finally our net recourse debt at the end of the quarter was just over $400 million, and as a result we've remained conservatively leveraged at about 27% long-term debt to capitalization. That will summarize the results for the first quarter and I am going to hand it over to Dave.

Dave Pathe

Okay. Thanks Mike and thank you everyone for joining us this afternoon. Just before we take your questions I want to just add a few comments to Mike’s summary of the financial highlights there. Ambatovy is obviously top of my mind. So once I will just talk on that for a moment if I could. We issued a press release just couple of weeks ago that gives you a sense of where we are. There have not been a lot of dramatic developments since then. From a budget perspective, we are still working towards the $6.4 billion all in number, which includes the working capital, foreign exchange etcetera on top of the original capital estimate of 5.5.

Since that time, the press release -- and we've continued working up, starting up the various circuits in the (Inaudible) facility. We now have the sulphide precipitation circuit operating, we have produced some mixed sulphides and are slowly building an inventory on that, that will then be feeding into the refinery, and when we have a sufficient inventory built up to start the refinery, that's I think when we will be able to conclude that we have achieved mixed sulphide production and we will let you know when that occurs but that should be coming in fairly short order.

First metal will follow from there. More importantly, from my perspective, is that, while we’ve had various headaches as is expected in starting up a facility like this that makes it difficult frankly to predict the exact timing of specific milestones or events along the line. Everything we’ve seen so far suggested the chemistries were acting very well in the three autoclaves that we have running so far. We’ve been very encouraged by that. Nothing has occurred and our start up process so far that gives us any same reason to doubt that, ultimately we’ll have successful operation here.

Just touched this on markets, Mike talked about our experiences in the past quarter and metal prices compared to the previous year. Obviously, we’re seeing metal prices, we did anticipate a lot of volatility this year and we’re seeing that. I think we expect to see that to continue the balance of the year as the world lives and dies by daily headlines out of Europe or out of China or out of the US is what we are expecting and I think you’ll see that continuing to bounce around but it’s nothing that we weren’t anticipating at the beginning of the year.

Coal, Mike touched on coal pricing as well. The coal here did settle for the Japanese coal, where we sell a fair bit of our export coal in and around $115 mark. Newcastle has come off since then, I think now, hovering just over a 100. Just to give you a sense of what to aspect over the balance of the year. I think 35% of our production is now probably contracted but Japanese coal year level. Most of the balance is either contracted at spot or a quarterly reset rates. So I think that for the most part, this is the thought for going forward for the rest of the year. It will be a pretty good indication of what we’ll be expecting going forward.

Operationally, everything -- we are quite pleased with the performance across all of our businesses. They are all performing more or less as expected. That’s why you see no significant changes in our production guidance for the year. The one small change we did -- we make was in the mountain operations, we reduced our total expected production there by couple of 300,000 tones. Couple of factors drove that. One, current pricing, we are adjusting the production levels that are little bit mined a little bit to optimize the blended output from Obed and Coal valley and to maximize the revenue that we received there. We also did have some difficulties that took a little longer getting into a new coal mining area, the Coal valley and a bit of a joy receiving any big shovel that we have now since sorted out, but the extra time I took in the first quarter set us back a little bit. And so that’s in aggregate explains the slight reduction you have seen in our guidance for production.

Touch on costs, part of the story and that was the increasing costs there, the season factors that are driving that. It’s largely the same story we’ve experienced for the last few quarters and that’s a continuing pressure up and pressure on some of the input commodities. Sulfur is up again 37% year-over-year and up 9% over the previous quarter. Diesel was up as well. High oil prices helped us in one part of the business but whether you see that show up in the cost figures in other parts. Diesel was up 26% year-over-year and is averaging, I think, an increase of pushing 50% over the last few years.

The other factor driving our costs is obviously the decline that Mike touched on in cobalt pricing. And cobalt is a by-product credit when we calculate our net direct cash cost for about a nickel and as we see cobalt pricing come down, credit lessons the reduction we see in overall costs.

Couple of other things just to mention. In coal -- in the Prairie operations, you see some variation and we have remarked on this in the past, the re-unit cost in the Prairie operations are bit of a -- can be distorting in that the different contracts or different mines, some of the mines are contract mines and are not always revenue and costs are not necessary always directly tied to production.

As we’ve seen that causes some variation depending on where the production is being incurred across in different mines. This quarter, our overall aggregate costs were not that different from the first quarter of last year but because of the way the production was incurred and what goes through some of the different mines of the different mine sites to save the unit cost up a little bit, but that’s not necessarily the best of indicators to where the business is overall.

Two other minor points just to draw your attention to in the event that is the things that we are watching. You may have noticed that our potash royalties were off a little bit from where we were in Q1. We are still maintaining our guidance there for the year. The driver that the potash demand was off a little bit in the first quarter from potash producers, I think there was some weakness in pricing. I think at this stage is too early for us to be revising our guidance but it’s something that we are watching.

The other thing we are experiencing just to draw your attention towards over the course of last year and to the first quarter of this year we had slightly higher gas availability in our power business than we typically been expecting. We are continuing to watch that and if we think that that is a trend that’s going to continue, we could see a potential small upper provision in our production of electricity generation guidance for the year. But we are still working through that in Q4 to see where that’s going to take us over to the course of the year. Those are the main things I wanted to just highlight for you following Mike’s comments. At this point, I think, we are happy to take any questions that people may have.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions) Your first question today comes from the line of Matt Murphy UBS Securities. Please go ahead.

Matt Murphy - UBS Securities

David, I just saw the disclosure on couple of disturbances with the labor at the mine site and protestors at the processing plant in Ambatovy, just wondering if those two are related or if everything there is resolved?

David Pathe

There were a couple of minor disturbances; neither of them had any significant impact on production or access to the site. The issues were primarily local, political issues and some people looking for jobs. We did demobilized a significant piece of the construction workforce during the quarter and that may have been a factor in it, but that overall has gone pretty smoothly and we haven’t had any disturbances for the last couple of weeks again. So we have had isolated incidences and then and we may have well have those again, but we haven't had anything major that's not, certainly not getting in our way of any new start-up activities that are going on there at the moment.

Matt Murphy - UBS Securities

And on the mining side, it was employees or was that related as well to the demobilization?

David Pathe

So at the mining site it was employees demob have been a factor some of the working conditions, I think there were some questions about that, but again it was a minor disturbance and it lasted a day or so and we've resolved it.

Matt Murphy - UBS Securities

And also a question I saw a few months ago that there had been some changes that the ministries in Cuba in terms of how they run, just wondering if you see any read through on that and to how your discussions with the Cuban Government might go and whether we will see some activity on funding expansion and more?

David Pathe

There is a restructuring taking effect I think officially potentially at the end of this month in the Ministry of Basic Industry, which is the ministry that does oversee most of our activities in the country, where they are splitting out some of the other basic industry from the energy and resources side of the economy there. So that would be the ministry that we’ll be dealing with going forward.

We are not expecting that to have any dramatic change in our sort of day-to-day interactions with the government, with our partners there and that the personnel should be remaining largely consistent. They have been telegraphing this change is coming for sometime and is not expected to have any dramatic impact on us. We’re still continuing the discussions on reserves on other matters that relate to the Phase II expansion and we’re hoping to make some progress on that this year.

Matt Murphy - UBS Securities

And then just lastly given the news in Indonesia, just wondering your view on so the way we exchange at all does that put any of your further investment at risk or do you think you know proceed with the terms of year-end for now?

David Pathe

By news in Indonesia you’re talking about some of the changes in ownership requirement and that kind of thing?

Matt Murphy - UBS Securities

Yeah.

David Pathe

For those, we’re not getting out of it; Indonesia announced this quarter the requirement that after a period of time I think its 10 years the mining operations in the country would be required to have 50% or 51% local ownership. And at this stage, we think its really too early to tell what that is hopefully going to mean there is a lot of stuff that needs to get sorted out in terms of how that gets implemented, when the timing starts on the 10 year count and how to transfer to get achieved the 51% would be accomplished.

We think there is a lot of more discussion to have in terms of say that how that actually would be implemented and what that will mean for mining companies there in terms of Indonesia; Indonesians are still very anxious to encourage investment in the country. And so we think there will be more come in that in the coming months and quarters.

What it does for us in the interim and the immediate for interims is what we do is, it hasn’t really affected our plans. We are proceeding to trying to get the drilling program that we want to get done this year and I think we will have lots of opportunity to understand more fully what that implications before making any significant investment decision there.

I think we are looking to spend a few more million dollars this year on the drilling, but it will be, we hope that much more clarity on that before making any significant decisions on larger spend and beyond an agreement or ultimately a broader capital allocation decision to proceed with the project there.

Operator

Your next question comes from the line of Robin Kozar of RBC Capital Markets. Please go ahead.

Robin Kozar - RBC Capital Markets

Just two things I want to touch on, first was just Obed, just digging a little bit deeper into that and the second, just in terms of the outlook for the input cost? But for Obed you were mentioning on the call David that your optimization versus optimizing in terms of blending the amount of production that’s coming out of Obed, is that more a function of the price or is that a function of the product quality or the specs coming out a little bit?

David Pathe

It’s a bit of both really. Robin, ultimately it’s driven by market pricing and it’s in the Obed quality coal, coal quality there is a little bit different from Coal Valley and so we do a bit of blending of the two to achieve the kind of optimal pricing allocation against, or pricing determination against the Newcastle price in terms of trying to get a coal, an aggregated coal product that matches up well against the coal effects and what customers they are looking for. The proper allocation doesn’t then depend on, in part on what the overall Newcastle pricing environment is as well.

And although, we are varying the numbers that are there, it’s pretty really relatively on the margin compared to our aggregated production we’re talking about maybe 100,000 tons difference there and therefore for a change in million tons that we’re looking to produce this year. So I would want you to get impression that it’s anything too dramatic there that we will have to see where pricing goes from here on Newcastle pricing.

Robin Kozar - RBC Capital Markets

Is there I mean obviously a higher price for better and lower prices versus in terms of actual benchmark or something that…..?

David Pathe

Yeah, it’s not a bright line at any particular Newcastle number, but we are operating on premise there, but higher pricing being better.

Robin Kozar - RBC Capital Markets

The second question, I just and it is kind of briefly resisting input cost in the metals business; I mean just in terms of where you are seeing so far this quarter if you are seeing the input costs stabilize or continue to rise and I will hear from you?

David Pathe

Overall, I think we’re see anything too dramatics since the end of the quarter in terms of where we are at input prices. The sulphur price and the diesel price like a lot of the commodities that we already have, and we’re price takers on those. The history in 2008 when the nickel priced out quite dramatically with the sulphur prices were a bit, or more sticky downwards and so we may see or we might hope to see some decline in sulphur over the course of the year, but there could be anyhow a number of factors that will drive that as well. So it’s difficult to say with any degree of certainty or confidence where it’s going to go from here, but we are hoping that we will see some that we can maintain a pretty healthy margin in the metals business for the balance of the year.

Operator

(Operator Instructions) Your next question comes from the line of John Hughes of Desjardins Securities. Please go ahead.

John Hughes - Desjardins Securities

Just one or two quick ones; on the Ambatovy call option, can you remind us what the expiration date is?

Mike Robins

Two years after.

David Pathe

Yeah, it runs for two years following completion of the project and there's a definition that relates into the financing and the shareholders in terms of what completion actually means but it will go for some years yet.

John Hughes - Desjardins Securities

Okay, so that's a commercial like reaching commercial production type of things.

David Pathe

Beyond commercial production actually and tied to the completion out of the financing.

John Hughes - Desjardins Securities

And on the coal front you noted, particularly on the mountain and the export was there any demand, have you seen or are already seeing any sort of demand push back on the exports market or was the lower volume driven specifically by the logistics of the port?

David Pathe

In terms of the challenges to the sales number was purely logistics at the port in getting coal through the ports and on to ships on a timely basis. Most of the coal that we export goes to Japan under pretty long standing customer relationships there and so this pricing coal in Japan hasn't really been an issue. They have had a bit of a reduction in their aggregate coal imports since the tsunami last year, but overall we haven't had any trouble getting our production in place there. It's not a huge amount of their aggregate import number by any means and it's an attractive product to them because of its low sulfur quality that they used to blend with coals that they import from other places. So the sales number is different from production where purely it is the result of port logistics.

John Hughes - Desjardins Securities

Thanks and what about politics in Madagascar. Can you bring us up-to-date on, is there any changes pending there or is there any, what's happening over there.

David Pathe

Well, there are changes pending but there have been changes pending for quite some time now in terms of there hasn't really been a loss in the way of developments not just since last quarter but since the last few quarters, the President there of the transitional authority there is still in place, the roadmap towards elections that was more or less agreed by the various contingency in Madagascar with the help of the Southern Africa development community there that help facilitate the negotiation.

There are still some sticking points in those negotiations, one being Amnesty for the former president is one significant sticking point. They do still desperately want to move to some process where they can get a free election. They have had a lot of aids suspended and they are missing out on aid money that has disappeared since the coup, so there are two or three years in that without being able to see the benefit of that aid money and they really do crave the legitimacy that some form of election would bring them to get some of that aid money back again. Unfortunately they have really been in a state kind of perpetual negotiation as they try and agree the terms of reference in the path forward towards election. And there really hasn’t been a lot of dramatic movement on that in the last couple of quarters from our perspective.

Operator

Your next question comes from the line of Alec Kodatsky of CIBC. Please go ahead.

Alec Kodatsky - CIBC

I just had a question on the unit costs for the Mountain operations at 89 bucks a ton, I assume that there is some influence there for the logistical challenges. I am just trying to get a sense for how much may have been included or how much in access was related to those shipment issues that you saw in the quarter?

David Pathe

Logistically we are the big driver of that number, the part of that number is driven really by higher diesel prices and some of the other input commodity costs, haul distances and I think in part and getting into this new coal area which took a little bit longer than we were anticipating, where the mining should be little more efficient, but the port fees themselves and the logistics, it’s more just getting the volumes to push through the port pursuant to the contractual terms given the amount of material that they are trying to move through there.

Alec Kodatsky - CIBC

Okay. So you weren’t responsible for demolish charges or anything, it is just purely that you couldn’t get our material on the boats?

David Pathe

We couldn’t get it shipped to the dock a time enough basis for us to get that before the quarter end. Not significant impact on costs from our perspective.

Operator

Your next question comes from the line of Johannes Faul of BMO Capital Markets. Please go ahead.

Johannes Faul - BMO Capital Markets

Just had a couple of questions for you, first I just want to clarify if those, in regards to that call option, those $13.7 million, was that before or after tax that impact?

David Pathe

Before tax I am told.

Johannes Faul - BMO Capital Markets

Okay, okay. And just secondly, if you could perhaps elaborate a bit on what exactly that option would entitle share to do. Also the 5%, will that be spilt in the middle between Sumitomo and yourself and would there be any additional payments or how is that structured?

David Pathe

Yeah. It runs for a period of two years, actually after the senior financing, the project financing goes non-recourse and what it is, is effectively a right or an option for us and Sumitomo to between us acquire the 5% of the project held by SNC-Lavalin. There is also a put on SNC-Lavalin as a part where they can put it to us and to Sumitomo. The pricing depends on whether it's call or the put that is exercised, but they are both a function of book value. The other protection that we have is that the option is obviously at our option, it is split between us and SNC-Lavalin. If SNC-Lavalin exercises the put and we don’t want to or not into position or don’t want to be a purchaser of it, it is ultimately Sumitomo that would be obligated to purchase the 5% under the put.

Operator

Your next question comes from the line of Anoop Prihar of GMP Securities. Please go ahead.

Anoop Prihar - GMP Securities

Just two questions. First of all at Ambatovy, what's your experience being so far with respect to the quality of the construction at the refinery?

David Pathe

We have talked a fair bit over the past year about some of the construction issues we've had there. I think today through our experience in the last two or three months since we last spoke in terms of starting up, we haven’t had any significant issues there. The issues that we've had have all been in the kind of typical headaches you would expect in starting up a facility like this and in terms of pumps that don’t pump and valves and pipes that leak, rubber linings that fail, tanks that leak, instrumentation that doesn’t work properly or valves that don’t work properly. All stuff that is difficult to predict until you are actually using each segment of that thing, but ultimately stuff that sooner or later you get on top of and get to the end of. So although we have highlighted we have had some construction issues in the past and we continue to highlight that as a risk to a successful ramp up here. We have not in last couple of months since we spoke come across any show stoppers there.

Anoop Prihar - GMP Securities

And your response was more in terms of the quality of the equipment and really what I was trying to understand was in terms of the quality, the labor and the trades that you have there is everything more or less as you anticipated it would be?

David Pathe

Yeah, overall in terms of the operators and that we have there I mean there's obviously a learning curve that they are going up as well. We have this worked quite well with the trades that they are doing the work and then in terms of the refitting are performing well and doing what we need them to do on a timely basis and the operators are performing reasonably well. They are learning from some of the things that have happened, but we don't see anything there at the moment that is a significant barrier to further success this there year as well.

Anoop Prihar - GMP Securities

And then just coming back to the coal for a second, the MD&A made reference to mining truck availability as being an issue, I wonder if you could elaborate on that just a bit?

David Pathe

I didn't quite catch that.

Anoop Prihar - GMP Securities

The MD&A made reference on the export coal side to mining truck availability as being an issue during the quarter?

David Pathe

In Moa or in Mountain?

Anoop Prihar - GMP Securities

I beg your pardon, in Moa?

David Pathe

Yeah, there was some -- I think production in Moa was off a little bit in the quarter compared to the first quarter last year compared to what we are expecting and as we are getting some newer equipments in there and it took a little longer to get formulated into queue then we were expecting. That equipment is there now and well I think we are a little behind where we are hoping we would be at the quarter; I think they have already had some good success since the quarter-end catching up there and we don't anticipate that having any impact on our full year production.

Anoop Prihar - GMP Securities

And just finally the activated carbon tends got buried in the numbers, but can you talk a little bit about how that one facility has been operating?

David Pathe

That plant is actually running very well. Its not a -- it doesn't get a lot of discussion, it’s not a big driver of results for us ultimately, but the plant is now operating quite well. I think they are getting past year better performance there and everybody is quite pleased with the way that's working. And I think there are some discussions about whether and what the timing would be for potentially a second plant. I don't have any timeline for you on that, but those discussions going to be taking place.

Operator

(Operator Instructions) Your next question comes from the line of Terry Ortslan of TSO. Please go ahead.

Terry Ortslan - TSO

I just wanted to get an update on the April the 4th press release, projecting there was date that you talked about in the month of April, it’s the very [precipitation] will be working and you should expect the secondary and autoclaves and all be fully operable. So is that still correct or have this changed?

David Pathe

Yeah, everything from our April 4th press release continues to be correct. Since that time, we have been operating three of the autoclaves; we mentioned up and running we made good progress in getting it forth going as well. The history of precipitation circuit that we made mention out there, we have that up running and have actually produced some small quantities of mixed sulphide; we’re not at a point that we stand to declare a victory and mixed sulphide production I think we will be in a position to do that when we built a sufficient quantity and inventory to be able to start feeding it into the refinery, but I expect we will be in a position to do that fairly shortly.

Terry Ortslan - TSO

So in the second quarter whereby the volume of mixed sulphides going to refinery will be that scheduled to impact the time table?

David Pathe

Yeah.

Terry Ortslan - TSO

So that hasn’t change from the press release time?

David Pathe

No; whether we declare a victory on mixed sulphides before the end of this month or not, we’ll see and it will depend on how many leaking pipes we have and that those sort of issues, but we have started and are operating the sulphide precipitation circuit and are slowly building inventories of mixed sulphide in order to be able to treat them into the next stage in the process which is the refinery.

Terry Ortslan - TSO

When you say victory, you mean producing any quantity; it’s not commercial yet, this time in the second quarter still?

David Pathe

Yeah, I think when we define what mixed sulphide production which we said in the past, we’ll announce, I think sort of announce that we have mixed sulphide production when we have the sufficient quantity of it to be able to start the next stage in the process which is the refinery. That circuit has been operating over the course of the month and so we have produced some more quantify mixed sulphide, but not enough yet to actually start the refinery.

Terry Ortslan - TSO

And so don’t want to rate -- put the lines for it, but the total capital you talked about, it includes all the rates for the next year when you become commercial production or is it as of today?

David Pathe

There are two numbers that we’ve been talking about for the last few quarters. Now it’s the $5.5 billion total capital cost and the $6.4 billion total cost, the difference between the two numbers being primarily working capital, interest expense and foreign exchange. And we are still working towards that $6.4 billion number, but it is an estimate, very much so an estimate at this stage, because it’s a function of a variety of factors that not the least which include how well and how quickly the project production ramps up and how nickel prices hold up over the course of the year.

The $5.5 billion numbers, more of pure capital number in terms of what it cost to build and complete everything. And at this stage of the project, we think we may actually do a little bit better than that $5.5 billion number and I think that’s why we have introduced in the guidance, in the outlook, a slight range for Ambatovy capital for the balance of this year, but really we are focused now just on getting the facility running from one end to other and getting production up to a level as quickly as we can.

Terry Ortslan - TSO

The $6.4 million is a typical the way we do in the mining business thereby you are accounting some of the revenues for production which is not commercial against the cost, against the cap, right?

David Pathe

That’s correct; that’s the number right up until the point where we get the commercial. I guess in terms of commercial operations where we move from a capitalizing project accounting system to a system where we’re actually recognizing revenue and incurring expenses.

Terry Ortslan - TSO

There were other questions earlier about Madagascar; are there any other major projects, obviously it have to be the tough target there, in the canal lets say, are there anything else going in Madagascar by governments and also the way their resource and actions happening around the world will be more focused and diverging away from yield (inaudible) and agreement and anything else, what else is happening in Madagascar in the major projects; doesn’t matter what’s the effect of this?

David Pathe

We are definitely the biggest thing that’s going on in Madagascar. From a foreign investment perspective there are some other more minor mining and resource projects, there are some more minor exploratory oil projects as well, but there is no doubt that we are by far quite significantly larger and the most biggest project in Madagascar.

Terry Ortslan - TSO

What about the mineral fans and everything else has been talked about?

David Pathe

As far as I know there is nothing dramatic going on at the moment there are some people down there looking for different elements, turning to some different projects off the ground and then some oil exploration as I say. But there is no large governmental type projects that that we are looking at.

Thanks for your attention and thank you.

Operator

And ladies and gentlemen, this concludes the question-and-answer session. And I’ll now turn the conference back to Paula Myson.

Paula Myson

Thank you and thank you everyone for joining us today. We are available if you have any further questions and have a great afternoon.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and you may now disconnect your lines.

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