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Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quantum Minerals' Fourth Quarter of 2018 Earnings Results Conference Call. [Operator Instructions]Mr. Clive Newall, President and Director of First Quantum Minerals, you may begin your conference.
Thank you very much, operator. And thanks, everyone, for joining us today. Here on the First Quantum side in London, we have our finance department, Hannes Meyer, CFO; Juliet Wall, General Manager Finance; and Simon MacLean, Group reporting Controller. And joining from Panama, Philip Pascall, Chairman and CEO; and Zenon Wozniak, Director of projects.As usual, we will proceed -- before we proceed, I'll draw your attention to the fact that over the course of this call, we'll be making several forward-looking statements. And as such, I encourage you to read the cautionary note that accompanies our fourth quarter and the full year 2018 MD&A and the related results news release as well as the risk factors particular to our company, which are detailed in our most recent Annual Information Form and they are available on our website, first-quantum.com and on SEDAR. Following my opening remarks, Hannes will take us through the financial results. Then we will open the line to take your questions.A reminder that the presentation, which accompanies this conference call is available on our website and can be accessed either on the Events section or on the Q4 2018 results conference call button under the News section of the homepage.I'd like to start off with our very good news. I'm sure you all saw the news release out yesterday. We announced that at Cobre Panama, ore was introduced to the primary crushing until the stockpile, and on February 11, ore was introduced to the first milling circuit. These are very significant milestones for Cobre Panama and represents many years of efforts, which is now culminating in the commencement of operation of this mega project. Everyone at First Quantum is very proud of this achievement, and thanks to all of those involved in getting us here.On our website, you can see a -- you can view a short video and see updated project photos on the projects, Cobre Panama, which clearly shows the progress made at the site from the commencement of operation with ore.The first milling of ore was only one of several milestones achieved at Cobre Panama. During Q4, we also successfully brought into operation the second 150-megawatt generating set of power station, engineering procurement project pre-strip was also completed.All in all, we are excited by the prospect of entering the ramp-up phase of the Cobre Panama project and are looking forward to getting it to a steady-state operation as soon as possible. We're also very much looking forward to hosting the official mine opening ceremony next week.So turning back to our results for Q4 and the year. Both operationally and financially, it was a very solid year for the company. For the full year 2018, our copper production exceeded guidance, and the year represents the seventh straight year the company has delivered year-over-year production growth. With the introduction of production from Cobre Panama this year, we're expecting 2019 to continue that trend. We're expecting approximately 15% growth in copper production for 2019, given the midpoint range we provided for our production guidance from Cobre Panama.Kansanshi and Sentinel continued to the biggest contributors to our 2018 production, contributing more than 75% of the total copper. Sentinel achieved record throughput, recoveries and production in 2018 with copper production, it was 17% higher than 2017. Kansanshi mining operations were in line with expectations, while a new record was achieved at the Kansanshi smelter for the year.At our smaller operations, the 20% production increase over 2017 at Cayeli was slightly offset by lower production of Las Cruces and Pyhasalmi. The land slippage at Las Cruces, which I'm sure you've all read about, that we announced in late January, will result in lower production at the operation in 2019, and we expect about 25,000 fewer tonnes in 2020. The investigation into the cause and the impact assessment is ongoing. Currently, we're processing lower-grade stockpiles while we obtain the regulatory approval to return to the pit-to-mine Phase 6. These expectations are reflected in our current production guidance.Our low unit cost of production and all-in sustaining costs continued through the year, despite continuous pressures from increased royalties, increased sustaining capital spending and increased energy costs, somewhat offset by production volumes and lower contractor costs. We do expect to maintain our low-cost structure in the next few years, however, the pressures will remain.During the year, several issues arose in the jurisdictions where we operate. In Q1, we were served with a tax assessment relating to capital items imported at Sentinel. This issue is still ongoing and we remain engaged with the Zambia Revenue Authority and are committed to bringing the matter to a just and prompt resolution.Later in the year, the Zambian government announced a new tax and royalty regime, which in part became effective on January 1, 2019. These changes to royalties and taxes are being included in our current cost guidance. Also announced as part of the new tax and royalty structure, the Zambian government will introduce a new sales tax intended to replace VAT on April 1, 2019. Although details on the new sales tax have not been made available, we do expect further increase in our cost structures as a result.We also continue to deal with the Panamanian Supreme Court ruling on the constitutionality of law 9 and are working with the government to resolve the issue. The process does not impact our ability to continue to advance our Cobre Panama project or production, and the project continues to be widely supported in-country. Most recently, we announced a new $2.7 billion term loan revolving credit facility to replace the existing RCF. This extends the debt maturity profile of the business, demonstrates the strong support we have from our banking group and improves the financial flexibility of the company, and Hannes will comment further on this shortly.So in short, 2018 was a strong year for the company, both operationally and financially, providing a foundation to deliver significant production growth in 2019 and the years to come. Our priorities remain bringing Cobre Panama into commercial production in a manner, which Panama and the company can be proud off. To begin the deleveraging of the balance sheet through cash flow growth expected and to provide returns to shareholders who've been patiently supporting our vision and strategy for many years.Now with that I'll ask Hannes to take us through the financial review.
Thanks, Clive, and good day to everyone. Turning to the slide headed quarterly and full year production. The group achieved record annual production of 606,000 tonnes to 6% higher than 2017 and 11,000 tonnes ahead of our guidance. Copper production in Q4 of 158,000 tonnes is a new quarterly record and 3% higher than the same period in the prior year. This is due to improved performances at Sentinel, Guelb Moghrein and Cayeli and the continued strong performance at Kansanshi.Moving to the next slide, continued and consistent optimization. Sentinel's copper production of 224,000 tonnes was 17% higher than 2017. This growth in production was driven by higher throughput in 2018 due to improved ore supply and optimization of the milling circuits as well as higher recoveries. The Kansanshi smelter achieved record annual production of 347,000 tonnes of copper anode and treated a record 1.4 million dry metric tonnes of concentrate in the year. The smelter throughput was 14% higher than 2017 and has exceeded design capacity of 1.2 million dry metric tonnes by 15% through the operational efficiencies.Turning to the next slide, financial overview. Comparative EBITDA of $481 million was $163 million above quarter 4 in 2017, and the full year EBITDA of $1.7 billion is nearly $600 million above the full year of 2017. This was driven by higher sales volumes and higher realized metal prices.Comparative earnings were $0.26 per share and $0.71 per share for the quarter and the full year, respectively. The copper sales hedge program resulted in a hedge gain of $25 million in the quarter and increased realized prices by $0.07 per pound. Net debt of $6.5 billion was higher than the previous year-end due to the Panama planned capital expenditure program.Turning to the next slide on quarterly unit cash costs. Copper C1 cost was $0.07 per pound, below the same quarter in the prior year due to the impact of higher copper production volumes, increased by-product credits from sales of sulfuric acid at Kansanshi as well as higher zinc sales at Pyhasalmi and Cayeli.All-in sustaining cost of $1.68 per pound for the quarter decreased $0.08 against the same period in the previous year. The decrease in underlying all-in sustaining costs reflects lower Zambian royalties due to the lower average LME copper price and the change in C1, partially offset by higher sustaining capital expenditure. Copper C1 and all-in sustaining costs were within guidance in each quarter of 2018 and the full year. Our C1 and all-in sustaining guidance for 2019 and 2020 excludes any impact with respect to Las Cruces land slippage.Turning to the next slide on debt and liquidity profile at year-end. At year-end the company was in compliance with all facility covenants and ends the quarter in a strong position with $700 million of committed undrawn facilities and $788 million of unrestricted cash.On the sixth of this month, the company signed a new $2.7 billion term loan and revolving credit facility underwritten by BNP Paribas, ING and Societe Generale. The new facility replaces the existing $1.5 billion revolving credit facility. The new $2.7 billion facility with an accordion feature to increase it up to $3 billion before the end of this year comprises a $1.5 billion term loan facility and a $1.2 billion revolving credit facility, which can be upsized to $1.5 billion, if the accordion feature is activated.This financing includes revised financial covenants, extends the debt maturity profile of the business, demonstrates the company's access to a diverse range of capital markets and improves the financial flexibility of the company through the added liquidity. The covenants gives us increased headroom through 2019 and 2020. Net debt to EBITDA covenant ratio is 5.75x until December 2019. The ratio will then reduce to 5.25x until June next year, and then 4.75x until end of December next year, stepping down to 4 -- a ratio of 4x until mid-2021, and then 3.5x until final maturity. The facility will be used for the redemption of the 2021 senior notes due in February 2021 in full or in part and for general corporate purposes. The company will issue a call notice to redeem 820.5 million of the February 2021 notes at a price of $101.75 plus accrued interest by the end of this month. Any additional money raised under the accordion of the new facility will be used to redeem the remainder of the '21 notes.The next slide shows the company's improved debt maturity profile with the new facility and after partial redemption of the '21 senior notes. The debt maturities now better match the cash profile of the business with plenty of time to address the next major notes issue, the $850 million '22 notes maturing in May 22.Turning to the net -- next slide on our hedge program. Earlier this month, we executed 30,000 tonnes of new copper hedges covering period February to July 2019. As of today, the company had 7,500 tonnes of unmargined copper forward sales contract at an average price of $2.81 per pound, outstanding with periods maturity to June 2019. And zero cost collars for 52,500 tonnes at prices ranging from a low side of $2.70 per pound, to the high of $3.50 per pound with maturities to July 2019. Approximately 19% of expected copper sales in the first half of this year are hedged to unmargined forward and 0 cost sales contracts at an average floor price of $2.91 per pound. We will continue to increase our hedge cover as price targets are met and will use zero cost collars alongside forward contracts and purchased options as appropriate.Moving to the next slide on capital expenditure. Expenditure on Cobre Panama for the full year was $1.3 billion or $907 million on a net basis. Guidance on total Cobre Panama project capital remains unchanged at $6.3 billion. Guidance for the company's sustaining capital and other projects includes expenditure relating to Cobre Panama future operations. In addition, guidance includes expenditure related to other development projects as well as some planned expenditure at Ravensthorpe, and I'll give more detail a bit later.Underlying sustaining capital is expected to average approximately $250 million per annum from 2020. Outside of this, over the 3 years, some allocation for the expenditure is as follows: $220 million towards the development project pipelines, which is discretionary and dependent on various factors. Ravensthorpe, some of which will be dependent on nickel market conditions. Some [ site ] operational projects, included in Panama. In the Panama, this includes amounts brought forward to allow future ramp-up to 100 million tonnes as well as amounts on capital spares operational initiatives and the additional mining fleet. At Sentinel, this includes amounts for a fourth crusher and a prime -- and primary crusher #2.Thank you, and I will now hand back over to Clive.
Thank you, Hannes. So operator, could you hand over for the questions now, please?
[Operator Instructions] And your first question comes from the line Orest Wowkodaw with Scotiabank.
I was wondering if we can get some color on the Cobre Panama production guidance, specifically for 2021. And I'm curious if you're expecting to ramp up to 85 million tonnes throughput by the end of '20, how come you're not expecting any increase in production in '21? And I'm just curious if that's grade related.
Philip or Zenon, do you want to take that one?
I think you'll have to repeat it. I didn't quite follow that.
Well, you're -- so you're guiding to 270,000 tonnes to 300,000 tonnes of copper in '20 at Cobre Panama, and your 2021 guidance is only 300,000 tonnes. I would have expected that increasing more in '21 over '20 as you're ramping up the throughput through '20. So I'm just wondering if there's an offset that we're missing in '21 to keep the production at only 300,000 tonnes before you move up to 350,000 tonnes in '22.
So there has been a change in our grade profile, certainly, since last year with the new revised mine plan. So you're absolutely right, that would be a part of it. And then, as you see, it's moving to 350,000 tonnes in 2022.
Will we be able to get that grade for '21?
What was that, sorry?
Yes. We will be publishing a technical report in due course. So I can't...
Yes, I mean, the assumed grade around that is 0.39, and then we assume it is a bit of a step-up.
So it will be put in the public domain soon, Orest.
Okay. And then just secondarily, any idea on what we could expect for cash cost for Cobre Panama in '20 and '21?
Well, we've guided, as you'll see, for 2022 at $1.20. I think it would be wise to assume slightly higher in 2021, 2020 of between $0.10 and $0.20.
Orest, just on my comment on the projections further out, as Juliet mentioned, you'll see variations that are made in the estimates of grade and the like, from mine plan that moves according to what you're -- what the actual throughput is and how we prioritize the exploitation of various parts of the pit. And this year, this is going to 2019, a lot of the focus is obviously on understanding more clearly how the plant runs and how the mine operates and the like. And so some of those further out projections based on mine plans, to a large extent, are waiting to understand the results and performance of the plant over the next 3 to 12 months. And we will definitely upgrade those guidances as that picture becomes much clearer. And I think that possibly would have been part of what you're seeing in the step from 300,000 tonnes and 350,000 tonnes. It's grade-related on some mine plans and also be some measure of recoveries according to what's actually known at the moment.
Your next question comes from the line of Matthew Murphy with Barclays.
Hannes, maybe just another one on the CapEx there. I might have missed what you said. But the sustaining capital in other projects of around $600 million in 2020 and 2021, if I net out the $250 million in underlying sustaining, that leaves $350 million. And I think you said development projects will be $220 million. So what's the other...
That's correct.
What's the other, I guess, $130 million?
I mean, that's spread between Ravensthorpe Panama and Sentinel. Juliet, I don't know if we want to give more detail there?
Yes, so you -- sorry, were you asking specifically 2020, 2021, is that right?
Yes.
Yes, I'd say there is -- there will be some, as Hannes mentioned, some allocated towards Ravensthorpe over those 2 years, which is price-dependent up to about $70 million. There is the project pipeline as well mentioned, and some amount for Kansanshi and Sentinel projects as well.
So that's in the $130 million? And then the $220 million in development projects is spending other than those?
Correct.
Yes.
There will be greenfield projects, depending on conditions on those sites.
Okay, that's great. And I mean, can you just give any color on the -- as that relates to your Zambia production profile, does this spend on Kansanshi allow a 235,000 tonne type of production level to be sustained? Or should we be expecting, at some point, higher spending there? And Sentinel, when that CapEx brings the production up from 250,000 tonnes, or do you still expect it to be up from 250,000 tonnes?
Well, if I just elaborate on positions in Zambia, we will, of course, and have said, we will be very cautious about capital expenditure there. So that will mean that on Kansanshi, we will maintain our output as best we can for at least the next 3 to 4 years. We have said that if we don't increase the capacity of the plant to process sulfide ore then that production thereafter at Kansanshi will decline, and the timing for that is a subject of ongoing review. At Sentinel, this year, there is a commitment for the fourth crusher, which will give us some increased capacity. And that would probably be the limits of what's possible out of Sentinel going forward. If Sentinel produces more, it's -- while Kansanshi produces slightly less, it measures more easily with the capacity of smelters, both for ours and others in the copper belt. It's, of course, an expansion of what we used to call S3, will require some additional smelting capacity to take advantage of it. And that kind of capital expenditure at the moment is something, which we would be very cautioned -- cautionary about simply because of the nature of the change to royalties and taxes.
Your next question comes from the line of Greg Barnes with TD Securities.
This may be a little unfair, given you're just starting the ramp up at Cobre. But I want to talk about the 100 million tonnes throughput rate. Just trying to get a better sense of the timing on when you want to move forward with that and when it'll happen?
To which rate are you referring?
100 million tonnes a year at Cobre.
That's a good question for which we'd love to know the answer. And what I mean by that is that our test work that's been done, we've conducted, I don't know exactly, but about 250,000 meters of grade control drilling, with -- and at the same time, done metallurgical work, shows that for what we're looking at, at the moment, the grind size can be slightly coarser, and the energy for grinding is less than anticipated. And that means that once -- our milling circuit would likely have more capacity than we had estimated. But exactly how much will really not manifest itself until we've run, that's just the nature of it. And so you're dead right, it's a bit unfair right now. But in the next few months, we'll get a much better feel for what we can handle there. What is important to understand is that almost everything else in the plant that we have been able to apply ourselves to is rated 500 million tonnes a year or more. So where at Sentinel, we have some limitation that comes out of mining and crushing, but not in the rest of the plant. At Cobre Panama, the primary crushing and conveying and the mining rates have a lot of flexibility, and particularly because there's a lower strip ratio and a lot of pre-strip already done. So it will boil down to limitations in the milling circuit, and we have yet to see what that might look like, and therefore, how quickly we can get a 100 million tonnes and exactly what we need to do that.
Okay. So those production forecasts you've given for 2021 and 2022 really are in flux and then, I guess, sort of the low end.
That's reasonable, yes. I mean, they -- yes, they're conservative.
Okay. And Philip, just on the tailings dam at Cobre, can you talk a little bit about how that's constructed? And obviously, there's huge water or precipitation levels in Panama, and there might be some concerns around tailings dams?
No. I mean, the subject to talk about is tailings, generally, I think, and that's I'll take the opportunity to do that. With the possible exception of Pyhasalmi, which has been there for about 50 years, I have, as the CEO, been involved in and personally take on a part of what designs we have and how we proceed with tailings. And our operating guys know that at times, I will intervene to make sure that they will give it priority. And that's applied elsewhere. In the case of Cobre Panama, that design has been the subject of considerable scrutiny before we were involved and then, subsequently, with completely different consultants. It's an unusual tailings dam design. There are, as far as we know, 3 others in the world that are built in that fashion and designed to be water-retaining structures where necessary. And those are highland copper and one from Bingham Canyon and another in British Columbia. And unlike -- so if we get asked a question, is it downstream or upstream? It's basically the wall progresses downstream. It's actually called center stream, which is an unusual arrangement, but the wall will drain and, and therefore, the vulnerability to the kind of conditions where the wall gets saturated and has inherent weaknesses when it stores water are no longer a consideration because basically, it's designed to drain properly anyway. We have no doubt that the material here, being a sulfide, will leach well. One of the interventions that I have was in its original design, excess water was pumped off the dam, using pontoon arrangements. Here, uniquely, we have a tunnel that's a very substantial tunnel, and those who might have been to the site would have seen it. So its capacity is sufficient to take an extraordinary flood all of which would have occurred in an hour and ignore the storage capacity of the water or dam itself. So it's huge, it's overdesigned by a factor of something like 10 of the record sort of floods that have ever happened. And that was to set it in a quite passive fashion that will drain whatever excess water would arise, and there are some other emergency provisions anyway. So we're quite confident that, that wall will operate well as a water-retaining structure where needed, but the beaching and the nature of excess water being taken off the pond have been considered in some detail. There is another factor to cover Panama, which I think is important. Quite often in most operations, the tailings dam falls under management of the plant, and at times, I suspect, gets forgotten about or often doesn't get the attention it needs. This has a completely different management structure. It operates independently of the plan and very significantly. It has people who are intense, know it well, have been involved in its construction and going to see other operations of this sort. So I have a confidence that they quite independently of the plant management can make their point and ensure that things run properly. If we ever get opportunity to show people it, they will be able to go through very carefully how that wall operates and is designed, which I think is another important consideration.
Your next question comes from the line of Jackie Przybylowski from BMO.
My first question is going back to the Cobre Panama ramp-up. Can you maybe just give us a quick -- some color and maybe compare, like, how the ramp-up is looking so far compared with the experience that you had at Sentinel? And maybe what the differences are between the 2 projects so far?
Perhaps we just ask Zenon because we put quite a lot of pressure on him.
The differences are very significant. Sentinel, for us, is quite a learning curve. It was a large throughput mine, and it was probably slower to ramp up than what we wanted. But we learned a lot from that. We also learned a lot from the smelter, which ramped up very quickly. So a lot of what we learned from both of those projects has been applied to Cobre Panama. And if anything, Cobre Panama has probably been overdesigned to some extent. And we're optimistic that, that will help to bring a smooth and efficient and fast ramp-up to Cobre Panama. It's still very early days, but the initial indications are already good. And this is the first week or so, or first 1 to 2 weeks of operation has been smooth with very few problems that often are associated with commissioning. So they're very different comparing Cobre Panama to Sentinel. And I think Cobre Panama, at the moment, is looking good.
That's great...
And I'll elaborate on that. The distinction of the smelter from virtually every other mineral processing plant is that the QA and the checking of its automation system in advance of operation was absolutely paramount so that the smelter would operate on automatic from the day it started. We learned from that. And one of the elements that we insisted on here was that the power station would be simulated and operated on automatic, and that the plant itself would be simulated that all of the input, output units and anything for the control system would be tested in the QA very thorough, so they could operate from beginning under automatic. And that is not a common practice in mineral processing plants, which -- in which the automation tends to follow over some years. The results that we've been seeing, and it's now the early phases of commissioning, is that, that is really paying handsome dividends, combination of the quality assurance on all of the automation and the details and being able to train people with the simulation, which reflects actually how it will run in its ultimate form have great advantages for smoothing out in advance, some of the difficulties are otherwise encountered at Sentinel.
That's, great. If I can ask another question, can you comment on the update or status of your discussions with the Zambian government? And do you see any opportunities for any concessions in terms of the taxes and royalties that were effective on January 1 -- or the royalties that were effective on January 1 or the taxes on April 1?
It's probably not politics for me to talk about those details as it stands at the moment. You've seen various statements made in the press and, certainly, our relationship has been a very amicable one, and we're working our way through that. And we just have to see where we get to with the nature of those laws that are put in place, started from 1st of January. And by and large, once that happens, it takes a while to undo them, and we understand that. So it's a process that we are working at. But I wouldn't want to speculate as to where that will get to.
Got it. And maybe if I could just ask one final question on Las Cruces. I know you mentioned in the release that there's some higher-grade ore that you're no longer able to access. Is any of this sort of fallout of the slide going to affect your ability to move underground in the future? Or will you have to move this material before you go underground in the future?
The portal was actually covered. I've spent some time covered in white, and that doesn't concern them much in terms of getting back to it to go underground. The loss of material, in the first instance the best case they have is that they were the low-grade stockpile, which would in total have been able to yield in due course, not in early days, but something like 6,500 tonnes of copper, which will probably be lost, but the rest will be recovered.
Your next question comes from the line of Karl Blunden with Goldman Sachs.
On the law 9, uncertainty that you mentioned in the press release, are there the next steps or milestones that we should keep in mind as you move forward with that?
Philip, do you want to take that?
Asking about would you keep in mind going forward?
Karl, can you repeat your question?
Yes, sorry about that. It's regarding Panama and the uncertainty that you cited in your press release about law 9. You've mentioned you had confidence in resolving it in the near medium term. What are the next steps there that we should keep an eye on in milestones that you're working through?
Yes. Our steps on that, with a lot of advice and, obviously, discussion at the high level, is an application to the Supreme Court. The Supreme Court, if you wanted a parallel, has -- like in the U.S., at times, it's short of judges, and they have a workload. And so it's not possible to give a very definitive answer to the timing for when they would be able to deliberate on it. But it's a fairly clear request for what is -- they call clarification, and we would just wait for that. And that would give us the best understanding of where we go from there. Obviously, I mean, I can only say that we have some confidence that, that will be deliberated on very rationally and we'll get an outcome from it. But its timing is one which we'd like sooner, but we'll wait for the processes to occur.
Okay, got you. That makes sense. It certainly looks like the banks are comfortable with any uncertainty or risk associated with that. On this one, I'm not sure how much you can comment on. But there have been press reports indicating an interest on First Quantum's part in increasing ownership at Kansanshi or adding a stake in ZCCM. Is there anything you can share with us about those press reports?
I think the Minister of Finance statement was probably the most useful one of that. They had certainly been asking and entertaining discussion to do with some elements of the ownership of ZCCM, which is held in different places, if you refer to the 17% component. And we've had those -- we're a party to it, of course, because we own the other 80%. And I think that probably the most I can say is that those discussions have been held, and a rather more speculative article that was put out wasn't one which we would make any comment about.
Your next question comes from the line of Matthew Fields with Bank of America Merrill Lynch.
Congratulations on getting first ore at Cobre Panama. I just want to ask why you're only redeeming $820 million of the 2021 notes. Why not the whole $1.1 billion at this time?
Matt, we do have a provision in that facility, an accordion to allow us to upsize from $2.7 billion to $3 billion. If we upsize to the $3 billion, we will take out the remaining $300 million. We felt it was opportune, at the time when we're doing this refinancing, resetting certain covenants to deal with the -- to address Zambia taxes that are coming through and to add some additional liquidity to the balance sheet. So therefore, we've added some liquidity to the balance sheet. And if we upsize that facility in this year, we'll take out the remaining notes.
Okay, great. And then is it your intention to pay down that term loan, I guess, in Slide 17 that you outlined, $450 million in '20 and '21 and the remainder in 2022, as you generate cash?
That's definitely my intention. We do honor our banking agreements. So if we have to repay, we will repay that.
And is it still -- you've said in the past that you sort of want to reduce nominal amount of debt by about $2 billion before you embark on your next major project. Is that still your thinking?
Yes. I mean, we absolutely do need to reduce absolute amount of debt. And I mean, we have mentioned sort of $2 billion in the past, so that is part of the thinking.
Your next question comes from the line of Lawson Winder with Bank of America Merrill Lynch.
First off, I'd like to commend you all and the team on site at Cobre Panama for the Herculean effort in getting it to where it is today. And then maybe also, can you just comment a bit more on how the pit is ramping up and in particular, how many rope shovels are now operating there? And I believe the plan was to have a fourth there at some point in the first half.
Yes. The third rope shovel is commissioned in January, and there's a fourth one. I'm not sure exactly of the date, April or May. I'd just talk about the mining because I think, as I mentioned earlier, it was a distinction from Sentinel. We had it in mind to do a lot of pre-strip and ensure that, in that case, there was a lot of flexibility in terms of what we can feed to the plant. That has happened. There was a desire that we did not do all of that with the pioneering fleets of equipment so that we had material that could be moved with the large trucks and large shovels as a means for development of the operators of the mining fleet. Now that has happened, and we reached the 68 million BCMs of stripping during January that we've had as our target. And of course, that mining organization then carries on running, and one of the questions about capital is that, of course, we continue to capitalize the work that they do. It's work -- I mean, it's stripping work that we'd have to do in the time in any event, and we need to keep that mining fleet and its operating crews productive. They have the equipment to be productive at a rate that's somewhat higher than we're currently feeding the plant because it's very early days. But it does mean that it will have a lot of flexibility to ramp up quickly as the demands are made, and they're very conscious of that. They may well have to meet the capacity of the plant that is substantially more demanding than maybe any estimates that they're given.
Okay. Philip, that's very helpful. And also, if I might just ask on your budget for this year, particularly with the CapEx spending budget and then the Zambian tax situation. So are you assuming a 44 -- 45% effective tax rate in your budget for 2019? Are you assuming 31%? And if it is the case that you're assuming a lower tax rate -- I mean, if it does end up in a situation with the higher tax -- effective tax rate, I mean, does that impact your spending plans at all?
If you can answer that Juliet and Hannes.
Okay. I mean, yes, we are assuming a higher effective tax rate. And one of the big drivers or reasons for that is the non-deductibility on royalty. So that really almost has something like a 10% impact, so that's the big bridge. And so that is embedded in our plan, yes.
And then I'm not sure if you're able to comment at all on the nature of the proposed sales tax. I mean, I guess since the government hasn't said much, you might not be able to say much. But do you have any understanding of what it might look like and particularly in terms of how it might impact imports as opposed to items that are sourced within the country? If you can't say anything, I completely understand, and that would be it for me.
Yes. Lawson, I think it'd be wrong for us to speculate on what it would look like.
Your next question comes from the line of Sean Wondrack with Deutsche Bank.
Most of my questions have been answered, just a couple more. While these constitutional issues surrounding Cobre Panama is still in question, are you able to actually sell the copper at Cobre Panama once you've reached commercial production?
Sean, at the moment, in every element, we're proceeding with a -- obviously, with involvement of the government, as Law 9 dictates. So the answer is yes, and it covers some other detailed areas which continue to operate that way.
Great, okay. And then just one more. In terms of Cobre Panama, you now have -- you're now selling power into the grid. Is this captured in the cost guidance? And how impactful is it?
Yes. I mean, there was a little bit of revenue in our pre-commercial production cost of about $9 million in actual this year. And I think around about -- there is some assumed revenue, I think, of about $15 million next year -- or this year, rather, sorry, 2019.
Your next question comes from the line of Oscar Cabrera with CIBC.
I want to echo my congratulations on Cobre Panama. I was wondering if we can spend a little bit more time on the CapEx. And first, just a clarification, please. I believe you mentioned you're expecting to spend $220 million in 2020 and 2021 for greenfield projects. Can you just elaborate on that, please?
Oscar, yes, that would be projects that we have in Argentina, Peru and sort of...
And Spain.
And in Spain, at Las Cruces as well. So we do still have the underground project at Las Cruces. So just depending on various conditions there -- it's discretionary money. It's money that we've put in there. So it's just part of the budgeting cycle that we do put these numbers in, but various elements and factors got to develop before we proceed on any of those projects.
Okay. So -- and then just relating to one of the questions that you got a couple of minutes ago with respect to deleveraging by $2 billion before you embark in other projects. So those $2 billion -- or embarking on other projects means construction, right? It doesn't mean investing in feasibility studies and exploration, et cetera?
Yes. I mean, Oscar, it's a target to reduce by $2 billion, and you're going to see a path to getting to the $2 billion reduction. I mean, spending some money on the feasibility studies or early stage, we wouldn't consider that as a major expenditure. $220 million over a 2-, 3-year period in here -- no, that's not a significant capital expenditure or program that we're investing in. But I think the idea is to get it both ready. And if you do have certain opportunities, you proceed with some of that. And that is captured within this plan.
Oscar, it's worth if I just mentioned that, on the various projects we have, the one that's getting, at the moment, most attention is Taca Taca. And it's a combination of aspects that -- this effort to define some of the infrastructure better, whether it's to do with power or -- and particularly water, so they've been drilling to make sure we had enough water; and obviously, logistics for the roads and rail. And there's some drilling work that's to provide slightly better definition of the start-up pit and metallurgy. So they're all evaluation or determination activities which are to provide a much more concrete estimate of what has to be done and what is involved in Taca Taca for purposes of a forward position. Exactly when we would start any work on that or spend any higher levels of capital will definitely be determined by a desire that we have to reduce our leverage, and that would be important. And also, we have some discussions with government and the like to ensure that there's stability and some reassurance because, obviously, that kind of levels of capital expenditure would need to have that clear before we started. So we see a period of some time while all of those are brought to a definitive form. And I think what you're seeing in our allowance there is something that covers that plus a number of other areas that we operate in at modest levels, but certainly with no commitment to anything major.
I mean this is -- capital allocation is something that everyone is very focused on, and I'm glad you brought it up. In the past, we had talked about considering return to shareholders once Cobre Panama was in operation. Is that still part of the consideration, along with this advancing the other more interesting projects you have in your pipeline?
Absolutely. I think there are 2 different elements. One is what one returns to shareholders, and the other is the extent to which we reduce debt. And the decisions as to how we -- which portion goes where, in part, is obviously influenced by our bankers and the like and what requirements they would like us to see before we, obviously, pay a lot out to shareholders. But there would be a recognition that we can return some to shareholders along the way. And maybe Hannes could comment on any detail that constrain that.
Yes. Philip, I think you've captured it. I mean, it is a balance. And increasing sort of modest returns after -- to shareholders, increasing the -- the past few years, we've had very modest dividends, as Clive mentioned. And the deleveraging is certainly a key focus area for the company as well.
And then, if I may, just lastly, what assumptions are you using for byproducts on your cost guidance, that is gold price, silver price, molybdenum price, please?
We are using for gold $1,250. I think for moly it would be around about $7. And for silver, it will be about $17 an ounce.
Your next question comes from the line of Brian Nunes with Gramercy.
Congratulations on a great quarter and good results at Cobre Panama. I had a question on the new term facility. Is there any nexus to the Cobre Panama entity with this new facility, either being a guarantor or borrower?
No, Cobre Panama is not a guarantor to the facility.
Okay. So it is my understanding that there is 0 encumbrances through debt instrument over Cobre Panama right now because the bonds don't have a nexus to that either, right?
There are certain restrictions imposed in terms of indebtedness at Cobre Panama, so that is fairly aligned to the bondholders' needs as well.
Okay. But there's no -- Cobre Panama doesn't have -- is not an obligor to any specific instrument? And maybe the question I'm asking is -- part of the expectation in the market was that -- when you guys issued those 2 new bonds, was that, potentially, you shelf that bank financing, and it seems, at least to me, that the reason for that bank financing being shelved over Cobre Panama was that maybe it was these issues around Law 9, which is preventing this thing from being underwritten. And I just want to understand if that is indeed the case.
No, that is not the case. I mean, we issued those 2 bonds last year because the bond conditions were quite favorable, and project finance would have restricted the sort of operational flexibility and daily running of the operation. So it was a more opportune time for us to finance it with -- through the bond market. What we are doing now is basically dealing with the maturity coming up in '21. So we've got a long runway ahead of us of about 3 years before we've got to think about any major maturity due, resetting some of these covenants and adding some liquidity to the balance sheet.
No, that's good. And then is it still your intention to try to get a mix of 50-50 between bank and bond debt?
Yes. I mean, that's -- in the past, it's been a good sort of mix for us, and that is probably a good -- I mean, it's important for us to be probably big in both markets. I mean, as this facility has demonstrated, the bond market has been pretty weak in the last 3 to 6 months, but the bank market is still supportive. The bank market were ready to support us in terms of the project finance. And we've had some pent-up demand there, and we felt this is probably a good way just to access that pool of capital again. But at the same time, it is important for us to be big in the bond market as well because it does attract quite a big and efficient capital market for us.
Your next question comes from the line of Ian Rossouw from Barclays.
Just wanted to follow up on the tailings dam question. Philip, if you -- if it would be possible to maybe just talk around some of your other operations, you mentioned Pyhäsalmi, and just around the risks -- sort of potential impact risks and the sort of design structures and then also in Zambia as well.
Well, Çayeli tailings are disposed of as subsea, so it doesn't have a tailings dam. And that's always been very benign and it's -- it goes into an anoxic area where it causes no damage. And we took some time to develop that as an allowable and reasonable environmental way to handle things. Cobre Las Cruces has filtered dry tailings. When I say dry, they're 10% moisture, and they stacked effectively. That's a very different kind of storage arrangement in a lined pond. When I say lined, sort of nothing can seep out of it into the groundwater as a requirement. But this is in Spain. But because it's coming through a pressure filter, it's a very different form of tailings altogether. And it simply doesn't attract the same focus in terms of design of wall and the like that you would be talking about, say, in the case of Kansanshi and Sentinel. Kansanshi and Sentinel are both upstream tailings designs. In the case of Kansanshi, there are 2. There was, in the early days, at one of those, a need for us to make sure that we buttress the tailings, and we did. With waste dropped from the mine, it was very significant. We did it basically because we wanted to make sure that we're very confident of it. That is what's called TMF, one that's used rather less now and watched very carefully. But that buttressing means that it had a very strong wall in any event. Sentinel gets a lot of focus. The nature of those sulfide tailings is they're quite coarse and heavy. They settle and beach well. The early part of the disposal was into obviously the deeper part of the tailings area, and it's hard to get density in those. So we will move over time -- I mean you can move on top of them -- you can walk on them, at the moment, with machines, but we will move over time to drain any residual moisture that might have been collected in its early years because that would ensure that its stability is unquestioned. We keep the pond -- it's a very large tailings dam. I mean it's about, I think, 4 kilometers in diameter, and we keep the pond over in the middle so it's a long way from the wall. So that's pretty important. The recovery of water off that proceeds all the time, in part, to any new water, so we keep the water level down. So each of them get managed very carefully to accommodate the demands of the operation. One of the attractions of Zambia is that it has a 6-month dry period, and there's a net evaporation rate of some -- a figure like about 1.4 meters. So any kind of water that you're putting on a tailings dam, it will be -- there'll be a net evaporation rate that ensures that it's being dissipated, but we're recovering it in any event. That brings us to Bwana Mkubwa. Bwana Mkubwa, we've been managing since we closed the mine. That's over -- quite a long time now, going back to get vegetation on the embankments and to make sure that any drainage of moisture that sits on the top of -- liquid on the top is neutralized. Because, if you recall, it was -- there was -- acid used to leach that material. And that's gone on over time. And what it means is, of course, that the drainage is -- we made sure it's working all the time. And eventually, once we've got it so that there is vegetation covering the whole thing, and that will take us some years, then that vegetation alone will ensure -- with the normal transpiration of plants and the like, that would keep this moisture down. So they all get that kind of attention.
Cool. That's useful. Maybe just a follow-up question on Ravensthorpe. Just if -- I mean, if nickel prices are acceptable for you to restart, maybe just could you give an indication of how much CapEx will that require and just sort of thoughts around different sort of processing and circuits and potential CapEx for that?
The capital to restart, we estimate as something over $10 million, and that's largely the time it takes, which we estimate at about 6 months, pulling together a team of people to kind of establish what you need to get started and then, of course, the purchase of inventory of sulfur, which we have to do in advance to ensure there's sulfur there for the acid plant. So it's not a huge capital to get started, and it will be able to operate for 2 or 3 years on the Hale Bopp orebody during that period. And we've been working on environmental applications and the like and designs for a conveyor across to Shoemaker Levy, and we've been drilling that orebody. So we've got a mine design to get approval of Ministry of Mines, which we expect by the middle of this year, and then a design for a conveyor to bring material back. And we don't have a definitive estimate for that at the moment, but it's around about $60 million or $70 million. And that is so that one can mine and convey the material to the existing plant. And Shoemaker Levy is slightly higher grade than Hale Bopp. So in the longer term, that has benefits, but it's also -- it's the huge part of the orebody there. And we wanted to time any restart not only on what the nickel price is, which, of course, at the moment, is more attractive anyway, but also to ensure that we could move to Shoemaker Levy without any major disruption or anything. So that's pretty much what we have in mind.
And does that $60 million to $70 million include the pre-stripping of the new pit?
Including?
Pre-stripping at Shoemaker Levy.
Oh, yes. And then the ore comes right to surface.
Okay, okay. And maybe just last question on Cobre Panama ramp-up. You referred to the production -- sort of the majority of the production expected to about 80% in the second half. I know with Sentinel, obviously, you had some issues with payabilities and the -- obviously, your payable production was quite a bit lower than your contained metal production. I mean, have you taken into account a similar ramp-up or slightly conservative ramp-up in those estimates?
Yes. I mean, what you're probably talking about is the grade of material. And certainly, in this year, we expect the grade of our concentrate to be lower, and our marketing guys have dealt with a market on the basis that we would have a very low minimum grade so that they are aware of it coming. What is attractive about Cobre Panama is it has 0 arsenic. And so many of the smelters are keen to have that source of material anyway as a means to blend into concentrates that have high arsenic.
And that brings us to the end of the question-and-answer session. I'd now like to turn the call back over to Mr. Clive Newall. Please go ahead.
Thanks, operator. Thanks, everybody, for listening today. We look forward to talking to you again at the end of the next quarter. I hope we will be able to have some more positive news on Cobre Panama. Goodbye, and thanks.
This concludes today's conference. You may now disconnect.