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Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lundin Mining Q1 2018 Conference Call. [Operator Instructions]Paul Conibear, President and CEO, you may begin your conference.
Thanks. Thanks, operator, and thank you, everyone for joining Lundin Mining's First Quarter 2018 Results Call. I'd like to draw your attention to the obligatory cautionary statements as we will be making several forward-looking comments throughout the course of this presentation. On the call to assist in answering any questions at the end of the presentation are Marie Inkster, our Senior Vice President and Chief Financial Officer; and Peter Richardson, Vice President and Chief Operating Officer.We had a strong quarter on a number of fronts positioning us well to meet our production guidance this year as well as to deliver on multiple growth initiatives. We continued to advance a number of high value-added projects across our portfolio. Construction of the first phase of the Los Diques tailings facility at Candelaria in Chile is complete, and continuous tailings placement has commenced ahead of schedule.Underground production rates at Candelaria are ramping up, and the new open pit mine fleet and mill optimization investments are advancing according to plan. Underground development to support a major zinc expansion at Neves-Corvo is progressing, and surface works have begun to double the size of the mill.Eagle East ramp development continues to progress well, ahead of schedule and under budget. And supported by an excellent balance sheet, we remain very active assessing M&A opportunities that command value to our company.Our operations in aggregate produced nearly 92,000 tons of base metals attributable to our bottom line in the first quarter, all with cash costs in or better than guidance and generating an operating margin of about 50% on average across the mines. We remain copper dominant, with copper generating nearly 60% of our revenues in the first quarter.Zinc's contribution to our revenue has increased year-over-year to 18% this quarter in an excellent zinc market. Zinc's share of our revenue is expected to continue to increase as the zinc expansion project in Neves-Corvo comes online.Our nickel sales are clearly benefiting from over -- improving nickel prices as well as continued robust high-margin operating performance from Eagle.Now moving to the highlights of our first quarter financial results, the details of which are in our financial statements issued last night. Our realized copper price in revenue for the first quarter was negatively impacted by provisional pricing adjustments of approximately $0.15 per pound. However, zinc and nickel had small positive adjustments. Overall, revenue was slightly lower year-over-year, attributable to sales volumes, mostly offset by higher metal prices and lower treatment charges.Ultimately, we achieved a strong operating margin again this quarter and generated USD 170 million or $0.23 a share of operating cash flow before changes in working capital.Moving to discussion of our balance sheet. From this slide, you can see that our cash and net cash positions increased quarter-over-quarter even after investing more than USD 150 million in our assets during Q1. We remain focused on disciplined growth, and our capital allocation priorities continue to center around that.We are investing in our own assets with low-risk, high-return projects and are very active, diligently assessing accretive external opportunities. We will continue to prudently manage our balance sheet and consider other returns of capital to shareholders from time to time.Transitioning focus to our operations, we had a steady quarter at Candelaria. We produced 31,800 tonnes of copper at cash cost of $1.71 per pound, in line with our full year guidance.Mill throughput was impacted by 2 events of plant downtime for maintenance. However, recoveries were better than expected.Waste stripping is progressing in line with plan. In the first quarter, we mined a total of 14 million tonnes of waste. The mining contractor is continuing to mobilize additional equipment to site to ramp up waste movement with an overall mine target to move a total of 75 million tonnes of waste this year.Underground production is ramping up well and is expected to progressively contribute more to mill feed over the course of the year.We are now operating our own 60-tonne underground haul truck fleet and new loaders at Candelaria North. In the first full month since the introduction of this much larger owner-operator fleet, we've achieved a record 8,600 tonnes per day. And we're heading towards the target of 10,000 tonnes per day by the end of this year.All purchase orders for the new open pit mine fleet have been issued and the delivery schedule committed to by our suppliers. We will start taking delivery of the new Cat 793F haul trucks and hydraulic excavators starting in Q3 of this year.The mill optimization project is progressing on track for completion in stages with all work done by the end of next year. Upgrades are planned for the primary crusher, cyclones, ball mills, pebble crushing and flotation circuits and modifications to the desalination plant to add more water to the plant. Detailed engineering is ahead of schedule and awarding of major equipment packages has commenced. This project will increase copper recoveries, mill throughput and overall plant reliability.Moving to Slide 10. This is a plan view of the Candelaria operations overlaying current and future underground Candelaria North and South sectors, which are part of the current life-of-mine plan. Development of the new Candelaria South sector has commenced and is progressing well to contribute production later in 2019 as per plan at approximately 4,000 tonnes per day.Studies for further optimization of the Candelaria underground mines continue, including a potential production increase beyond the currently permitted 14,000 tonnes per day. Pictures on the right are of the latest-generation Cat loaders and 60-tonne underground haul trucks purchased as part of our transition to owner-operated at the Candelaria North sector. This new fleet will increase our production rates and lower underground mining costs.The Los Diques tailings project has been very well executed through a primarily self-perform approach. Construction of the first phase is complete, ahead of schedule and under budget. And from this photograph, you can see commencement of continuous tailings placement behind the dam. All regulatory requirements have been satisfied and operating permit applications have been submitted.Construction of phases 2 and 3 have been pulled forward to benefit from available waste from the pit, and this is progressing very well. So as you can see, we had a good quarter at Candelaria and are positioned well going forward.A good news story at Neves-Corvo this quarter. Last year, we made a number of key personnel changes at the mine, and since then, there have been noticeable improvement in mining execution, which has enabled improved mine productivity as well as greater mill throughput. Increased mill throughput offset the planned decline in zinc Head grade, and production was comparable to the first quarter of 2017. Improvement in process water quality from startup of a new water treatment plant and heavy rainfall in the region also contributed to improved metal recoveries and plant availability.Copper production reversed the declining trend of recent quarters, and we achieved record quarterly lead production. Zinc production was steady, and we are on track to meet our full year production and cash cost guidance. The zinc expansion plant project is progressing with underground development, which is the critical path. However, it is running a bit behind schedule. There have been some delays both due to the impact of the labor action last quarter and issues with underground contractor performance.Surface works for the mill expansion are now underway and scheduled recovery action is being taken. We are undertaking a comprehensive review of the schedule and budget and aim to provide updates with our Q2 results in late July.Contrary to Q4 last year, we did not experience any labor action in the first quarter, and we are hopeful that there will be no more labor disruption at the site. However, there may still be risks of labor unrest, which is prevalent in a number of sectors across Portugal. We continue to have a constructive dialogue with the Neves-Corvo workforce and are receiving high levels of community and government support for the operation and our zinc plant expansion investment. Another very robust quarterly performance from the mine, mill and team at Eagle. The operation produced 5,100 tonnes of nickel and 4,800 tonnes of copper in high grade concentrates. The very low quarterly cash cost of $0.49 per pound of nickel remains well within the lowest quartile on the industry cost curve. Consequently, full year nickel cash cost guidance has been reduced to a $1.10 per pound of nickel from $1.35.Eagle East ramp development continues to progress very well. Overall, about 50% of preproduction capital works have been completed. The Eagle East project is approximately 1 month ahead of schedule and running under budget. Eagle East ore production is expected in early 2020. Permitting for the additional disposal of tailings at the Humboldt mill continues to progress well, and we have anticipated having those permits in hand by midyear.On the exploration side, we plan to drill 3,500 (sic) [ 35,000 ] meters this year as part of an $18 million exploration budget at Eagle, continuing to explore for more mineralization connected to the system that fed Eagle East and also commencing drilling on another new property target within trucking distance from the mill.This slide shows the Eagle mine deposit on the left and Eagle East deposit 2 kilometers away to the right. As you can see from the long section, development of the declines are approaching the Eagle East ore body and we'll begin advancement of the spiral decline ramping down to the ore body soon. We're quite excited to get to this stage, as by July, we'll be able to start underground definition drilling on Eagle East, and we are optimistic that we can expand the volume of mineralization once we start localized underground infill and step-out drilling. Another excellent quarterly performance from Eagle and great progress continuing on Eagle East project.A good quarter from Zinkgruvan as well. The zinc headgrade was slightly below plan though is expected to improve to meet budget as the year advances. Planned maintenance meant mill throughput was slightly below the fully expanded 1.35 million tonne per annum rate. However, we fully expect to achieve the full mill rate for this year. We remain on track to meet full year production and cash cost guidance. And a significant drilling program is continuing as part of our rejuvenated exploration program at Zinkgruvan. We're on track to spend at least $13 million on multiple targets in relatively close proximity to the mill.Looking at a schematic of the existing Zinkgruvan deposits, we have quite a few under-explored target areas. Foremost of these areas where we're having good exploration success is the Dalby deposit. We'll provide a more fulsome update on this later this year.Turning to the investments we're making in our existing assets, this slide breaks down our capital expenditure and exploration guidance for 2018. The total capital expenditure guidance of $850 million remains unchanged. As outlined previously, we're making meaningful investments over the next 2 years at Candelaria, Neves-Corvo and Eagle to significantly increase the value of these assets. Looking at the detail, there are minor offsetting $5 million revisions to sustaining capital forecast at Eagle and Neves-Corvo highlighted in bold.Most of the increase in Neves-Corvo is foreign exchange-driven, while the decrease at Eagle is attributable to deferral and potential elimination of some of the work we had provisionally planned around the Humboldt mill tailings facility.We do not provide capital guidance beyond the current year. However, we do expect this year to be the high-water mark given the many initiatives at Candelaria, including the rolling off of Los Diques with completion early this year, the zinc expansion project and Eagle East projects to be coming online later in 2019.The largest exploration budget in the company's history, forecast at $83 million, remains unchanged, and we expect to get a good value with additional resource and reserve discovery from this investment.For completeness, Slide 21 reiterates our production and cash cost guidance for the year. We've lowered the cash cost guidance at Eagle to $1.10, mainly on copper byproduct pricing credits, but also continued robust operational performance at the mill. At the midpoint of guidance, we expect to produce over 360,000 tonnes of base metals at competitive cash cost this year.Looking ahead, each year for the next few years, metal production will increase from all of our mines as our expansion projects and high grades at Candelaria come online. We are guiding over 15% growth in attributable copper production from our current assets between this year and 2020, primarily on the improved Candelaria life-of-mine plan. Attributable copper production is expected to increase beyond the 2020 level, with the investments and initiatives at Candelaria and higher grades from Eagle East.We expect a 60% increase in total zinc production over the same period with ramp up of the ZEP at Neves-Corvo, which doubles zinc production from that asset, and the incremental improvements at Zinkgruvan. This is a meaningful addition to our zinc production profile, and we expect to enjoy high zinc prices for the next several years.Nickel production declines modestly into next year before Eagle East comes online, however, production levels then increase significantly as Eagle East's high-grade feed comes to the mill.We expect a really good year ahead, and we will strive to exceed guidance and execute really well on our growth projects.With that, I'd like to turn it over to our listeners for questions and answers.
[Operator Instructions] Your first question comes from Orest Wowkodaw of Scotiabank.
Paul, I was hoping you can give us a little bit more detail about the zinc expansion at Neves-Corvo in terms of the delay so far. I'm curious whether we should think of this as a delay in a factor of months or could this be something more serious? And then I was also wondering whether -- your disclosure talks about the bottleneck being the underground development. If -- is the mill and the surface infrastructure on schedule? And could that be used to process zinc ore from other parts of the deposit?
Yes. So multiple parts, Orest, to your question. And I think, to keep it in context, our internal target was to bring the zinc expansion online mid next year. We've guided the second half of the year. What we saw -- what we experienced in, I guess, probably Q3, but in particular in Q4, some contractor productivity issues, which were further exacerbated by the strike action that we had each month, October, November, December. So taking that existing rate of productivity and moving it forwards, we're probably off by 2 to 4 months in the underground development. And it is the critical path. Second part of that is we do have flexibility where we source the zinc from because we got 5 deposits, zinc in all of them. The original plan was to get down, do all the underground development in a timely manner and bring the majority of that zinc up from lower Lombador, but we do have flexibility. We can bring it from Corvo or some of the other deposits. So yes, have some flexibility there. I'd say probably on average, we're 3 months behind where we want to be on the underground development. But if you take the existing advance rates and if you assume there's no more contractor improvements in productivity, that pushes it out towards the end of next year rather than certainly the midpoint. So I'm hoping we're just being conservative with this, but we're seeing it now and we've been working on underground development for really since last June so we thought it prudent to guide that it's not going quite as well as we planned. And this is assuming there's no more labor disruption, and I hope we're over that now. On your questions on the mill. I mean, the mill is not critical path. We did delay the contractor mobilization. We could have moved them onto the site in January, February but we still saw some risks for the labor action at that point in time. The last thing we wanted to do was move contractors onto site which were not critical path for the project and then have them on hold while there were still labor actions. So we delayed them coming onto site but it's not rate controlling at this point in time. We probably have used up a good portion of the float that we had on the surface work, but it's underground that we're focused on.
Your next question comes from Alain Gabriel of Morgan Stanley.
Two questions from my side, if I may. Firstly on the exploration activities and the uses of cash, clearly, in your release, you discuss your current efforts at your existing sites. How happy are you with the progress of your M&A team on one hand and of your -- with the progress of your team that's looking at sites in Peru and Eastern Europe on the other side? If you can give us a color on that, that's one. And two, you have a substantial capital expenditure program this year and next year. How much of your equipment prices has been locked in so far, roughly speaking, given the inflation that is coming through in the industry?
Yes. Okay. On -- I mean, on our own exploration, we're really pleased with that, on our brownfield. We continue to see -- on new areas that we're going to, Peru and Romania, which is where we have greenfields projects, it continues to be frustrating to get permits and actually get drilling into the ground, and I think that's a trend that goes across most jurisdictions. Peru is a very, very mature mining environment. Boy, is it hard -- if you do things right, it's very hard to get permits to drill. You have to go through a fairly substantial EIA process plus community dialogue. So we're probably a little disappointed that we haven't got drilling going, but that's a small fraction of the exploration effort that we have this year. On M&A activity as I think noted in our last call, our year-end results, last year we were busier than ever before. A number of formal processes, probably 7 different things we looked at. We continue to be quite busy on a couple of things. But you know these things, so you have to have the patience of Job to progress them. So we'll see whether things happen or not. And on the -- your other question in regards to what we've locked in. I think, we're really pleased that we were ahead of the curve early last year on getting orders in with Caterpillar and a strategic agreement with Caterpillar. We were the first major substantial order that came in with commitments that they'd had in quite a few years in South America, and therefore, the pricing of the major truck fleet that we had for underground and on surface for the open pit at Candelaria is locked in. So we've got good deliveries, high response time from Cat and Finning and secured prices. On the zinc expansion, it's probably a little bit early to comment on. And I don't know the stats on exactly how much procurement we've done there, but we already had bought the SAG mill. It's been in storage for quite a while. It's a large piece of equipment that we committed a long time ago. That's clearly locked in. We're not seeing any particular cost inflation in the cost of equipment or the things that we're looking at, let's say, at the Candelaria mill optimization project. What we are cautious of is delivery periods, because there's going to be a lot more competition for manufacturing space.
Your next question comes from Ralph Profiti of Eight Capital.
Paul, I wanted to circle back on some of the commentary you made about the zinc expansion plan. And I'm wondering if there's risk to the 2018 CapEx guidance of $190 million, because by year-end 2018 almost 75% of the original budget would have been spent, and so it's probably not a material issue if that's the case. But you spoke about delays. It seems as though FX has moved unfavorably versus the original budget. But you didn't talk about a material CapEx creep. So just wondering how much risk there is to 2018 CapEx.
Yes, I -- it's premature to expect that there'll be any CapEx change on the zinc expansion project in Portugal. But obviously, when you see some signs of delay, if it's 2 or 3 months or something like that, you have G&A that runs extra. We don't want to forecast any numbers right now, but we're going to do a bottom-up estimate before our Q2 release in July. I think as far as CapEx spend for this year, it's probably reasonable, expect it to be a bit less, but that's really a deferral into 2019 on the zinc expansion. I think it'll be hard for them to spend the money that was allocated there. But we'll have a -- it's still relatively early in the year. If they really get their act together, they can pick up the pace and get back on track.
Okay. Okay, that's helpful. It also sounds like the labor situation in Neves-Corvo has moved to a more general risk, perhaps a small improvement over your commentary versus last quarter. Would it be fair to say that there is no localized labor issue?
I don't think there is. I mean, the system is different in Portugal. We don't have, like, a mine-specific labor agreement that has a 3-year period. It really falls under, by and large defaults to the labor law in the country, the labor code. There have been all sorts of strikes across Portugal over the last year or so or -- and certainly, 6 to 9 months, ports, airlines, airports, and stuff like that. Things seem pretty quiet right now for us. I think the guys at the mine were pretty strategic and one of the demands that was being made across the country last year was early retirement in certain industrial plant situations. So we actually did come in and offer an early retirement program. We did that in Q1. And we took our own initiative and modified the mine site performance bonus, which has been very well-received. So I think we've taken some action there, which has been positive and we've had a lot of -- some new people there and a different degree of engagement with the work force, which historically, that engagement was done through the union. So there's a lot more direct dialogue to understand the needs and concerns of people that work directly for us. So I think things appear pretty good right now.
Your next question comes from Alex Terentiew of BMO Capital Markets.
Most of my questions have been asked here on the Neves-Corvo zinc expansion, but just one follow-up question on that. Of the EUR 257 million CapEx budget for that, maybe how much has been spent already today, just to try to quantify and -- to Ralph's question, you mentioned operating cost for all your non-U.S. mines, foreign exchange has a -- had a little bit of an impact. So I'm just trying to quantify how much of that CapEx could be at risk so to speak. And then also, at Semblana, any plan to start accelerating more exploration at that deposit, and maybe kind of work on getting a plan going to see that get into the development plan in a few years?
Yes. On Semblana, we want to make sure that we get over the hump on the zinc expansion project first. We have been having some dialogues with the government on Semblana looking ahead, but it's -- our first priority is the zinc expansion. It's -- [ get line of sight ] there. On -- we're just digging through some numbers now. So of the overall zinc expansion project, sort of 50% of it's underground. Part of the EUR 256 million, half of that's underground. And we've got sort of half for the underground development done. So there's still quite a bit of work to go on that. I think there is -- there should have been some breakdown, I think, on -- in the MD&A on the actual dollars that were spent, in the quarter at least.
Yes, Alex, in U.S. dollars it's about USD 50 million. So in -- in Q1 of this year, right, USD 24 million and last year was just over USD 24 million, as well.
Your next question comes from Greg Barnes of TD Securities.
Paul, it's been 6 months since the pit wall movement at Candelaria. What have you learned? What have you seen in the pit? Any the other areas of risk? What [ sort of technical ] work have you done, just so we get a sense of how things are progressing on that front.
We've learned how to move a lot more rock in a short period of time. I mean, there's been absolutely no change to the status quo there. The rockslide occurred, we came up with a remediation plan, and we're working steadily on that. And mobilized contractors seemed to help. So I think we moved about 14 million tonnes or so, I think, in Q1, Peter, and the total amount we plan to move this year is 74 million, 75 million tonnes. So on track there. There are no other issues throughout the pit. So for us right now, it's just head down in execution to move that waste and clear up the area and free up the higher-grade material that -- [ we'll get ] in phase 9 and giving us more faces to work on in phase 10, which is where most of the waste [ of things strip from ].
So you're not seeing any other similar potential slips in the pit or any other areas of weakness or anything that could happen again?
No, not at all. No.
No?
No.
Your next question comes from Jatinder Goel of Citigroup.
A couple questions just on M&A. Firstly, do you still think it's tactical to close any transaction in 2018 based on where you are in your current process of things that you're looking at? And secondly, are you just looking at individual assets or would you consider a multi-asset company-level transaction as well, given you've got cash currency which most people like more than shares currency.
Yes. I think, we have been pretty clear in over -- I guess, over the last year or so that the depth of our balance sheet would enable more choices than we've had in the past. We are able to do something transformational if we find the right opportunity. By and large, the things that we have looked at over the last 16 months or so, since the beginning of last year, have all been incremental asset additions, and that's probably more likely.
Your next question comes from Lawson Winder of Bank of America.
Just -- well, another follow-up question for me on the ZEP. The cost in -- that you're now reassessing -- I'm -- it sounded like it was just CapEx, but I'm curious, with this reassessment, is there any element of the operating costs that are being looked at? And really what's motivating the question is, you've mentioned that you've offered some concessions to your workers, first of all, and then second just -- are there any increased costs associated with the slower underground development that might then carry through for the life-of-mine?
I wouldn't expect that to be the case at all. And the incentives that we've offered, it's -- I mean, the early retirements doesn't even move the needle. So that's not a factor. The revised mine site bonus system, in fact, has got greater productivity aspects to it. So I think it would motivate everybody to a win-win. I don't know, Peter, if you've any other comments there. I think on OpEx?
No, [indiscernible].
Yes. No, this is just a matter if there is a project delay and if we're not able to pull it back, there's a minimum -- some additional G&A, which is a relatively small portion of the overall CapEx.
Okay. That's really helpful. And then also at Neves-Corvo. The zinc sales seemed to trail production by quite a bit this quarter. I'm just curious, is that something that could continue going forward or do you expect to make that up?
So the timing of sales?
Yes, because the timing of sales, we can't report them.
Yes, I don't think it was unusual. Have you factored in the payabilities? There always is a difference in production and sales, but there may have been a boat on the water at quarter end or a delay, but it wasn't anything significant. So from time to time, we'll have a little bit more in inventory and we don't expect any unusual buildup of inventory for that.
[Operator Instructions] Your next question comes from Stefan Ioannou of Cormark Securities.
Most of my questions had been answered or asked already, as well. But just, I guess, on Neves-Corvo as well, just looking at the current operation, the copper recovery. I know there's been some talk about just some complex metallurgy there and challenges with getting copper recovery up. Should we sort of envision copper recovery going forward at that 74% to 75% level? Or are you doing any work in the background to maybe try and boost that up by a few points?
Peter, you want to respond?
Yes, we're doing lots of work in the background to get back to historic levels when it comes to copper recoveries. That's ongoing.
One of the key issues there is water quality. We now have the water treatment plant up and running, which -- it'll take a while, but you get quite a large buildup of sulfates and gypsum in the water with the closed circuit we have now, so the water treatment plant is designed to strip some of that out. And we've seen a direct correlation between water quality and copper recovery historically. Okay. I think that may have been the last question on the queue. Or operator, is there any more questions?
There are no further questions, sir. I'll return the call to you.
Yes. Okay. Well, thank you, everybody. We look forward to our next call at the end of July and very pleased that we've got a very strong base metals market and lots more investor interest in our sector. Thank you very much.
This concludes today's conference call. You may now disconnect.