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Good morning or afternoon. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Lundin Mining first quarter results. [Operator Instructions] I would now like to turn the call over to Marie Inkster. Please go ahead.
Thank you, operator, and thank you, everyone, for joining Lundin Mining's First Quarter 2019 Results Call. I would like to draw your attention to the cautionary statements on Slide 2 as we will be making several forward-looking comments throughout the course of this presentation and most likely in the Q&A as well. On the call to assist me with the presentation and answering questions are Jinhee Magie, our Senior Vice President and Chief Financial Officer; Peter Richardson, our Senior Vice President and Chief Operating Officer; and Steve Gatley, our Vice President, Technical Services.Overall, we had a very good start to 2019. We are pleased with our results in the first quarter, with all mines operating well and well-positioned to deliver on annual production and cash cost guidance.I'd like to touch on a few key highlights for the quarter before I turn the call over to Jinhee to discuss financial results. Development rates continued to progress ahead of schedule at Eagle East, and we are on track to see first ore to the mill in the fourth quarter of this year. We had another successful quarter advancing our low-risk, high-return initiatives at Candelaria. These remain on budget and on schedule to be completed by the end of this year. With the ramp-up of underground production and more ore to be sourced directly from the open pit, copper grades and production are expected to increase in the second half of this year.The Zinc Expansion Project, or ZEP as we call it at Neves-Corvo, continues to make meaningful progress on surface and underground. This is a challenging and complex project touching many aspects of the existing operation, and careful monitoring of the time line and cost continues to ensure the project remains on track.Lastly, while announced post-quarter, we were working hard during the first quarter and prior to that towards the acquisition of the Chapada copper-gold mine in Brazil. We believe strongly the acquisition of Chapada furthers our strategic goals and brings high-quality, long-life expandable copper production at attractive cash costs and strengthens the quality of our base metal mine portfolio. In short, this is a very exciting time for Lundin Mining.And with that, I will turn the call over to Jinhee to highlight the first quarter financial results. Jinhee?
Thanks, Marie. Looking at a summary of our results, our operations in aggregate produced over 98,000 tonnes of base metals in the first quarter. We sold over 80,000 tonnes of table base metals and generated over $416 million in revenue. Severe weather conditions in the Upper Peninsula during the quarter affected both Eagle's production and timing of sales of nickel and copper concentrate. We expect sales to catch up in the second quarter.We remain predominantly leveraged to copper. Copper generated 64% of our revenues in the first quarter, up from 59% in the first quarter of 2018. Zinc contributed 20%, up from 18%, and nickel contributed 6%, down from 12% in the prior year comparable quarter.Slide 6 represents a summary of the first quarter results, the details of which are available in our financial statements and MD&A issued last night.First quarter revenue was 11% lower than the same period in 2018 and gross profit 6% lower. This is mainly attributable to timing of sales and lower sales volumes, primarily at Eagle, partially offset by higher metal prices and price adjustments. Impact on gross profit reflects lower production costs and depreciation expense.Attributable net earnings from our continued operations were $0.07 per share for the quarter. First quarter net earnings include a loss on our equity investment of Freeport Cobalt of $11.9 million or $0.02 per share, which was impacted by the write-down of inventory. We generated $62 million in cash flow from operations in the first quarter, and operating cash flow before noncash working capital adjustments of $139 million or $0.19 per share.First quarter capital expenditures on a cash basis were $182 million, in line with our most recent guidance in this significant investment year.Our Board of Directors approved our regular CAD 0.03 per share quarterly dividend for an annual dividend of CAD 0.12 per share.Lastly, we ended the first quarter with approximately $735 million in cash and cash equivalents, roughly $660 million of net cash, conserving $40 million of lease liabilities as well as Candelaria's $35 million term loan taken out at the operational level to assist with the management of short-term working capital. The $30 million increase in lease liabilities quarter-over-quarter was the result of the implementation of IFRS 16 leases on January 1 of this year.I will now turn the call back to Marie to discuss our operations and projects
Thanks, Jinhee. Candelaria had a good quarter. Both the mines and mills delivered according to plan and significant progress was made advancing our growth projects. We are on track to deliver our annual production and cash cost guidance of 145,000 tonnes to 155,000 tonnes of copper at $1.60 per pound. Ramp-up of the Candelaria North sector underground mine continues well, achieving a current production rate of approximately 10,500 tonnes per day. Copper feed grades are to increase in the second half of this year as production ramps up, production commences from the South sector and as more ore is sourced directly from Phase 10 of the open pit.The new open pit fleet equipment delivery is well underway. Approximately 70% of the equipment has been received and placed in service. Most of the remaining equipment is to be delivered this year, with 2019 CapEx guidance for the mine fleet reinvestment unchanged at $75 million. The Mill Optimization Project is progressing on track for completion, with approximately 45% of construction work completed to date. Construction continues to be undertaken during planned maintenance downtimes to avoid any negative impact on production. The 2019 CapEx guidance to complete the project is unchanged at $50 million.Similarly, the development of the South sector is progressing well with the production startup date now projected by the end of the third quarter of 2019. Candelaria remains on track to deliver 30% production growth by 2021 with improving cash costs. Medium-term annual production is forecast to average over 180,000 tonnes per annum for the next 10 years.Slide 8, Neves-Corvo had a strong operational quarter, though copper production was negatively impacted by lower-than-planned copper grades. Overall, ore mined and processed were greater than planned, however, availability of [ paced ] backfill impacted mine sequencing and access to higher-grade stopes. The impact was partially offset by mining and processing more stockwork copper ores with lower grades but higher metallurgical recoveries. Zinc head grades, in contrast, were 5% higher than the prior period and positively impacted production.Copper cash costs of $0.92 per pound for the quarter were lower than that of the corresponding period in 2018 and well below guidance, largely as a result of the higher by-product credits.The implementation of IFRS 16 leases resulted in a reduction in cash costs of $0.07 in the current quarter, but this was offset by a corresponding increase in the all-in sustaining cash.The Zinc Expansion Project, which we call ZEP, advanced well. Overall, ZEP was 54% complete at the end of the first quarter. The total project capital cost estimate is unchanged at approximately $385 million or EUR 320 million, of which $366 million (sic) [ $365 million ] or EUR 305 million is preproduction capital. The 2019 CapEx guidance remains unchanged at $210 million.As mentioned, this is a complex and challenging project, touching many aspects of the existing operation. Careful monitoring of the time line and costs continues to ensure that this project remains on track for our early 2020 start-up.I'll turn the call over to Peter now to walk through the ZEP progress in a little more detail. Peter?
Thanks, Marie. I will talk to a few photographs taken earlier this month to highlight some of the progress we've made to date on ZEP.Underground development continues to progress. Development included the final breakthrough of all the conveyor ramps, as can be seen in the picture on the left, showing the breakthrough of ramps 6 and 7. Concrete foundation work advanced in all 3 underground electrical substations, as can be seen in the picture on the right.Installation work continues to advance on various aspects of the material handlings conveyor system. Slide 10 shows progress made in assembling the number 3 transfer tower. Structural steel was completed at this transportation point and is significantly advanced for the crusher, which is not shown here.Surface construction progressed well in the first quarter, including the completion of the flotation building steel and cladding, as can be seen in the picture on the left. The SAG mill rough set has been completed and, as seen in the center photo, steel end frame installation of the flotation cells is nearing completion. And the photo on the right shows the new paste thickener nearing construction completion. Not shown, the new lead thickener is now operational, having successfully been commissioned on April 1.In summary, ZEP is scheduled to start commissioning in early 2020. As Marie mentioned, our focus remains on careful monitoring of the time line and costs to ensure the project remains on track for an early 2020 start-up.I will now turn it back to Marie to go through the remaining operations and projects. Marie?
Thanks, Peter. Eagle performed well in the first quarter and remains on track to achieve full year guidance despite experiencing extreme weather conditions in the first quarter. Nickel and copper production were both lower than the prior year quarter due to planned lower ore grades. Winter weather conditions impacted ore transportation to the mill for some days during the quarter, and railcar delays affected timing of sales of nickel and copper concentrate.The Eagle East project continues to make excellent progress and continues to advance ahead of the original schedule and under budget. First ore is expected to be trucked to the mill in Q4 of 2019. 2019's CapEx guidance is unchanged at $30 million to complete the project.We continue with our aggressive 2019 exploration programs at Eagle, with a shift in focus from near-mine targets to regional targets with fewer rigs. As a result, exploration expenditure guidance is being reduced to $15 million from $23 million for the year, with planned meters being reduced to 30,000 meters from 40,000 meters previously.Lastly, at Zinkgruvan. First quarter zinc production was higher than the prior year quarter, reflecting improved zinc ore head grades. Lead production was lower than the prior year quarter on lower mill throughput. Having produced over 21,500 tonnes of zinc at a cash cost of $0.44 per pound, zinc remains well positioned to deliver on its 2019 guidance. Our operational focus at Zinkgruvan will remain on planning and execution.On the exploration front, over 12,000 meters were drilled in the first quarter. The 2019 exploration program remains unchanged at 78,000 meters of drilling planned from surface and underground on several targets. Dalby remains our highest exploration priority and will be the focus of the 2019 program as we aim to expand and upgrade the mineral resource estimate.On Slide 16, our capital expenditures guidance for 2019 remains unchanged from our operational outlook update in November and reiterated in our 2018 full year results update earlier this year. 2018 and 2019 capital expenditures are expected to peak on existing assets and will reduce significantly in the coming years following the completion of the Candelaria initiatives, ZEP and Eagle East. Exploration investments are expected to be $70 million in 2019, down from our previous guidance of $80 million, with the majority of the decrease due to the previously mentioned shift in focus at Eagle to regional targets with fewer drill rigs.Touching on last week's announcement of the acquisition of the Chapada copper mine in Brazil, I wanted to take a minute to reiterate why the acquisition is compelling to Lundin Mining. We believe strongly the acquisition of Chapada furthers our strategic goals and ticks the boxes on our asset acquisition criteria to which we have remained disciplined. Chapada brings high-quality, long-life expandable copper production at attractive cash costs and strengthens the quality of our base metal mine portfolio. The acquisition is clearly accretive on key operating and financial metrics, including earnings, EBITDA, operating cash flow per share and is accretive to our mineral asset's NAV. And like our acquisition at Candelaria, we believe we will be able to create further value with future expansions and potential exploration success. We believe upside opportunities exist to create additional value, leveraging our expertise and experience gained through production expansions currently under study for Chapada and copper-focused exploration.Chapada brings proven production in a well-established mining jurisdiction, has an excellent operating team and improves our asset and geographical diversification while maintaining our copper focus. The transaction is expected to close early Q3 and transition preparations are already underway.Turning to Slide 16. From our current assets, we have an excellent growing production profile. This is further enhanced with the acquisition of Chapada. The investments we are making now have set us up for multiple years of production growth and decreasing cash costs. Using the midpoints of our copper production guidance ranges and Yamana's disclosures for Chapada production, annual copper production is expected to increase nearly 50% in 2020 over that of 2018, and would approximate 300,000 tonnes of copper next year.A 55% increase in total zinc production is forecast by 2021 over that of 2018 as the ZEP at Neves-Corvo is commissioned and fully ramped up, doubling zinc production from that asset.And lastly, while nickel production is guided to decline modestly this year, production levels are to increase starting in the fourth quarter of this year when the higher grades of Eagle East are mined.In conclusion, before opening the line for questions, I wanted to reiterate our excitement to have announced the acquisition of the Chapada copper-gold mine last week. The acquisition is clearly accretive on key operating and financial metrics. We believe we will be able to create further value with future expansions and exploration success. Our operations continue to deliver and we remain well positioned to deliver on our 2019 production and cash cost guidance.And with that, operator, I would like to open the lines for questions. Thank you.
[Operator Instructions] Your first question comes from Orest Wowkodaw from Scotiabank.
I had a couple of questions about Candelaria. Specifically, I was a little surprised by how low the grade was in Q1. And I'm just wondering whether we should still think about -- I think the tech report had an average grade this year closer to 0.61, whether we should expect it then to go kind of well above that average in the second half of the year.And then secondly, just obviously some of that was offset by really strong throughput of 80,000 tonnes a day. How sustainable is that moving forward?
Yes. A couple of questions there. I guess, we fully expected that in the earlier part of the year, we would have lower grades because we are doing the pushback. So as we progress with the pushback in the second half, as I mentioned earlier in the call, we do expect our grades to be higher. So I wouldn't say that the technical report is incorrect. I think it's a reliable document that you should refer to. In terms of the throughput, we had really good throughput this quarter because we didn't have any major maintenance stop. We did it in December. So if you recall, we had a big maintenance stop in December but we didn't have one this quarter. So that helped the throughput quite considerably. I don't know, Peter, if you have anything to add?
No. I think you said it all, expecting higher grades.
Is there any more significant maintenance expected this year?
Well, we have our regular downs. So I think they're scheduled and we carry them out when they're scheduled as preventive maintenance. We want avoid any kind of down -- unintended stops, Peter. I think the biggest one would be in June or July?
Yes. It relining work, what's coming up.
Okay. So it will impact Q2?
Yes. It depends on schedule. It will be midyear, so it could be late Q2 or early Q3.
Your next question comes from Fahad Tariq from Crédit Suisse.
Just one from me. On Eagle, the nickel cash costs at $0.37 per pound, can you give some more color on how to reconcile that with the annual guidance? I can appreciate that some of it is related to the accounting change, but maybe just some color on how to compare that to the $2.20 annual guidance.
Yes. The cash cost, it looks very strange and it's mainly because of the very low volume of sales. We did have some delays with the railcars. So we didn't get a lot of our nickel sales off. So if you look at the sales volumes, they're only just under 1,700 tonnes of nickel, but we did have good sales of copper. So the by-product will look really odd in relation to the amount of nickel sold. There's a reconciliation of the cash costs in the MD&A, and you'll see that the by-product looks unusually high, but it's just a matter of the volume of nickel sold.
Next question comes from Stefan Ioannou from Cormark Securities.
Just staying on the Eagle theme. Just with the change in exploration budget there from a -- in your mine target to regional. Are you guys seeing anything regionally that's gotten you really excited to prompt that? Or is it just [ assertive reaching ] of the overall program?
Well, it was part of the overall program from the beginning of the year. So I think it's just a continuation of that. There are some interesting targets regionally that we feel weren't -- of fairly good budget. So we'll continue to follow up on those.
Okay. Do you have any idea when we might see some of those results? Or...
Results? Peter, I'm not sure, when we might have some results from the Eagle exploration, regional.
We've got to start drilling first.
Yes, yes.
Your next question comes from Oscar Cabrera from CIBC.
Marie, I was wondering if you can just talk to the plan on resequencing of the stopes in Neves-Corvo. Was this caused by the expansion on zinc? Or -- I believe you mentioned something about a paste plant, so could you put context around that? And do you think that, that has a detrimental effect on costs going forward?
No, this was a very isolated event and it was just to do with the paste backfill and availability of the paste backfill. So it's nothing that's an ongoing issue. It wasn't connected with ZEP at all. It's just one of the normal things that happen as you mine that. Peter, I don't know if you have any more insight on...
No. It's just like you said, we were having some issues with the paste fill in Q4. We've got that sorted out, so we've had really good paste production. So it should be back on sequence now.
Okay. And then secondly, it was interesting that the buyback wasn't mentioned at all, unless I missed it in your MD&A. So I think I'm going to try to ask the question I asked when you acquired Chapada again. How do you -- looking at your capital structure in terms of priorities? And if -- can we think about the buyback as something that is there but may not be used?
Yes, so I guess with the announcement of Chapada, it became evident to people why we hadn't executed on a buyback, I would hope, because we were restricted a great deal during the entire course of the first quarter of the year. So it was not possible for us to execute on the buyback. There were a couple of times, one of them being when our stock took about a 10% hit in one day on a false news report, where we wanted to be in the market and we couldn't be. Obviously, we have the transaction and our focus is going to be on completing the transaction. The buyback remains open, it remains open and available to us until December. And we'll consider from time to time whether we execute on that based on what the market's doing, and we think there's still value in our shares that haven't been priced in even after the acquisition announcement.
[Operator Instructions] Your next question comes from Jackie Przybylowski from BMO.
I guess, the first question, I just wanted to follow up, Marie, since you alluded to it. I've had a few people asking me about that article, the false article. I think it was Bio Bio, was the name of the article, but I may be pronouncing that wrong. Have you received any follow-through or any kind of indications from anyone that there's going to be a follow-up investigation or anything like that into any of the allegations that were made in that article?
There's nothing from us. I think our news release was fairly clear in our position that we are not involved in any bribery allegation and are not subject of any investigation. So we have no new information.
Great. That's great. And secondly, I've already chatted with Mark about this, but I think it's probably worth asking on the call anyways. The Global and Mail article that featured you, which was a great article, by the way, on April 22; in it, at the very end of the article, you mentioned that you were looking to do an acquisition in 2019. Can you just clarify? That came out about a week after you had announced the Chapada deal. So can you just clarify to everyone maybe what your plans are in terms of M&A through the rest of this year, if you have any plans?
Yes. The article -- the interview for the article was conducted prior to our announcement of Chapada, which is why it wasn't mentioned in the interview. But I think there was also a Reuters' piece where they asked about whether we were stopping on M&A, and the answer is no. I think we're going to focus for the next few months on closing this acquisition, completing our integration and making sure that we don't have any value loss in the period between announcement and fully integrated. So that will be a primary focus for us. But we made no secret also about the fact that we wanted to do a 2-stage plan on corporate development. We had a 2-stage strategy. One of them was to acquire the next Lundin mine, which was an operating mine. And after that, we wanted to try to start to fill our pipeline with a project. So our corporate development team will continue to pursue project acquisition opportunities and look at other various things. So they're not going to put their pens down and just celebrate for the next year. They're going to keep working because I think, as evidenced by this exercise, we -- it takes a long time to execute on something. So I think we'll always be working on the M&A side of things. But our focus for the next few months will be definitely on closing and integration and making sure there's -- that we take it into the company well.
[Operator Instructions] Your next question comes from Lawson Winder from Bank of America Merrill Lynch.
I just want to follow up on the lease accounting. So the existing guidance as it is for cash costs at Eagle. So does that include an adjustment for -- or does it reflect the new IFRS lease accounting or does it not?
Yes. So this is actually an irritant to me because this is one of those accounting pronouncements that takes something really understandable by people, which is OpEx, and turns it into interest, depreciation and something else that people can't understand. So basically what the Eagle difference is and why it was $0.11 this quarter and not a much smaller amount is the railcars. So we have a lease for railcars that used to be OpEx, and we would include that in the C1 anyway. But now it's turned into CapEx and so that now becomes a CapEx. So it moves from our cash costs, which is where a logical person would think it would be, into all-in sustaining. And that's the same case for some of the other operations, too. But I think because the Eagle's sales were so low, it had a bigger impact there. Jinhee, I don't know if you wanted to talk about the lease accounting at all, with that intro.
No, that's exactly correct. We see a much bigger impact this quarter, it's about $0.11 on the cash costs, and that's because we had such low sales. That will be lower in the future quarters when we have increased sales.
Okay. And then just a follow-up on that same question. So the $2.20 per pound guidance, that already reflects the fact that IFRS 16 has been effective in 2019. Am I understanding that correctly?
Yes. It shouldn't have a material impact over the course of the full year.
Your next question again comes from Orest Wowkodaw from Scotiabank.
Just with regards to Chapada, obviously you're not going to close this transaction until, I think you said, early third quarter. I'm just curious how long you think you need to kind of -- once you close, how long do you need to kind of evaluate the asset and reset expectations with respect to issuing your own technical report?
Not sure at the moment, Orest. I think we have some definite work to do. There's a lot of very interesting things happening there, and it will take our team some time to look at that. So we'll have more color on that when we're able to complete and we can make some statements about what our intentions are. For the time being, I think we're not the owners of the asset, it's a little premature to start making pronouncements on expansions and things like that. So when we're able to execute and complete the transaction, then we'll have a better idea.All right. You're like my husband, Orest. You have the first word and the last word.
I have no further questions in queue. I'll turn the call back over to the presenters for closing remarks.
Okay. Thank you, everyone, and we look forward to speaking with you again in our second quarter results call.
Thank you, everyone. This will conclude today's conference call. You may now disconnect.