First Quantum Minerals Ltd
TSX:FM
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First Quantum Minerals Ltd
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Good morning. My name is Cindy, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quantum Minerals second quarter earnings results conference call. [Operator Instructions] Mr. Clive Newall, President and Director of First Quantum Minerals, you may begin your conference.
Thank you, operator, and thanks, everyone, for joining us today. Joining me on the call today are Philip Pascall, Chairman and CEO; Hannes Meyer, CFO; Tristan Pascall, Director, Strategy; Juliet Wall, General Manager, Finance; and Simon MacLean, Group Reporting Controller; and Rudi Badenhorst, Director of Operations, Zambia. As usual, before we proceed, I will draw your attention to the fact that over the course of this conference call, we'll be making several forward-looking statements. And as such, I encourage you to read the cautionary note that accompanies our second quarter 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 available on our website on SEDAR. A reminder that the presentation which accompanies this conference call is available on our website. So as usual, I'll get us started with some opening remarks, then Tristan will provide an update on Cobre Panama before Hannes' review of the financial results. We will then open the lines to take your questions. Again, there continues to be very little as usual these days as the pandemic continues. We have seen some easing of restrictions related to COVID in a few jurisdictions, but in others, new or tougher restrictions are being put in place. For this call, this is now the second time that the majority of the participants are dialing in from home, but we are hopeful that over the next few weeks, some kind of normalcy will resume as more offices open. At the start of the quarter, globally, governments were beginning to deal with COVID-19 as its serious impacts were being better understood. Similarly, we have put in place various protocols and measures to protect our employees and communities, but otherwise, our operations continue to operate fairly normally. In early April, as you know, a suspension of labor in Panama resulted in Cobre Panama being placed on preservation and safe maintenance, which impacted production significantly. However, as recently announced in early July, we were given the go-ahead to resume operations. And we are now back on track to deliver our revised production expectations. Tristan will provide more detail on the activity at Cobre Panama in the quarter and what the plan for resumption and ramp-up entails. Despite the suspension of Cobre Panama, the quarter was really solid, both operation and financially. We delivered a significant improvement in costs and production consistent with the revised guidance. Our C1 costs were at the low end of the guidance range, and our all-in sustaining costs were better than guidance. Kansanshi was steady with improved throughput and recoveries on both mixed and sulfide ore circuits. Sentinel was the star of the quarter. Production was at its highest levels since 2018, and costs were at a record low as a result of increased throughput, lower fuel prices and currency depreciation. In May, Ravensthorpe shipped its first nickel as restart and ramp up to full production continues. We had an additional nickel shipment in June, and deliveries are expected to continue monthly for the rest of the year. Although the impact of the pandemic at our operations has been manageable so far and has had a relatively modest impact operationally, I do need to acknowledge the impact the pandemic has had on our workforce, many of whom have been unable to return to their families and homes for extended periods as a result of quarantine requirements, rotation, timings and travel restrictions. On behalf of the entire company, I'd like to thank our people who have made these personal sacrifices, and we recognize the significant contribution they continue to make to the success of the business. I would also like to express our sincere condolences to the families and colleagues of the 5 members of our workforce in Panama that perished as a result of COVID-19. The company continues to place top priority on health and safety throughout our operations, and this will continue in future as we focus on measures to prevent the transmission of COVID-19 amongst our workforce and communities. Now I'd like to turn things over to Tristan to provide an update on Cobre Panama. As most of you know, Tristan was GM at Cobre Panama through the construction phase until being pointed -- appointed Director, Strategy earlier this year. However, he has continued to provide oversight as the operation navigates the current unique environment. So over to you, Tristan.
Thanks, Clive, and thank you to everyone who's joining the call. Certainly, the second quarter at Cobre Panama was a challenging period, but there were some strong successes along the way, and we're confident in the ramp-up for the remainder of the year. As Clive mentioned, at the beginning of the quarter, during the first week of April, the Ministry of Health of the Republic of Panama ordered the temporary suspension of labor activities on site in -- to the COVID-19 pandemic. I'll emphasize that First Quantum acted early in response to the pandemic. When COVID-19 was declared an international public health emergency, the company moved quickly to introduce health and sanitation protocols across all of its sites. By the beginning of April at Cobre Panama, we had already implemented health and sanitation protocols and reduced the personnel on site down to around 2,800. In response to the Ministry of Health Resolution, the company placed Cobra Panama on preservation and safe maintenance beginning on the 7th of April in order to ensure the safety and the protection of personnel, the environment and also the assets. And personnel levels were reduced down to about 800. Clive mentioned the tragedy -- the tragic loss of 5 members of our colleagues from Cobre Panama who succumbed to symptoms associated with COVID-19 in April and May. We extend our deepest condolences to their families. And we'd also like to thank the medical staff from the Ministry of Health who treated our people in hospital and those who continue to work on resolving the wider pandemic in the country. We've been working with governments on their response to the wider pandemic, and this has included donations of medical equipment, including PPE, testing kits and ICU equipment. And we've been helping to support families in need with food and supplies in our surrounding communities. We've always been committed to giving back to our communities around the mine and providing help and support when we can. In order to sanitize the mine, Cobre Panama implemented a deep disinfection program. We've been working closely with our unions, our suppliers and the local community in this. For example, the local women's cooperative have been producing many of the face masks for the site. And we set a very high standard for COVID-19 protocols on the site. It's a testament to the hard work of each and every employee on the site that we are able to successfully implement these standards. Many of our people work extended rotations throughout the quarter away from their families, and we thank them for their commitment and support. The temporary suspension orders from the Ministry of Health were lifted on 3rd of July, and we announced shortly thereafter the resumption of normal operations. We've implemented already a reopening plan, under which we expect operations to ramp up to full production by mid-August. The priority for Cobre Panama continues to be health and safety of the workforce and surrounding communities, and the strict protocols and sanitary vigilance remain in place as the new normal way of working. The reopening plan provides for the safe and sanitary increase in personnel on site for around 800 that were on site during preservation and safe maintenance. At the end of last week, there were around 1,450 personnel on site, and we expect to be at around 1,850 personnel by the end of this week with another 600 personnel already in preemptive quarantine. Each movement of personnel currently involves 14 days of preemptive quarantine with testing at front and back to ensure no contagion. We are able to run at full production with around 2,200 frontline personnel, but we're aiming for a sustainable full complement of around 3,400 to be brought back to site in a phased manner and in line with the health protocols. Only essential frontline personnel are on the priority list to return to site, and our support areas are working remotely off-site. We are also adapting to push new ways of working in the case of travel restrictions, such as remote and virtual maintenance support, so we can utilize our personnels' expertise from their home countries. In terms of production, during Q2, we did run at a reduced level of operations really in order to keep vital equipment warm and dry and free from condensation in the Panama climate and to ensure good environmental standing. We were cycling through each mill train running one at a time. And as a result, we produced around 21,000 tonnes of copper and 7,800 ounce of gold in the quarter. Recoveries were slightly impacted by the increased proportion of surface stockpiles we processed under the restricted operations, but we do expect recoveries to return to normal levels for the rest of the year. The cash cost of production in Q2 reflect the lower production level and included with the C1 and all-in sustaining costs is $4 million associated with health and safety protocols. A further $6 million in costs associated with placing the operation in preservation and safe maintenance were incurred in April but excluded from cash costs. For the rest of the year, unit costs will reduce as a result of the higher production volumes. But we do expect some ongoing higher health and safety costs. In terms of guidance, we've taken a cautious approach. We recognize there are some risks out of our direct control, which may yet emerge as a result of the pandemic. So production at Cobre Panama for the full year 2020 is now expected to be between 180,000 and 200,000 tonnes of copper and between 70,000 and 80,000 ounces of gold. We currently have 1 train running at near capacity and will bring up the remaining 2 trains over the next few weeks. We do have some catch-up on prevention and maintenance but stand very confident for the operation to be fully ramped up by mid-August. Our expectations for the remainder of 2020 and into 2021 are that we can ramp up to the 85 million tonne annualized throughput with confidence. We're actively working on mine plans for the expansion to 100 million tonnes per annum at present and remain on track with the timetable on the 43-101 for this expansion. With that, I'll now ask Hannes to take you through the finance presentation. Thanks, Hannes.
Thanks, Tristan, and good day to everyone. I'd like to take you to Slide 8. And there's a presentation available on our website if you want to follow that in the presentation and it's called Overview. In summary, total copper production was in line with the same quarter in 2019. And total unit cost C1 and all-in sustaining costs achieved their lowest level in 3 years. Sentinel performed exceptionally in this quarter with the highest production since the fourth quarter of 2018 with record low unit costs. There were robust performances at both Kansanshi and Guelb Moghrein, with both operations achieving a reduction in unit costs and consistent levels of production. Guelb Moghrein's C1 was the lowest in over a decade and the lowest reported all-in sustaining cost. Production benefited from Las Cruces operating at normal throughput levels compared to the impact of the land slippage last year. As Tristan highlighted, there was reduced production at Cobre Panama as it operated under preservation and safe maintenance mode. Copper prices were relatively low for much of the quarter, but have trended upwards from the end of June into July. As a result of the recent increased prices and given uncertainty around the impact of COVID-19, the company has taken the opportunity to extend its copper sales hedge program out to December 21 to mitigate any future price risk. I will talk to this as well as our nickel hedge program in more detail later in the presentation. The company has also hedged 151 million liters of ultra-low sulfur diesel as part of our cost management strategy. Ravensthorpe completed the commissioning of 2 high-pressure acid leach circuits in April and May, respectively, with the first shipment of nickel occurring in the quarter. Production is expected to continue to ramp up throughout the third quarter. Turning to Slide 9 on production. Total production for the quarter of 169,000 tonnes was slightly higher than Q2 2019. Sentinel's performance was particularly pleasing with higher throughput driving production to one of its highest quarterly levels, 11% higher than the same quarter in 2019. Kansanshi delivered another robust performance with higher throughput and recoveries, ensuring overall production was in line with the same quarter of 2019. Las Cruces operated at normal throughput levels compared to the same quarter in 2019, which was impacted by the land slippage. Cobre Panama production was lower than planned as a result of preservation and maintenance mode operation. Gold production of 55,000 ounces was lower than the same quarter of 2019, reflecting preservation and safe maintenance at Cobre Panama and planned maintenance at Kansanshi. Turning to the next slide, financial overview. Comparative EBITDA of $352 million in the quarter benefited from favorable movement in the hedge program and foreign exchange as well as lower costs. There were gains -- these gains were offset by 12% lower market copper price as well as cost in ramping up production at Ravensthorpe. There was a comparative loss of $84 million in the quarter and a comparative loss of $0.12 per share. And net finance expense of $186 million has been recognized, of which a significant portion which previously been eligible for capitalization in the same period of 2019, but it's now expensed following the declaration of commercial production at Cobre Panama. Net debt was marginally higher than the previous quarter, impacted by timing of service, preservation and safe maintenance period at Panama and ramp-up costs at Ravensthorpe. In addition, the phasing of tax payments was relatively high in this quarter. And then going to Slide 11, which has got the exchanges and comparative EBITDA just depicting that and showing the impact of the metal prices -- production, but also offset by benefits on the hedging and the ramp-up cost of Ravensthorpe. Going to the next slide, Slide 12. Copper unit cash costs, both C1 and all-in sustaining costs for the quarter, were at their lowest level for 3 years. Copper all-in sustaining cost of $1.62 per pound and C1 cash cost was $1.20 per pound for the second quarter of 2020. The $0.15 per pound and $0.12 per pound decreased, respectively, compared to the same period of 2019. Lower C1 cash costs reflects, in particular, decreases at Zambia operations due to lower fuel cost, favorable ForEx, lower maintenance at Kansanshi and increased production at Sentinel. Sentinel achieved a record low C1 cash cost of $1.36 per pound. Lower C1 cash costs for over a decade at Guelb Moghrein with lower mining, fuel cost and higher realized gold prices and the lowest reported all-in sustaining costs. C1 cash costs include contribution from Cobre Panama of $1.72 per pound, which is higher than planned as it was operating under preservation and maintenance. Lower all-in sustaining cost reflects lower C1 cost combined with lower royalties. Turning to the next slide, copper hedging program outlook. Copper hedge program has been extended to December '21 to ensure stability of cash flows while maintaining compliance with financial covenants and with the fluctuations in commodity prices. The bar chart represents -- presented here shows the split between swaps and collars at 29th July. The company has unmargined copper forward sale contracts a little bit more than 210,000 tonnes at an average price of $2.71 per pound outstanding with maturities to December '21. In addition, the company has unmargined 0 cost sales contracts for just a bit more than 200,000 tonnes at a weighted average price of $2.70 pound -- per pound at the bottom to $2.94 outstanding with maturities to July '21. Approximately half of the expected copper sales in the next 12 months are hedged at an average oil price of $2.70 per pound. The company also has just under 8,000 tonnes of unmargined nickel forward sales contract at an average price of $6.76 per pound with maturities to February '21. Turning to the next slide on debt and liquidity profile. The company ended the quarter with $882 million of net unrestricted cash and cash equivalent and was in full compliance with all its financial covenants. Taking into account forecasted operating cash inflows, capital expenditure outflows and available cash and committed facilities, the company expects to have sufficient liquidity through the next 12 months to carry out its operating capital expenditure plans and remain in full compliance with its financial covenants. We continue to take action to manage operational prices and also to further strengthen the balance sheet. Turning to the next slide on 2020 guidance. As noted by Tristan, Cobre Panama copper and gold guidance have been reduced following its preservation and maintenance period operation. Production guidance for all other copper operations remain unchanged. Total copper production guidance is now 725,000 to 770,000 tonnes compared to 755,000 to 805,000 tonnes guidance previously issued. Total guidance has been -- gold guidance has been reduced to 230,000 to 250,000 ounces, a 20,000-ounce decrease from previous guidance. Nickel production guidance at Ravensthorpe has been narrowed to 15,000 to 17,000 tonnes. Cash cost guidance has remained unchanged and is not being reduced as COVID-19 does pose some additional risk. However, we have been operating over the past quarter at the lower end of the C1 guidance and slightly below guidance for all-in sustaining costs. Total capital expenditure guidance remains unchanged, but with a change in allocation to reflect essential sustaining expenditure and phasing of expenditure as well as reduced capitalized stripping at Cobre Panama. Full year depreciation expense guidance has been reduced by $50 million to reflect reduced Cobre Panama production. Thank you. And I will now hand back over to Clive.
Thanks, Hannes. So operator, can you please open the lines to take questions?
[Operator Instructions] Your first question comes from Orest Wowkodaw from Scotiabank.
Tristan, a couple of questions about Cobre Panama. Just curious with the ramp-up now and the workforce remobilizing, when do you exactly expect to achieve that 85 million tonne throughput rate on a sustainable basis?
Orest, yes. So as I said, we can run all 3 trains with about 2,200 people. But that's really the frontline guys driving trucks, the operators on the process plant. We'd like to get at a sustainable the full level of about 3,400 people on site, and we'll phase that up. So mid-August, we're comfortable in that. On a sustainable basis, we'd like to have that 3,400 people, and that would underline that capability. And that will come from mid-August. I think it will just get more and more reliable across the year. So Q3 will still be in a ramp-up because of the workover, July, August and then into September. And I think you'll see Q4 at a fairly steady level or going well.
Okay. And do you -- given the extended curtailment this year, do you see any risk to the current guidance for 2021 at Cobre, specifically the 310,000 to 330,000 kt?
Orest, no. We're not changing that guidance at the moment. Yes. As in the capital slide, we're looking at discretionary, making sure that every capital dollar that we spend is appropriate, and that includes capitalized stripping. But we're comfortable in that capitalized stripping level in terms of impact for next year. So at the moment, there's no change.
Okay. Great. And then just finally for Hannes. With the copper market having perked up and with a number of other mining companies starting to term out debt, I'm just curious if you're next just given the amount of debt maturity you have starting in 2022.
Orest, yes. I mean, as you know, we proactively manage our debt. So the next big maturity coming up, besides bank maturities that sort of amortized through the period, is the '22 bond, as you mentioned. And look, we tend to be opportunistic in that. So if the market is there, we'll extend those maturities and go back and issue new bonds and extend that. But it's a matter of market conditions determining that.
Your next question comes from Greg Barnes from TD Securities.
Back to you, Tristan, again. On the protocols -- safety protocols you put in place at Cobre, social distancing, I assume and what have you, do you think there will be an impact on costs?
Greg, as I outlined there, there was $4 million in Q2 costs from the health and safety protocols. And we'll continue with those more stringent protocols, and it won't cost more than that because that included a lot of the disinfection and cleaning and so on. So it's a marginal cost. But yes, it will carry on because we're running under this new normal that we all find ourselves in.
So you're not really expecting much of a change in your unit cost guidance then for Cobre as result of all this?
No. No.
And Tristan, I asked you last quarter about the Jiangxi situation. There has been some recent noise around that. Any further comments on discussions, progress, what have you?
It continues in good order. So we -- regular e-mail, regular communication. The face-to-face communication is difficult at this time, but no other advancements.
And just finally from me. At Sentinel, the costs came down. As you noted, record low costs for the quarter. Is that sustainable? Or is there something in the quarter that was particular that helped drive that lower?
Rudi, do you want to take that?
Okay. Yes. No, I think Sentinel is obviously doing quite fantastically well. The production levels are up. Mining is looking good. So there's consistently good production looking at some reports set for July. Obviously, the exchange rate, the [indiscernible] exchange rate has favorable impact on costs. And I don't see much of a strengthening in that exchange rate. So we'll see a continuous benefit on dollars exchange rate. Where the oil price is, most of the agents, they are oil price-based. And we've renegotiated fuel contracts and ensure that we have excellent diesel fuel costs for the remainder of this year going into next year. So I think Sentinel is set to continue to impress throughout this year.
Your next question comes from Matthew Murphy from Barclays.
Just as a follow-up to that one. The Sentinel G&A, I noticed was only $0.01 a pound. I'm not sure. Were there any funnies in that number offsetting G&A?
Sorry, Matt. We lost you at some stage. Can you repeat that question, please?
Sure. Yes. Just in the back of your MD&A where you have the Sentinel -- or you have the cost breakdown for each operation for Sentinel, I saw G&A was only $0.01 a pound. And I was just wondering if there's anything offsetting that. Because normally, I think it's around $0.10 a pound or around there.
Juliet, do you want to comment on that.
We can follow up if it's too detailed right now.
Sure. Let's get back to you later on the call once Juliet just look at those numbers.
Sure. Okay. Can I just ask about this request for arbitration? Can you make any comments about what led you to make that request and what it pertains to?
We're advised by our legal counsel to provide no comments on this issue. So I'm afraid we can't add anything to what is there pretty clearly set out in the MD&A. I would like to just confirm that there is no liability associated with that. We've had a number of questions prior to this call. But if you read it properly, there are no liabilities associated with it.
Sorry, I had -- can I just answer this? I have my mute button on, sorry. On -- just going back to the G&A, it's a reclassification of VAT nondeductibles in Q1. So it's just being transferred into mining and processing lines. So it's just a reallocation. So there's no sort of funnies going on there.
Got it. Okay. And so that -- I understand the -- just back to the arbitration question, I understand you can't make any comment. I'm just wondering, is this -- is the action something that the government of Zambia might have expected? Or like would you have given on some warning that you were going to take that action before you did it?
I think no comment is best.
Your next question comes from Matthew Fields with Bank of America.
I just want to follow up on I think Orest's question from the beginning about sort of actually terming out your maturities. The first kind of term loan amortization came this quarter, and you've got another one in the back half of the year. Is the expectation that, that term loan amort will be handled with free cash flow generation and cash on hand? Or would you rather kind of be more active in sort of doing some bond issues to clear out revolver and clear out term loan amort?
Matt, the plan is to pay it from proceeds of operations and cash available. But I mean we've got that option as well available. If the bond market is supportive, then we can always go there and look at terming out some of that through access to the bonds.
Okay. And then second, your CapEx is trending well below the $675 million guidance, I think $300 million for the first half. Is there a risk to the downside on that full year number? If you can sort of find savings throughout the year, should we sort of erred to the lower side of that $675 million number? Or are there big chunks of things happening in the second half that will sort of balance that out?
Clive, I can take that, if you like?
Tristan, that's fine. Yes. Yes, please.
The $675 million is our latest -- sorry, I keep on pressing the wrong button. The $675 million is the -- is our latest forecast. So I would go with that. So there is often a bit of a change in the phasing on quarter for stripping, for example, but I think that's the latest guidance.
Your next question comes from Oscar Cabrera from CIBC.
If I may, just tagging on to Matt's question on CapEx. The reduction this year in stripping is clear from Cobre Panama. But could you perhaps comment on the increase in sustaining in other CapEx, $50 million, where that came from? Or where is it going? And how do we think about sustaining CapEx for '21 and '22 as guided previously?
Yes. So we've -- the latest guidance on sustaining CapEx is $220 million for the year. I think that we originally started with a guidance of $250 million in February, and that went down to $200 million. But there's an extra $20 million in the Zambian operations for essential sustaining spend on equipment and mine fleet. So that's part of the $20 million. The other $30 million is for spend -- nonsustaining spend in Panama, including on the TMF, some expansionary CapEx on small projects. So it's a phasing largely of that spend. And in terms -- sorry, what was the follow-on question? Was that in terms of CapEx versus sustaining CapEx for next year? I would still stick with the guidance that we gave, which I think was around about $250 million probably.
Right. And then just wondering if you have heard anything else or any -- do you have any updates on the Law 9 discussion with the different entities with the government of Panama?
Tristan?
Yes, Oscar. Look, it's been difficult in this space to have the face-to-face discussions, which are necessary there. The constructive dialogue was ongoing. But at this stage, with the situation in Panama and more broadly travel and so on, things are progressing but slowly at this time. So no, there's nothing to update there on Law 9, other than the commentary around the mine coming out of the temporary suspension of labor was very positive in terms of the understanding and impact that it has in the economy in Panama. And we did meet with people during the quarter, the Ministers of Finance and so on. And there's a good understanding of the placement of the line in the economic outlook in Panama.
Right. And hopefully, that goodwill carries on. Then lastly, on Zambia, with the changes to the export tax and that -- so there was about $50 million in offsets that you got from the VAT. Can we expect anything, more things like that for the balance of the year? And has the government indicated how long they plan to maintain this or eliminate the export tax on precious metals?
Hannes, do you want to take that?
Yes. I mean the export tax on precious -- that's removed. So -- but I don't think that's -- there's a plan for that to come back. So I think on the VAT, it's sort of a continuous process where some months we get offset. And look, we've had these offsets now in the quarter. And then sometimes, it's less so. So it's a -- so there's no indication, but that's been the practice is that you get some of it back in certain months and other months, you don't.
Okay. So in terms of an effective tax rate, Hannes, what should we be thinking about?
Juliet, do you -- I think you've got the effective tax rate calculated.
Yes. I mean we tend -- it obviously gets a little bit complicated because of no real tax credit for interest. So we tend to guide excluding Panama interest roundabout 30%. And we're certainly seeing it at that level -- that sort of level at the moment.
Our next question comes from Karl Blunden with Goldman Sachs.
It's a follow-on to some of the other comments that have been made, just in terms of views on asset sales or sales of streams to help also extend that maturity runway. I'd be interested in your latest thoughts. Are those still looking into something like that? And then can those transactions progress just given the difficulties with diligence under COVID right now?
Do you want to do that, Tristan?
Sure, Clive. Thanks, Karl. Look, I think at the moment, the outlook or the environment for that has certainly improved. I think from earlier in Q2, the copper price environment at the moment is very appealing. And so actually, there's a little bit of traction and things moving well there. You asked a good question on due diligence. Obviously, any transaction of that nature will require people on the ground. And that's probably the key deliverable to make happen. But in the interim, we've been able to do a lot in terms of virtual management presentations, videos and so on. And there's a lot of technology around that enables one to keep some progress. And I think we're starting to see some freeing up of travel and people being able to move from country to country, and that's certainly part. So at the moment, the schedule still looks reasonable in terms of what we had thought, and we're making progress there.
That's helpful. And then maybe this is for Hannes. And Hannes, maybe it's too specific, but I'd be interested in your thoughts. You have a cap structure at a bunch of different elements. Some of them have prepayment penalties, some call protection on the bonds. How much do you think about the negative impact of that call protection on what you pay to take it out versus the benefit of really extending runway when the market is open as it is today?
Look, we do look at those call protections. So the '22 bonds are now callable at par. So that's relatively easy. I guess if we get a lot of cash in, then you've just got to weigh it up the cost of servicing the debt versus that -- the call premium. But sort of every year, there's the bonds coming up callable at par. So it does help to take it out as sort of a relatively cheaper cost. But that's a good problem to have. Yes.
Your next question comes from Ian Rossouw with Barclays.
Just a follow-up on Cobre Panama for Tristan, just on some of the I guess spending that you've delayed. I just wanted to get a sense of -- you really said you're comfortable with production, but just wanted to get a sense of how much of that is sort of deferring into next year. And then maybe, Juliet, just for the broader group. I recall you said in the Q1 presentation that CapEx guidance might not go up because some of the deferrals for this year are going into next year. I just wanted to get a sense if you have a better idea of CapEx for next year.
Ian, look, I think Juliet was saying we don't see too much change from the guidance. Quite a lot of that is not deferral. It's more just that we found savings there. So at Cobra Panama, I think the one area where CapEx -- where the main component of CapEx looking forward is the 100 million tonne per annum expansion. And we had envisaged some capital in the second half of the year, and we'd still like to make progress on that. We'll see how that goes in terms of permitting, ready to start that work. And that's probably the major one from Cobre Panama. The sustaining capital and so on that you see for the businesses in the tailings, and that needs to happen in order. What we've done there is shift the schedule a little bit, but that capital would be required nonetheless. So it's just a scheduling element there. Elsewhere at Cobre Panama, the capital has been saved really on component change-outs because we haven't been burning machine hours, for example, on the large rope shovels. Those really are very chunky capital commitments to do the undercarriage change on the P&H shovel. And so when we're not burning the machine hours, we're able to push that out. But the depreciation of that reflects elsewhere in the business. So I don't think we'll be changing the guidance, and that was the comment from Juliet for next year's capital. And in terms of Cobre Panama, we're comfortable with the level that we're spending in the mine in order to keep the production profile correct for next year. The work that needs to go in and the work where we're putting it in is, can we make the mine run at an optimum level of 100 million tonnes per annum. But at the levels we're running at around 85, we're confident of where we stand.
Okay. And then just a follow-up on Ravensthorpe. You produced quite a small bit of nickel. So I'm not sure if it was representative. But it looks like the payabilities are up a little bit. Is that a reflection of changes in the contract structure with clients? Maybe just to give a sense of that? And are you still planning to produce mixed hydroxide going forward? Or do you intend to change some of that metrology around that?
I'll have to answer that, Clive, I think.
Yes. Yes, please.
The payabilities are almost the same as they were historically. We're operating in a pit that's called Hale Bopp. And it's -- the nature of its geology and so on is that it's slightly more diverse than the earlier days of -- that we operated in. And that's just something that we have to accommodate through this year. There's a capital project that's underway that takes us to Shoemaker Levy by the end of first quarter next year, 2021. And that's a much larger, and that's a long-term resource with much easier diversity of geology and that, therefore, beneficiation, slightly higher grades. So -- and that's really what you see in the projections is the rest of this year in Hale Bopp and then sometime early next year, moving into Shoemaker Levy. And that project is well in hand, and it will carry on for the next 6 to 9 months.
Okay. But I mean is -- with the demand in I guess nickel hydroxide or intermediate products increasing, I mean is there an opportunity to improve payabilities and sort of pricing structures for the product?
We've done a detailed study on producing a nickel sulfate that's pretty pure, cobalt sulfate that's pretty pure. And we will go -- we will not commit to doing that until we're in Shoemaker Levy and producing at full output. And as you know, as one of the initiatives, we've had people to look at taking a stake in Ravensthorpe. So we are mindful of what suits the various parties most. In other words, whether they'd rather have it as mix on upside and handle it themselves in some way as part of that arrangement or would they prefer it if it's upgraded. And that will get determined, obviously, in the light of the outcome of that exercise. Does that make sense to you?
Yes. That's useful. That's all for me.
Your next question comes from Jatinder Goel from Exane BNP Paribas.
Just one question on CapEx. Looking at '21 and '22, out of $850 million, we got $250 million stripping, and you mentioned $250 million on sustaining. So out of the remaining $350 million, how much is allocated to Latin America for each of these years? And does COVID-19 change any of those thinkings on spending into both Taca Taca and Akira at this stage based on the level of disruptions you might have seen? And anything that might have changed in your mindset on how to deploy capital for the next couple of years?
Juliet? Are you still on mute?
Yes. Sorry. In terms of allocation of CapEx for Panama, of the $850 million, there would be about -- split about $70 million of sustaining CapEx and about $150 million to $160 million of expansionary and other project CapEx, and then a portion of the stripping, about $75 million, would also relate to Cobre Panama.
So just to be clear, how much is allocated to Latin America, Peru and Argentina in that $350 million other CapEx for '21 and '22? And if we have much...
There wasn't much for Taca Taca. So there was not much capital in for Argentina. We have some capital in for the [indiscernible] I don't know, Philip, maybe you want to comment on that maybe but...
We had some discretionary spend -- development spend of up to $50 million in those years.
So yes. As Hannes said, there's a limited amount allocated for both those projects. And it's limited because clearly, we're not intending to make any decisions to go ahead with a significant project in the near future. And that's an undertaking we've given to the market at large, and that's our position. I mean if the circumstances were to change, then we'd give a lot of warnings to everyone as to why that was happening. But there's no reason for us to expect that now, and hence, the relatively small allocations.
Your next question comes from Ioannis Masvoulas from Morgan Stanley.
A few questions left from my side. The first one on cost guidance for the year. If we look at the Q2 run rate at $1.20 and the fact that Cobre is ramping up, the Zambian quarter remains probably weak and the $0.03 savings that you mentioned in Zambia, looks like H2 cost levels could also be quite low. So under what scenario would costs come in close to the middle or even the high end of the range, given that you haven't really changed anything in the overall guidance? And I'll stop here for the first question.
Yes. I mean, as Hannes said in his script, we've obviously been operating at the lower end of our guidance for this quarter, roundabout $1.20. And we would -- we did consider narrowing the guidance. But just some of the risks around COVID, if there were any sort of any stop/start interruptions or anything like that, I suppose, that could impact could impact C1 and ramp-up. So we're hopeful to come in at the lower end of guidance.
Understood. And then Clive, I'd answer that. Ioannis, it's a good question in that, obviously, we are operating at a low cost. But it's a fairly conservative one because, as Juliet said, there are quite a few possible things that would occur. And having just come through a recent history, that was not that easy to predict. It would make sense for us to be conservative. But I prepare one of the questions that Greg asked earlier about sustaining low operating cost. We did hedge diesel. And it's not called diesel. It's called heating oil, [ New York ] heating oil. It's an index, and we hedged about 50% of our total use for the next 12 months throughout -- right through 2021 at a time when the -- to give you a guide because that's the only way to make sense of the figures. The oil price was $24 a barrel, which, of course, it's moved from -- you don't get it for $24 a barrel because it's in contango as the years go up. But that already looks like it was for virtually every month going forward, we would look pretty good and therefore, we can retain low operating costs. And diesel energy, a significant part of the saving because that index not just relates to the fuel that we use in trucks and the line, but also to things like explosives. So we have tried to make sure that we could retain those lower earnings. But the higher side of it, as you point out, is more a function of disruption in production, for some reason. They should obviously push that up.
Understood. That's clear. And maybe a second question on the Cobre Panama production guidance. So if I take the low end, the 180,000 tonnes and assume Q4 is back to normal. So that suggests that you make no real progress on volume growth in Q3 relative to Q2. Given that you are already ramping up and assuming you get to the full run rate by mid-August, again, would -- wouldn't that wanting to look very conservative from that ramp-up point of view?
Yes. Ioannis, look, that's a reasonable perspective. It's just the vagrancies of bringing labor in and out of the site is really what that caution is about. I can paint a scenario for you where we ramp up very -- in a very orderly fashion. But right now, the virus in Panama, it looks like it spiked and reached its maximum, but that would be very early to say that with -- in a definitive fashion. So we're just aware that there's a large body of contagion in the country, and so we need to be checking people very carefully as they come through. And potentially, if you had a group come through and there was co-transmission, then we would need -- we would delay that group of people coming in. So it's that kind of thing that would knock you back. But otherwise, yes, in an orderly -- in terms of -- everything ran like clockwork, then I think yes, we would definitely be pushing those numbers.
Understood. And just the last question from me, again, on CapEx. Just trying to figure out, thinking about the guidance for next year, how much of that reiteration of the 2021 CapEx guidance reflects the FX gains, particularly in Zambia? Because just reading through the script, it looks like you have pushed out some of the 2020 CapEx items into next year. So I'm trying to figure out how much offset you get through either FX or just overall like CapEx savings.
Yes. I mean in terms of CapEx, we go for CapEx guidance for the outer-years early in the year. So we'll have some savings. There's some rollovers that I don't want to comment in detail on next year's CapEx, but we should be ballpark the same sort of number. But I don't want to -- it's a detailed exercise that we go through end of the year, evaluate the new plans. I think it's probably safe to stick with sort of similar numbers for now.
Your next question comes from Dalton Baretto from Canaccord.
Clive, I know you can't comment on the arbitration, but I'm wondering if you can tell us whether or not the arbitration is related to the renewal of the mining concession at Kansanshi?
I think it's fair to say no to that.
Okay. Good. Second question, I'm wondering when we can see updates on the S3 project as well as the polymetallic refinery at Las Cruces? And how should we think about phasing that -- those projects over the next couple of years?
Philip, can you address that one?
Yes. Dalton, we will, during the third quarter, probably by the end of the third quarter, come up with a 43-101 for Kansanshi. And that will lay out, obviously, how one exploits that the Kansanshi ore body in the course of defining its reserves. And it'll probably give an alternative too because there are some slightly different routes that I'm going to take. And it's probably best if we leave that till then because you need to see all the figures rather than speculate at this stage.
Okay. And the refinery at Las Cruces, just thinking around that.
That's not currently a planned exercise as much as anything because we have to go to an underground mine. And it's a significant capital expenditure, which we've not planned to do, unless the market is a very different position for us. And what I mean by that is, of course, for the next couple of years, our main aim -- and in your discussions, you've just been having with Hannes has to do with debt reduction and the like. And unless -- until our picture has changed, we're not going to undertake a major capital works in Spain for that.
Great. And then just maybe one last clarification on something Hannes said earlier. So Hannes, did you say that there are no plans for the export tax on precious metals to come back at this time?
Well, like I say, I can't comment on that really now. I mean there's no -- I don't have any insight as to whether it will come back or not. I can't clearly -- I mean it's out for now. But taxes, if you look at the history, it's had a history of changing quite rapidly. I think most recently, it's been in a better frame of mind over the last, I would say, 1 year, 1.5 years, where there has been -- it has a bit more stability in terms of the taxes in Zambia and some relief in terms of certain of those previous tax meters that they introduced.
[Operator Instructions] Your next question comes from Brian Lalli with Barclays.
Just real quick on the cash flow side, a question I know I ask I feel like every quarter. But could you just maybe refresh or just update if there are any on the additional kind of below cash flow from ops cash usage? And I notably ask on interest expense, was there just a small, like timing difference in terms of when the cash outflow was relative to I think it's like your '23 and '25 notes. I think the coupon is technically April 1, but maybe it was paid at the end of last quarter. And that might explain why interest expense was only interest expense. Cash paid was only I think $66 million this quarter.
Yes. And Brian, you answered your own question there. That's correct. So that payment is due on the 1st of April. So what -- we typically have to get it to the agent 5 days in advance. So we normally get it out 31st of March.
Got it. Okay. I thought that might be it, but I just wanted to confirm. But again, in terms of cash interest expense, I know we get this question a lot. The $770 million to $810 million of total guidance, obviously, there's some noncash in that. Could you just refresh what the current view is of cash interest expense? And then as well, any additional cash items? I know -- I think it's $95 million or $100 million kind of at the end of the year to the Chorus group. Is there any other items that we should just make sure we're modeling correctly below the cash from ops line there?
Yes. The cash interest is about $550 million or so, $550 million in total for the year. You've got that roughly $100 million or so for the -- all those nickel payment that's due in November. Those are probably the sort of major other items. I mean tax then various, of course. We've talked about the effective tax rate, but that's in accordance with the rental prices.
Got it. And then I'll just ask, if it's possible to provide it. What is the current -- and maybe it changed with the April amendment, but what's the current margin or total interest expense on your term loan and revolver? I know that's not something that I think is typically disclosed, but again, the question we get a lot from investors, if you could provide it.
I don't think we've got the margin disclosed.
And now I would like to turn the conference back over to Mr. Clive Newall for closing remarks.
Thank you very much, operator, and thanks, everybody, for joining today. If we -- you have any follow-up questions, feel free to call myself or Lisa Doddridge, and we'll get back to you as soon as we can. So look forward to talking to you in 3 months' time. Bye.
Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may now disconnect.