First Quantum Minerals Ltd
TSX:FM
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First Quantum Minerals Ltd
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Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quantum Minerals Third Quarter of 2018 Earnings Results Conference Call. [Operator Instructions].Mr. Clive Newall, President and Director of First Quantum Minerals, you may begin.
Thanks, operator and everyone, for joining us today. Joining me in London are Hannes Meyer, CFO; Juliet Wall, General Manager, Finance; Simon MacLean, Group Reporting Controller; and Zenon Wozniak, Director of Projects.As usual, before we proceed, I'll draw your attention to the fact that over the course of this conference call, we will be making several forward-looking statements. And as such, I encourage you to read the cautionary note that accompanies our third 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 www.first-quantum.com and SEDAR.A reminder that the presentation which accompanies this conference call is available on our website and can be accessed either on the Events section or on the Q3 2018 Results Conference Call button under the News section of the homepage.So I'll get us started with some opening remarks before Hannes' review of the financial results. Then we will open the lines to your questions.It was another solid quarter operationally and financially in this important year for First Quantum. We delivered comparative earnings per share of $0.19 for the quarter, exceeding the consensus of $0.17 according to FactSet. Copper production in the quarter was consistent with second quarter and slightly better than the comparable quarter in 2017. However, Kansanshi and Sentinel continue to drive production growth compared to last year and prior quarter despite a period of reduced power availability during electricity network upgrades.Also the Kansanshi smelter continued to perform very well, achieving record quarterly copper production and concentrate processed.Las Cruces production declined in the quarter affected by a planned maintenance shutdown and a failure in the grinding thickener that occurred upon restart, which reduced equipment availability for a total of around 14 days in the quarter. Other smaller operations operated more or less in line with Guelb Moghrein showing some improvement, but Pyhasalmi and Cayeli down slightly from the prior year. So as a result of the strong operational performance, copper production guidance for 2018 has been increased to 595,000 tonnes.Copper sales was slightly better than the third quarter in 2017 with increased volumes at Kansanshi and Sentinel somewhat offset by lower volumes at our other operations. Our average all-in sustaining cost were $1.83 a pound of copper net of by-products, a slight increase from last quarter and prior year. However, they remain within our guidance range for the year.As I'm sure most of you are aware, close to the end of the quarter, the Government of the Republic of Zambia announced some proposed changes to royalty and taxes pertaining to the mining industry. Although the proposed sales tax lacks detail, it is clear that these changes could have significant impact on earnings. So the company has expressed its concerns to the Ministry of Finance and shortly after the changes were made public, the Ministry of Finance announced that a tax policy review committee would be appointed to deal with the technical issues related to the changes and that the ministry would be open to dialogue with mining companies on the transition to the new regime. Hannes will provide you with more details of these proposed changes later.Before moving on to progress at Cobre Panama on the quarter, I'd like to refer to the Supreme Court ruling in Panama. Near the end of the third quarter, the Supreme Court of Panama made a ruling on the constitutionality of Law 9 of 1997. Law 9 was passed by the Panamanian National Assembly in 1997 and granted the status of national law to the mining concession contract that had been entered into by Minera Panama S.A., a subsidiary of the company, in respect of the Cobre Panama project.However, the company understands that the recent ruling relates to the enactment of Law 9 and not the legality of the mining concession contract, which remains in effect and allows for the continuation of the development and operation of Cobre Panama.We have submitted a number of filings to the Supreme Court seeking clarification with regard to the Supreme Court's original decision. These have been accepted and will be ruled on by the Supreme Court before its original decision in relation to the constitutionality of Law 9 would take effect. Now as the matter is before the Supreme Court, we've very much limited our commentary and we really can't comment further although I can add that the Government of Panama, the Chamber of Commerce and Industries of Panama, the Panamanian Mining Chamber as well as other in-country industry chambers have provided support and given this, the Company is confident in resolving Law 9 clarification in the near to medium term.Turning to Cobre Panama itself, all parts of this mega project continue to advance quite rapidly. We have updated project photos on the website on the project and Cobre Panama, which clearly show the progress made at the site. We achieved some very important milestone since the beginning of the third quarter. The first of the two 150 megawatt generating sets of the power station achieved its nameplate capacity and the second generating set successfully completed the milestone phase of steam blowing, which is one of the final steps before generation. Accordingly the second 150-megawatt set is expected to begin generating power during the fourth quarter of the year.We're currently performing pre-commissioning and commissioning activities in the process plant with a number of air and water circuits now live and testing will shortly be extended to other major plant areas such as flotation, thickening and milling. Conveyor belts are being pulled as we prepare for the first ore introduction. Significant training and development of operations personnel is continuing, preparing the workforce for the operating environment and we're advancing well at peak construction levels and now also ramping up to peak commissioning levels.In terms of project completion, the project overall is now 80% complete. Procurement is 100% committed except for minor items that may arise in the final stages. Engineering is essentially complete. The power station construction is complete with commissioning of set 2 continuing. The port as you know is fully operational. The mine site, the mine pre-strip is almost completed, the Tailings Management facility, embankments are now at 77% complete. Our overall mine and process plant works are 74% and very importantly our construction for first ore and concentrate systems is at 83%. So this very good progress bodes well for our start-up and ramp-up plants.So now with that, I will hand over to Hannes to take you through his review.
Thanks, Clive, and good day to everyone. I'd like to take you through the presentation that's loaded on the website and its Slide 13 called quarterly production. So copper production was 4% or 6000 tonnes above Q3 2017 reflecting higher output from Kansanshi and Sentinel. Kansanshi and Sentinel copper production of 64,000 tonnes and 56,000 tonnes respectively were 8% and 5% higher than the comparable period in 2017 driven by higher throughput and recoveries. The Kansanshi smelter achieved record quarterly production of 90,000 tonnes of copper anode and treated a record 355,000 dry metric tonnes of concentrate in the quarter.Clive also mentioned that our copper production guidance has been increased in this quarter for the year to 595,000 tonnes and we've lowered our gold forecast to reflect grades related to Kansanshi and Guelb Moghrein.Turning to the next slide. Q3 2018 comparative EBITDA of $427 million was $123 million higher and gross profit of $246 million was $163 million above Q3 2017 reflecting higher realized copper prices as the underlying market rate increased and the price profile of the sales hedge program improved. The copper sales hedge program resulted in a hedge gain of $31 million in the quarter and increased realized prices by $0.09 per pound. Net debt of $6.1 billion was $251 million higher than the previous quarter due to the plant's capital expenditure program.Turning to the next slide, quarterly unit cash cost. Copper C1 cash cost for the third quarter of 2017 benefited from the impact of the review of operational provisions and subsequent release at Kansanshi, which reduced the C1 cost by $0.06 per pound. Excluding this impact, copper C1 cash cost was higher by $0.07 per pound for the quarter compared to the same quarter in the prior year as C1 was impacted by the increased fuel prices and phasing of maintenance. All-in sustaining cost of $1.83 per pound for the quarter increased $0.08 against the same period in the previous year. The increase in underlying all-in sustaining cost reflects higher Zambia royalties and the change in C1 cost. Copper C1 and all-in sustaining cost guidance for the year remains unchanged at $1.20 to $1.40 per pound for C1 and $1.65 to $1.85 per pound for all-in sustaining costs.Turning to the next slide, the balance sheet. This outlines the maturity profile and current liquidity profile. We continue to proactively manage our balance sheet to ensure that we have strong liquidity and appropriate covenant. We have no significant debt maturities until end of December 2020 and the senior notes maturing in '21 and '22. These are all callable at the company's option. At Q3 2018, the company was in compliance with all its existing facility covenants and ended the quarter in a strong position with $1.12 billion of committed undrawn facilities and $753 million of unrestricted cash.Turning to the next slide on the hedge program. The chart shows the improving price profile of our hedge book with relatively low volumes. No new hedges have been placed since June due to the lower copper prices and the hedge levels are approximately 25% in the current quarter and 10% in the first half of 2019. The hedge prices are well above current prices with 0 cost collars and average protection price of $3.07 per pound and average cap of $3.47 per pound and a small number, 7,500 tonnes or forwards, at $3.28 per pound. We continue with the hedge program to ensure stability of cash flow in the development and ramp-up phase of the Cobre Panama project but do not intend to add further hedges at the current prices. We will look to continue to use 0 cost collars alongside forward contracts and purchase options as appropriate.Moving to the next slide on capital expenditure. Expenditure on Cobre Panama for the 9 months of the year was $1.12 billion or $784 million on a net basis. Guidance on phasing of capital expenditure on Cobre Panama between 2018 and 2019 has been updated but with no increase to the total Cobre Panama project capital expenditure. Guidance on other capital expenditure remains unchanged.Moving to the next slide on Zambia proposed tax changes. As you will be aware, on 28th of September, proposed changes to the Zambia tax laws were announced. It is currently expected that the proposed royalty and tax changes would be effective from 1st of January 2019. Any sales tax which we understand will be introduced from 1st of April 2019, although details of this remains unavailable. The proposed changes to copper royalties would see a 1.5% increase to current rate. There is also additional introduction of a 10% rate when copper prices go above $7,500 per tonne and royalties will no longer be tax-deductible. There is also a new precious metal levy of 15% on gold exports.Details on the abolishment of VAT and the introduction of nonrefundable sales tax are yet to be announced. Conversations are ongoing between ourselves, the Minister of Finance and the Chamber of Mines. The total amount of VAT accrued by the company's Zambian operations at the end of the quarter was $392 million, of which $262 million relate to Kansanshi. Management of the company continues to engage in regular discussions with the relevant government authorities.Thank you. And I will now hand back over to Clive.
Thank you, Hannes. Operator, can you now open the lines for questions?
[Operator Instructions] And your first question from Orest Wowkodaw with Scotiabank.
I was wondering if we could get an update on start-up expectations for Cobre Panama with respect to first production. And also, I mean, with the project, I guess, 81% complete, you don't need to get to -- I assume you don't need to get to 100% completion for start-up. I am just curious what the target might be on that completion rate around the time of start-up.
Can you take that, Hannes, please? Sorry, would you take that, Zenon, please?
Yes, sure, no problem.
Never ask a finance guy.
I think in terms of start-up, I think it's unchanged from what we have said in the past, which is we plan to introduce first ore in quarter 1 of next year and we are on schedule for that. The commissioning is going quite well at the moment. There is quite a few circuits active and live, and we are pumping water around. We have got water to clean a flotation circuit down to the mills. In terms of the percentages, you are right, we don't need to achieve 100%. The percentages reflect a larger project at 185 million tonne per annum slurry, which includes the extra mill, mill 8 that include some extra [ closed ] sales, et cetera. So in terms of getting to start-up, we would start on the first 3 mills. There is 7 installed at the moment, 7 mills. There is an 8th mill that will be going in. We would start in the first step with 1 SAG and 2 bore mills. To achieve that, we probably have to be in the high 80%, possibly 90%, but again it is quite specific. So there's areas that would be completed next year such as mill 8 and the [ Moly ] plant, but the other areas milling, flotation, concentrate, are well advanced at the moment.
And then just finally on the capital as well. I mean, looking at your presentation, it looks like the budget is unchanged at $6.3 billion for Cobre, but you have only got $440 million left to spend on 100% level. Should we be concerned at all given the project is only 80% done, but you have spent 90%, I guess about 94% of the capital to date or is that just more of a timing thing with prepayments?
I wouldn't think that there is a need to be concerned. A lot of the CAPEX gets driven by equipment and materials purchasing. What's left more than anything at the moment is site man-hours simply to erect and commission, which comparatively is I won't say cheap, but is not as expensive as buying equipment and materials. And the procurement equity is essentially 100% complete -- I think about 85% from memory incurred. So it's just the balance of any payment for procurement that's outstanding and then the balance is site construction man-hours.
Your next question comes from Matthew Fields with Bank of America.
Just on the new Zambian proposals. Do you import copper concentrate for your smelter at Kansanshi?
No.
So that part of it is just not at all applicable to you?
There is a very, very tiny amount of concentrate that comes in there, so -- but it is not significant.
Yes, we had a small test sample that we imported recently, but -- I mean, it is not on an ongoing basis. So it is not part of our normal operating plant.
And then just of a bigger picture question as we complete Cobre Panama in the coming quarters and that starts to ramp up and produce. How do you feel about your overall kind of dollar value debt load? Do you may be intend to pay some down with cash or do you want to sort of keep that cash available to sort of focus on the next items up the bag, whether that is S3 at Kansanshi or Taca?
Matt, we have previously stated and then maintained that post Cobre Panama ramping up, we want to reduce our de-lever, first of all. Now that will naturally happen with the additional contribution from Cobre Panama, but we also want to reduce our absolute debt levels. Now that still remains the objective of the company.
Is there a target on that reduction?
Well, we will definitely reduce the absolute amount. So I mean I would probably target around $2 billion or so in absolute reduction. Deleveraging sort of numbers, probably closer to a 2x net debt to EBITDA in the longer run, that you should consider sort of a target for the company.
The next question comes from Oscar Cabrera with CIBC.
Clive, I know you've mentioned that you can't comment on the procedural issues in Panama. But I just wonder if you can put it into context so that we can understand how the process is being approached? One of the things that is clear is that the issue is not the concession, but when a judge rules on articles within Law 9, what does that really mean and what are you looking clarification on?
I do have a handy lawyer here who might be able to explain that.
The process that's ongoing at the moment that we can't really comment on is clarification process and the ruling that has been issued. In terms of its consequences of how that ends up, I don't think that would be prudent or even necessary to comment on at this time. As Clive has mentioned, we have a concession contract that remains in effect and our counterparty to that contract has been vocal and clear that they consider the provisions of that contract to remain in effective as they are currently stated.
I can appreciate that, but that counterparty couldn't be -- maybe they're not in office next year. So I guess the question is with the concession, would you be able to produce and get the cash flow from the project next year if there is no conclusion to the proceedings?
Yes, we're currently advised that there is absolutely no reason why we can't proceed with the construction and operation that's currently envisaged.
Then in terms of the reduction for gold production this year in Kansanshi, I notice that the expectations for gold production for '19 and '20 are unchanged. Is there like a mine sequencing or a reason why gold production goes lower this year and then nothing happens over the next couple of years?
We essentially typically will fully update our last year's guidance when the whole planning process is complete towards the end of the next year. So we give full update to guidance in January, February. I mean, as you will see, there are some actions being taken around gold in terms of productivity and some potential expectations of some increase, but we'll give the full update in January, February or March.
Oscar, as you know, because the gold is very low grade, it's very -- it's hard to get reliable reconciliation of production to results grade and we always -- we tend historically to produce a lot more gold than original results. The recoveries have suffered a bit, but so we are spending time on improving the gold circuits, but also understanding the changes to the nature of the gold as well. So there's a lot -- quite a bit of work going on at the moment. So more about that maybe, well, with the guidance early next year.
Okay. And I appreciate that, Clive. Thank you. And then lastly if I may, getting back to Cobre Panama, the -- can you just remind me, I think there was some commentary last quarter about the conclusion of the tailings dam and if that has an impact on first ore or not? I see that you are at 77% and we are fast approaching rainy season. Is there any issues with tailings that we should be concerned with or the construction?
I can take that one, Clive. Oscar, no, the tailings facility is made up of the eastern wall and the northern wall. The remaining work is on few sectors of the northern wall. Actually one of the photo shows that northern wall section adjacent to the completed section. So you will see it actually had a decent elevation and we would simply commence depositing tailings in other parts of the tailings management facility rather than adjacent to the sector that's still being completed. So it won't impact on the start-up and first ore.
Your next question comes from Greg Barnes of TD Securities.
Clive, I just wanted to revisit Sentinel. Obviously, you had a great quarter. I don't think the mill was effectively at design capacity, but cost per pound remains stubbornly high. Is there a way to bring those down now that you've got a plant more stabilized on a production basis?
Look, there was a lot of -- we brought forward a lot of maintenance which increased the maintenance cost during the period while there was power restrictions. So -- but it's really volume driven. It will only really get down to the target sort of C1 cost when it's running its full capacity, which isn't for a couple of years yet. So -- when we get into a high grade ore, that is. So the answer is no in the short term. It will stay stubbornly relatively high.
And what is the target for Q1?
Well, the sort of long -- originally the longer run one was about $1.50, but we are anticipating when we get into the high grade ore that it will go down to sort of $1.20, $1.30.
And that is a couple of years away, Clive, so we're talking 2021, 2022-ish?
Yes.
Yes, I think obviously this is all quoted before many impact of any sales tax as well comes through. So that would have an impact on Sentinel of round about $0.09 or so. So any numbers currently can potentially be impacted by that. I think, obviously, high fuel cost is something that we're seeing maybe having $0.05 impact on our C1. So it's impacted by higher fuel cost. Before impact of sales tax, you would expect hopefully a bit lower next year of about $0.10 to $0.15, but more roundabout $1.40, $1.45 in the later years 2020, 2021, but obviously that is before an impact on the sales tax as well.
So 2019, you're looking at $0.10 to $0.15 lower before the impact of the sales tax?_=
Yes, ideally something roundabout that approximate level, so little bit of a step-down, but that's before sales tax, so the sales tax won't be taken like that again.
It's just we haven't seen a technical report on mine plan on Sentinel for some time and obviously a lot has changed there. So I don't really have a sense of what the grade profile looks like, what the tonnage throughput profile looks like. Is there something we can get on that?
I don't think there's any plans to do a technical report in the immediate future. Is there anything being worked on the moment? I don't think so.
No, not at the moment. If there was some specific information, we could put something together, but there's nothing being worked on at the moment, no.
Greg, I'll have a chat with John Gregory and I'll get back to you.
Your next question comes from Karl Blunden with Goldman Sachs.
It's on the ZRA investigation. I notice that the statement in your financials was quite similar to last quarter. Is there anything that you can give us in terms of what progress has been made in the last 3 months since you last spoke to it?
We've submitted the documents mid-July and we've had subsequent meetings and as recently as last week, my head of tax was meeting at them Zambia as well. So we are making progress, but not much more to update than what we've said in the quarterly.
And Hannes, you discussed a little bit the debt profile on one of the earlier questions mentioning that using cash to pay down debt is an option. Are there other options available to you? If you look at your bonds, particularly the longer dated, the cost of refinancing those in today's market would be quite high given where they trade. What other option do you have if you don't have the required amount of cash available to pay down that debt? Is there any project level that you can consider? Just interested in the potential parts you could pursue.
Yes, I think if you look at our profile, we were targeting the project finance a year or 2 ago. And that would probably balance sort of bank date and bonded by absolutely 50:50. We currently got about $6 billion of bonds and all of roughly $2 billion of bank lines available. So it probably would make sense to add some more bank date again and just balance the portfolio. So that's certainly an avenue that is available to add more liquidity.
Your next question comes from Ralph Profiti with Eight Capital.
I was just wondering if you can help me get around potential sales tax in Zambia. And I understand that you don't have any details, but I am thinking about potential scenarios. If there are any precedents you can help us out with? And my second question is, is this sales tax going to be part of this tax policy review committee because I would find it hard to argue that you can sort of look to reduce it if you don't know the details?
Yes, I don't think we've -- we don't have any detail on that and it's also still very early stage with government. So this tax review committee is pretty much focused on the immediate and the tax changes that will come into effect in January. And I think the other data sort of the 1st of April is probably quite an ambitious date, I mean that's still much further off.
Your next question comes from [ Todd Cleary ] with AIG.
So can I ask just on the production or on the completion of Cobre, so you guys are at 80% NAV, spends is over 90%. What is the likelihood -- and I know you were talking about obviously labor cost even lower than equipment and facility cost. But what is the likelihood that you guys went over on the spend and how material could that be?
Zenon, do you want to take that?
Sure, yes. Look, in terms of the labor being a cheaper component, if there was an over, it would be relatively small in terms of percentage terms. And what will really drive it at the moment is how quickly it commissions and ramps up. From the work that we've done, we've certainly got a lot of positive enthusiasm that the commissioning and the ramp up will be smooth and quiet rapid, much like our smelter project was. If it's a protracted commissioning, then it drags things out, but at the moment all indications are that our commissioning and ramp-up should actually be quite smooth and quite rapid. And I think that would make a significant difference in alleviating the concern.
Okay. And then just on the actual commissioning and testing of the facility ahead of commercial production in Q1, can you guys talk a bit like what you guys do or the confidence you have in the testing to make sure that there was no issues that happen when you actually start to ramp up commercial production and try and hit your production targets for next year? As you guys have completed other projects before, what's the -- how often do you guys run into issues when despite the testing that was done beforehand, when you actually ramp up commercial production?
Right, okay. Well, look, the 2 most recent examples where the smelter project and Sentinel, and essentially we've been able to take learnings from both. And what we have incorporated into Cobre Panama is we have had a separate quality assurance, quality control group, quite a large group. Let's check the quality of the construction all the way through, and also there is a very rigorous testing regime in the pre-commissioning, which is essentially check sheets and -- well, check sheets and test sheets that force people to go and check what has been installed and whether it has been aligned properly and whether the work has been completed fully. And those check sheets are -- there's quite a few of them and they get done through the whole plant. So that's actually quite rigorous before you actually then start turning motors or pumping water, et cetera, there has been a lot of checks beforehand that have occurred so that when you get to that stage of actually turning drives, there has been a lot of work already taken place and that's not then chance as to whether it's going to be good, bad and indifferent. You actually go into it feeling quite confident because of those checks that have occurred beforehand and that's a very rigorous process and that's essentially a lot of what we are doing at the moment.
Next question comes from Sean Wondrack with Deutsche Bank.
Just a couple of quick ones. So clearly when you look at the value of the Zambian kwacha, it's come down a bit in terms of depreciating. Is there any kind of sensitivity you can provide to kind of changes in the Zambian kwacha given that a lot of your operating expenses are in Zambia?
Yes, well, operating expenses tend to be largely in dollars in Zambia. So for instance our power cost is in dollars, a lot of the reagents are dollar driven, top cost. So I think it's probably around, Juliet, maybe 15% or 20%.
Yes, about a 10% movement, would have between $15 million and $20 million impact, so $15 million dollar probably on local having cost up to $20 million if there is a 10% movement.
So it's largely local payroll cost and some local expenditure. So you are looking at probably 15% of the total cost and now Juliet has given you those numbers.
And I am sorry, just to be clear. You said a 10% movement is $15 million or $20 million?
Well, so if you look at sort of total kwacha cost of about 10% is about $20 million, $20 million to $22 million. Just looking specifically more like a payroll cost, it's roundabout $15 million. You do find that the non-payroll sometimes you may catch -- it catches up pretty well.
Okay. And then when you think about -- when you look at CapEx, it looks like you may have pulled forward CapEx a little this quarter. Should we expect that CapEx comes down a little bit in 4Q? Or do you think it's going to stay at these elevated levels?
Well, we have given the full year guidance for CapEx, so there is delta between year-to-date and full year. So it is about $210 million, I think, left on Cobre Panama, average $70 million a month. And the others are relatively for sustaining and others is relatively similar based on the [ numbers ] to date.
So it should come down a bit. And then just last one. Do you have any restrictions on repurchasing your debt in the open market at current prices? Should you decide if -- should you generate cash and you decide to pick away your longer dated, do you have any capacity available right now?
Yes, I do have capacity available. I think [ end of month, ] bank facility there is a limitation of I think about $500 million or something like that, yes. I have just got the notes, it says $500 million is the restriction in using cash to purchase back bonds in the open market.
And when you think about your position, if you were to see bonds kind of trading around these prices and Cobre were to start up and you are generating cash and the big period of investment was behind you, would that be something you would consider?
It is something I always consider. So it is something I specifically look at and it's certainly attractive at these rates, yes.
[Operators instruction]. Your next question comes from John Tumazos with John Tumazos Very.
In terms of the algebra of 150,000 tonnes next year at Cobre Panama, how might it break up? Would there be possibly 10,000 tonnes in the first quarter, 30,000 tonnes in the second quarter, 50,000 in the third, 60,000 in the fourth? What might the sequence be?
Well, before Zenon says anything, I mean, the original way we arrived at 150,000 is again we would start with 0 and ended at about 300 as the average. Zenon, can we schedule it yet? We won't be in a position to do that until we get going, are we?
That would probably be incorrect. I think what will happen is, we're expecting something quite similar to the smelter in terms of ramp-up, which is that it would ramp up quite quickly as the facilities come online. So it does get influenced by the exact start date of each of the mills. So we'd start with the first 3, 1 sag, 2 balls. That will then follow with the next 3 mills. And I guess that timing of how quickly all of those mills come on will determine that ramp-up profile because we're quite confident that from when we do start each of those sections that the ramp-up should be pretty quick. But there will be a time period before starting or between starting the first 3 mills and the next 3 mills because you can't simply turn it all on at once. There is just too much. It's not like turning on a light switch. So we could do it but probably best from when we're starting next year.
Should we expect any commercial shipments in the March quarter?
It's unlikely because the concentrate shed that we have has I think about 140,000 tonnes of capacity, from memory. So we would probably build up capacity in the shed for a while before calling on a ship, unless it was a smaller-sized vessel.
So it's possible in the first quarter there is production without shipments.
Both are possible. That would be possible and if there was smaller shipments, that would be possible as well. I think it'd be a case of looking at what ships are available and where the product might be sold to against the production in the first quarter.
Your next question comes from Orest Wowkodaw with Scotiabank.
I'm just curious if we could anticipate some give and take on the Zambian changes to the royalties and taxes, I mean, especially on the deductibility or non-deductibility of the royalties. Can you give us a sense of whether you think these proposed changes are set in stone or whether there's still going to be a potential negotiation period here with the Zambians?
Orest, we are certainly in discussion and we go back with our proposals and counterproposals in terms of this. But in the past what you have seen is, well, once it's announced, there's pretty much an effect like this. We will see where we can get to in terms of any relaxation of those proposals.
But do you think the current structure -- I mean, am I incorrect in assuming some of the other higher cost mines in the country could be put under water with these changes?
I don't think the other higher cost mines will be paying taxes anyway. So the non-deductibility doesn't really affect them that much.
Okay.
But the increased royalty does.
Increase in royalty certainly does.
[Operator Instructions]. And we've a question from Brian Lalli with Barclays.
Just a real quick from me and most of my questions have been asked, but I guess as we sit here and as investment community continues to monitor what's going on in Panama, what -- and I apologize if I missed this earlier, but what's the next step or next steps that we would look to see whether reported publicly is as you can imagine not the easiest region to follow in terms of new flow.
I agree, yes. Constitutional law is none of our strengths, I think it's bad to say. So understanding exactly how it all works is complicated. But as I said earlier, we can't really comment on what we're doing and where it's going at this point because we are -- it is before the Supreme Court as we speak.
I guess we'll keep our eyes out for it. And then lastly just a housekeeping item around the busy ZCCM status, it sounds like there's element to that than the middle of October we were rejected. You mentioned something about for the case being heard in kind of March of 2019. If you don't mind, can we just get an update on where that stands and if there's any expectation of cash outflows relative to that?
I think the case was heard earlier this year and found that that was no case. It was [ unappealed ] in subsequent and I think that's what's to be heard in early next year. And yes, I mean, based on that we are -- I mean, we don't expect cash outflows.
At this time, I will turn the call over to the presenters.
Thank you very much, operator, and thanks everybody for listening. If anybody has any follow-up questions, please call myself or Lisa Doddridge. Lisa has joined us as Director of IR and we welcome her on board. So please call her or myself and we'll endeavor to at least get the answers to you or point you in the right direction. And I look forward to talking to you again at the end of next quarter.
This concludes today's conference call. You may now disconnect.