Lundin Mining Corp
TSX:LUN
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Lundin Mining Corp
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Good morning, my name is Dan and I will be your conference operator today. At this time, I would like to welcome everyone to the Lundin Mining Q2 2018 Conference Call. [Operator Instructions] Thank you. Paul Conibear, President and CEO, you may begin your conference.
Thank you very much, operator, and thanks everyone for joining Lundin Mining's second quarter call. I would like to draw your attention to the cautionary statements as we will be making several forward-looking comments throughout the course of this presentation. Additionally, I'd like to draw your attention to the cautionary statements found at the end of this presentation deck in relationship to the Nevsun offer we have now formally launched.On the call to assist in answering any questions at the end of this presentation are Marie Inkster, our Senior Vice President and Chief Financial Officer; and Peter Richardson, Vice President and Chief Operating Officer.So, yesterday, the company announced that I intend to retire as President and CEO prior to year-end. This is something that I have been discussing with our Chairman, Lukas Lundin, the rest of our board and with Marie over the course of the last year as part of the company succession planning.Our operations and projects are all running very well. We have an excellent balance sheet and deep bench strength across our organization. I am delighted that the board has selected Marie to succeed me as President and CEO upon my retirement. Many of you know her well already and how integral she has been to Lundin Mining's success over the last decade. Her extensive leadership experience, institutional knowledge of our assets, and Marie's reputation in our industry make her an ideal fit to lead Lundin Mining forwards.
Thank you, Paul. I'm grateful and excited for the opportunity to lead our team and to continue building on the excellent track record of Lundin Mining. As many of you know, Paul and I have been working closely together from many years to grow Lundin Mining and keep the company strong through the cycle. We've been clear about our strategy with successful acquisition and reinvestment in our value-added projects that improve and extend the life of our mine and I am very much looking forward to continuing our strategy of growth and to continue to build on your success, Paul.
Sounds great. Our operations are on track to meet annual production and cash cost guidance and all of our projects [ are progressed ] well in the quarter. In particular, Neves-Corvo delivered another excellent quarter. The mine and mill both performed well. Given the production and cost trends we are seeing at Neves, we've been able to increase production and lower cost guidance.On our projects Los Diques, the tailings facility at Candelaria was handed over to our operations team in the quarter and water return systems are running at design capacity. We have completed a comprehensive review of the Neves-Corvo zinc expansion project. Our original guidance for ramp-up production remains unchanged prior to -- and prior to the end of 2019 with a modest increase in total CapEx forecast.Eagle East is progressing ahead of schedule and on budget. We are now ramping down to the ore body and underground definition drilling has begun. Underground production rates from Candelaria North Sector continue to ramp up with the average mining rate setting a new record. Development of the new Candelaria South Sector and mill optimization initiatives are also advancing very well.Earlier this morning, we formally commenced our offer to acquire Nevsun Resources taking the offer directly to Nevsun shareholders. We will address the offer towards the end of the presentation and answer any questions we can afterwards.Looking at our summary results, our operations in aggregate produced just over 91,000 tonnes of base metals in the second quarter, all with cash costs in line with or better than guidance. Copper generated 66% of our revenues while zinc contributed 16% and nickel 8%. 52% of revenue was from Candelaria and Neves-Corvo delivered a meaningful 24% of sales proceeds with much improved profit margins.Moving to the highlights of our second quarter financial results, the details of which are in our financial statements issued last night. Revenue was 3% higher year-over-year and gross profit 8% higher mainly attributable to higher metal prices and lower treatment charges partially offset by lower sales volumes. We generated earnings attributable to our shareholders of [ CAD 0.11 ] per share and cash flow from operations before working capital of $0.16 per share. We also declared a regular [ CAD 0.03 ] per share quarterly dividend. We ended this quarter in a strong financial position once again with over USD 1.5 billion in cash, net cash of $1.1 billion and an undrawn $350 million revolver.Moving to our operations, at Candelaria, we are on track to achieve and have reiterated full year production and cash cost guidance. We produced over 34,000 tonnes of copper at a cash cost of $1.71 per pound exactly in line with our full year guidance. Mill throughput of 7.1 million tonnes modestly exceeded our plan for the quarter while the average copper head grade was slightly lower than our expectations. We mined a total of 14 million tonnes of waste, bringing the total for the first half to 28 million tonnes. The mining contractor is continuing to ramp-up to assist in additional waste movement and we expect to see higher grades in the second half of the year.Underground production for Candelaria North continues to ramp-up, achieving approximately 9,000 tonnes per day in the second quarter, up 17% from last quarter and a new production record for this mine. Development of the Candelaria South Sector is progressing on schedule and on budget to contribute to copper production in the second half of 2019. Target production rate for the South Sector is 4,000 tonnes per day. Roughly $5 million of CapEx spending on Candelaria South has been deferred until next year, however, with no change in the overall projected capital cost and no schedule impact.Another thing to note is the excellent results we're getting with our Candelaria exploration programs. Both Candelaria North and South Sectors should see significant increases in resources and reserves in our annual September reserve and resource update and we are quite pleased with exploration results in several other areas across the large Candelaria mineral conceptions.Turning to the mine, 5 pieces of new pit equipment have already arrived at site including the first new haul truck and we continue to take delivery of other major new mining equipment each month. For haul trucks that were scheduled for 2019 are now to be delivered sooner in the fourth quarter resulting in roughly $45 million of additional expenditures being pulled forward into 2018 from 2019. The advanced delivery of these latest generation Cat trucks along with 2 large new loaders also coming in the next few months will help Candelaria ramp up on both waste stripping and higher grade ore production at lower overall mining costs.The mill optimization project is also progressing on track for completion by the end of 2019. Scheduling of work and refined cash spending projections have deferred $20 million to 2019, reducing forecast 2018 expenditures on this project to $30 million. Approximately 70% of equipment orders have been placed with the longest delivery item, ball mill motors, on track to arrive at site in time to support completion of all mill optimization construction by the end of 2019.The Los Diques tailings project has been a very well executed project. Los Diques was handed over to the operations team in May. It was completed well under the original budget and transition to the operations team ahead of schedule. Water collection and recycle systems are working to plan. We continue to advance construction of future phases of the Los Diques dam compared to original plans to get additional long-term cost benefit as Los Diques is one of our shortest hauls for mine waste rock which are using for main dam building.Neves-Corvo, Neves had a second excellent quarter in a row producing close to 12,000 tonnes of copper and more than 20,000 tonnes of zinc at a cash cost of $0.96 per pound on a copper basis. Higher head grades, improved mine productivity and higher mill throughput all contributed to the excellent performance driven by improvements in mine plan execution. Zinc production benefited from higher recoveries and in June, we set a new monthly production record of 7,554 tonnes of zinc for Neves-Corvo.Considering first half production and the positive production trends being achieved, we have increased production guidance and improved cash cost forecast for the year. Our exploration drilling ramped up in the quarter, drilling roughly 5,800 meters, targeting step-outs from our current ore bodies as well as other targets on the lease.Regarding the Neves-Corvo Zinc Expansion Project, we have completed a comprehensive review of this project on the schedule and capital costs. Production is forecast to commence in late 2019 as originally guided. Total projected capital costs are expected to be EUR 270 million or a roughly 5% increase from original forecast. The increase does take into account the impact of earlier scheduled delays.2018 capital expenditure guidance has been lowered to $130 million from $190 million reflecting the revised schedule and updated spend timing forecasts. Underground development is advancing. This aspect of the project remains a critical path. Approximately 70% of the materials handling development underground has been completed and all major underground construction contracts have been awarded. Delivery of conveying and crushing equipment is underway and concrete work has been initiated in the crushing chamber.Surface construction of the new zinc plant is well underway and orders have been placed for all engineering equipment. Major equipment for both the surface and underground is being received at site. The mill foundation was poured earlier this month. We have a tight schedule, we have a tight budget. However, they are achievable.Eagle performed in line with plan in the second quarter. The operation is on track to achieve full year guidance. [ Q2 2018 ] and the outlook for the remainder of the year is very much consistent with plan. Generally, head grades are expected to decline as the mine life progresses and before Eagle East is to come on in early 2020. In Q2, we produced 4,200 tonnes of nickel and 4,100 tonnes of copper with cash cost of $1.09 per pound nickel. Our profit margins at Eagle remain excellent and best-in-class. The Eagle East project continues to make excellent progress. Project is advancing ahead of schedule and on budget for production in early 2020. We anticipate receiving the permit amendment for additional tailings disposal at the mill later this quarter. This is slightly behind our prior expectations of mid-year as the public hearing was pushed out to late August by the regulators. We are very actively drilling around Eagle East. 4 surface rigs for drilling, testing near-mine targets. We now have rigs drilling underground doing infill drilling as well. An airborne magnetic survey was completed over several areas in the region and we'll be testing these later this year.More specifically on Eagle East, the ramp development of the dual declines was completed in the second quarter and work has begun on the final spiral ramp down to access the high grade Eagle East ore body. Progress on the new ramp has now allowed definition and step-out drilling to start to better define Eagle East and to pursue possible deposit extensions as exploration progresses towards the end of the year.Lastly, Zinkgruvan; Zinkgruvan produced close to 17,000 tonnes of zinc and close to 4,000 tonnes of lead at a cash cost of $0.41 per pound zinc. We have narrowed our zinc guidance slightly lowering the upper-end of the range. Strong mill throughput was offset by lower zinc head grades, a result of combination of mine sequencing and higher than planned dilution. [ Mine method ] adjustments have been made and supervision increased and improvements in delivered head grade to the mill are now being achieved. We had a very active quarter on the exploration front completing almost 10,000 meters of drilling from surface and underground. A new exploration permit has been granted as part of a significantly expanded exploration effort at Zinkgruvan. The application for a mining concession on the Dalby exploration area was submitted and this remains our highest priority for ongoing drilling around Zinkgruvan.Capital costs, as I've highlighted throughout the call, we have refined our capital spending forecast and made some changes to our 2018 and 2019 capital expenditure guidance. Overall, 2018 capital guidance has been reduced by $55 million to $795 million. Forecasted 2018 capital expenditure on stripping at Candelaria has increased by $15 million to $215 million. The other revisions are due primarily to timing of forecast expenditures such as pulling forwards $45 million of the mine fleet investment at Candelaria as equipment is available for earlier delivery. We made some shifts in the Neves Zinc Expansion Project timing of spend and moved $60 million into 2019. In regards to exploration, our guidance on exploration costs remain unchanged at $83 million.As we look ahead on our own assets, I would like to focus on our 3-year and longer-term outlook. This year, we are investing heavily in our future. We're setting a strong foundation to ensure strong production growth and lower cash operating costs over the next 3 years and beyond. All of our projects are progressing well and we've been very pleased by exploration success at all of our mines that will ultimately translate into improved life of mine production profiles at each location, which you will see later this year. In September, as we do every year, we plan to issue our annual resource and reserve update and you should be very pleased by what you would see, especially once again at Candelaria.Now turning to growth and growth through acquisition. We'd like to now summarize the Nevsun offer. Again, I would like to draw your attention to the cautionary statements found at the end of this presentation deck in relationship to that offer. Since October 2017, we have been trying to constructively engage and progress a deal with the management and Board of Directors of Nevsun. Each of 5 successive proposals made since early February were rejected by Nevsun despite multiple moves by us to address their concerns on structure, bidding partner and price. Each time we presented a proposal, the goal post changed. This morning, we formally took our premium CAD 4.75 per share all-cash offer for Nevsun Resources directly to its shareholders. This offer is simple, straightforward, has only customary market standard conditions and the price fully values Nevsun and its assets. This offer expires on November 9 of this year. This offer is not subject to financing.Our offer represents a compelling 82% premium to the trading price on 6th of February, the date of our first proposal to Nevsun. It is also a compelling premium to the closing price and 20-day volume weighted average prices as of April 30, 2018, the date of our publicly announced and fourth proposal to Nevsun. Our most recent offer represents full value for Nevsun and its assets. The offer takes into account and reflects the most recent results reported by Nevsun including latest disclosure on the Timok Upper Zone, the Timok Lower Zone, Timok concession exploration potential and the Bisha mine. Our all-cash offer provides Nevsun shareholders with immediate liquidity and certainty of value and our all-cash offer is fully financed.What are the risks of not accepting our offer? We believe there is a high likelihood of negative impact on Nevsun's share price if our offer is not accepted. We believe there is a risk of substantial Nevsun shareholder dilution if our offer is not accepted as Nevsun needs significant financing in the very near-term in the form of equity, stream/royalty and or debt. Further, there is a notable risk that both Timok and Bisha are not developed optimally due to lack of Nevsun's financial capability, not only now, but in the years ahead. We encourage Nevsun shareholders to read the full details of our offer in the circular issued this morning and filed on Nevsun's profile on SEDAR. Please consider this compelling offer very carefully. We strongly encourage you to choose a brighter future for Nevsun's assets. Operator, I'd like to open the lines for questions. Thank you very much.
Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Your first question comes from the line of Orest Wowkodaw with Scotiabank.
Paul, Marie, I was wondering if you could give us some insight in terms of -- if you're successful in Nevsun bid, what your development plans would be for the Timok Upper Zone? And specifically, I was wondering whether you would plan to change the design throughput or change other parts of the development of the project versus what Nevsun is proposing? Thank you.
Okay. Thanks, Orest. I think you need to reflect back and see what we've done with Eagle and with Candelaria. I mean we're -- reasonably speaking we're not limited by financial capacity to invest in new assets and optimize them. So specifically to the Timok concessions, once we get our feet on the ground, we'll ramp up exploration, know your asset and know it as best you can. If you find something, it's critical to optimize the development of the upper zone and being very cognizant of the impacts on the lower zone. We obviously would advance the project fast track, get it into production. I think the basic size of the operation that is proposed, we don't have significant differing opinions on that. We would take a hard look at the metallurgical test work that has been done and maybe reflect on the concentrate products in the market and we would certainly encourage and work closely with Freeport to advance the lower zone in parallel as much as possible to optimize the value of the concession.
And I mean given that you're not constrained by the balance sheet, do you envision that you could actually get Timok Upper Zone into production on a faster basis than Nevsun's proposing?
No, I wouldn't put that forth. I think that the schedule they have is an aggressive schedule, but we do need to get our feet on the ground I think to comment more specifically.
Okay and then just finally, if you're successful with the Nevsun bid, does Bisha fit into the long-term plans for Lundin or is that likely an asset that could be divested at a future point in time?
Yes, I think honestly, I think that's a wait and see, I mean it had a great history. I think there is untapped -- well, I know there is untapped geologic potential in the area because one of the Lundin Group companies used to own 2 of the deposits that are not yet in the mill. So, again, in the current situation now, I think we get our feet on the ground and assess it. We think we could add quite a bit of value there.
Your next question comes from the line of Oscar Cabrera with CIBC.
First, I'd just like to say if I may, Paul, thank you very much for all your help and insights through the years and Marie congratulations, I look forward to working with you. So the first question, in the original offer for Timok, you did not consider purchasing Bisha and in fact, there was [ an attempt ] to just not deal with the -- what some people call the Eritrea risk. So what changed from your perspective between that [ and this ] offer?
So, obviously we've been through a lot of different scenarios as we've progressed and we should not lose sight as our prime interest is Timok, always has been. We do have background in Eritrea, [ 2 Lundin Group ] companies, the geology is excellent there, but as currently stated, it has only got a 4-year mine life and that doesn't normally fit into the criteria for Lundin Mining. I believe with reinvestment, the future of Bisha could be potentially quite a bit different. And as we've gone through this whole process and we obviously tried to partner the aggregate acquisition of Nevsun with maybe a more fit for purpose new owner of Bisha. There were a number of barriers put up to that and certainly the country conditions and the relationship with Ethiopia has taken some milestone positive steps. So we realized we finally need to just come in over the top, keep this deal as simple as possible, which was a constant request by Nevsun and that's what we've done.
I'm sorry, Paul, you said request by Nevsun shareholders and have you had a chance to talk to the government in the country or to the mine ministers or related individuals?
No, we have not. Our decision to progress with an overall offer of Nevsun was relatively recent and we'll obviously in due course communicate and respecting it is their mine and their country.
Okay, thank you and then lastly, just going back to Orest's first question, when -- if you're successful with the offer and you complete it by the end of this year, when do you think you would start investing in the project and where would you envision first production from the upper zone?
Well, it's a 4-year to 5-year schedule I think from where we sit today. There's -- I think I'm sure there's still a number of outstanding things to address on the ground in Serbia. So I wouldn't want to get into our detailed expectations of schedule until we're on the ground, but as you've seen with what we've done with Eagle and with Candelaria, I think we have very good skills in transition. We respect the Nevsun project team, they are working hard on it. So we need to get on the ground and reassess and obviously bring it into production as quick as we can.
[Operator Instructions] Your next question comes from the line of Stefan Ioannou with Cormark Securities.
Just I mean one last question on the Nevsun stuff. Just Nevsun sort of noted that there'd be a sort of a significant tax payable -- capital gains tax payable on the transfer of Bisha. Have you guys done a lot of work on that and are you guys comfortable with the fact that a lot of the cash balance you'd be getting in the transaction would actually go to paying down taxes as opposed to going back into the bank account?
Yes. Well, it's one of the types of topics I guess that we were disappointed in that we couldn't get into the level of discussion that I think would have been helpful for Nevsun shareholders. From the homework we've done, albeit from a distance, we think these costs are all manageable and we did run a process -- we worked with Euro Sun to try to move this forwards and they were strongly rejected by Nevsun. We brought other players to the table to see if we could get a better partnership and they all looked at this type of issue too. So at the end of the day, there will be a cost to the transfer and we factored that into our bid.
And maybe just shifting gears back to your own operations, obviously, Candelaria is still catching up on I guess in part the slippage you guys had in Q4 of last year in the open pit. You all-in sustaining costs of [ $2.91 a pound ] versus current spot pricing, should we anticipate the all-in sustaining cost profile of Candelaria sort of remains high through this year and then should we see a significant drop going into next year once you sort of get through the bulk of that waste movement or how should we look at Candelaria in an all-in cost going forward here?
Yes, in regards to cost, we're bang on plan and we reiterate continued guidance of $1.70. We came in at $1.71 and in fact, we're expecting higher grades and the sooner we get the new equipment up and running, the more tonnes we move. The cost profile in the years ahead we've published and expect to achieve or improve on that.
Maybe one last question. Just on Eagle, just looking at it, it looks like the sales -- the volume of sales was a bit less than the production. Is there just a bit of an inventory buildup there and has that been sold subsequent to quarter-end or what's going on there?
We had some inventory at quarter-end, but it wasn't anything substantial. So it depends on the customer that [ it's spent to that makes payable to and to that ] vary from time to time.
And your next question comes from the line of Matthew Fields with Bank of America.
I guess I'd like to share in congratulating Paul on a great tenure with Lundin. I think everyone I talked to and I would agree think Paul has been a tremendous steward of the company and transitioning over to Marie, the company will continue to be in excellent hands. So I guess congratulations all around. I know that you said that the deal for Nevsun is not contingent on any financing and I'm well aware that you have adequate liquidity to fund this with cash and existing revolver if you wanted to. However, to optimize your capital structure, do you think that you would fund a portion of this purchase price with some debt to keep your optimal capital structure?
We are considering a number of things. If we were to go forward clearly consuming all the cash, paying this out would take all of our surplus I guess and so we would look at not retiring the bonds that are callable in November. So at that stage, we'd probably look at a refinancing and possibly an upsizing of that although there are some other opportunities that have been put forth to us in proposals of course for financing from some interested financing partners and banks. So we are considering a number of options.
And I'm showing no further questions from the telephone queue at this time. I will now turn the call back over to the presenters.
Thank you very much, everybody. It's been fantastic working for Lundin Mining and we've got an outstanding team here. Over the course of the next few months, I'm going to enjoy passing things over into some very capable hands. And the next quarter call in October, all yours Marie. Thank you very much.
I'll be looking forward to it.
Thank you to everyone for attending today. This will conclude today's call and you may now disconnect.