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spk05: Thank you for standing by. This is the conference operator. Welcome to the first Quantum Minerals Limited second quarter results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Benita To, Director of Investor Relations. Please go ahead.
spk04: Thank you, Operator, and thank you, everyone, for joining us today to discuss our second quarter results. Before we begin, I will draw your attention to the fact that over the course of the call, we will be making forward-looking statements. As such, I encourage you to read the cautionary note that accompanies this presentation, our MD&A, and the related news release. As a reminder, the presentation is available on our website and that all dollar references are in U.S. dollars unless otherwise noted. Tristan Pascal, our CEO, is dialing in from Zambia and will provide an overview of operations and performance during the quarter, followed by Hannes Mayer, our Chief Financial Officer, who will review the financial results. Tristan will wrap things up, after which we will open the lines up for questions. And with that, I will now turn it over to Tristan.
spk06: Thank you, Vinita, and thank everybody for joining us today on our conference call. The second quarter of 2022 was characterized by increased macro uncertainty and an emerging global economic slowdown. This was most notable in China, where the continued zero COVID policy resulted in economic growth of only 0.4% through the quarter. The copper price, as a result, has declined substantially. It's currently down more than 30% from its highs in March. While I'm pleased to say that our debt position decreased by a further $476 million during the quarter and that our debt reduction target of $2 billion was also achieved, I'm very cognizant of the headwinds that may face the company with a looming economic slowdown. The debt reduction efforts over the last several years have placed our balance sheet in a better position to weather this slowdown. The company is in a considerably stronger position when compared to slowdowns of the past. And in order to build further resilience through these uncertain times, we will continue to target a further $1 billion reduction in debt in the medium term, which Hannes will speak more to in his presentation. We will also remain tightly focused on driving consistent operational performance, successful execution of our brownfield projects, and by taking a cautious and disciplined approach with our capital investments. This may include deferring on sanctioned projects if we deem it necessary. The brownfield nature of our current growth projects, combined with our in-house experience, will also serve us well, we believe, to navigate through these volatile times. After a slow start to the year, I'm pleased to say that we saw an improvement in production in the second quarter. We are making progress on catching up on the backlog of truck maintenance and mine development that was present in the first quarter as a direct result of COVID-19 towards the end of last year. This catch-up, however, will still take a few more months to completely resolve. However, we have made headway. In the second quarter, we produced 192,668 tonnes of copper. The second quarter increase in production was entirely attributable to Cobra Panama, which produced 90,800 tonnes of copper and achieved quality records in mining volumes, throughput and also in copper production, which was very heartening, highlighting the excellent operating performance of the asset. Increased plant stability and continuous improvement projects allowed for this record performance, and we remain comfortable with our annual guidance range of 330,000 to 360,000 tonnes of copper. Second quarter copper C1 cash costs averaged $1.54 per pound, 11 cents lower than the previous quarter as higher production volumes offset the impact of inflationary pressure for key consumables. It is also important to note that our exposure to spot thermal coal prices remains limited until the end of 2023 due to the coal collars in place. In Zambia, an extended rainy season into April and the lingering impacts of COVID-19 restrictions, while largely subsiding, did continue to impact both Sentinel and Kansansi during the second quarter. Here at the Sentinel mine, copper production of 52,447 tonnes in Q2 was essentially flat compared to the previous quarter. Sentinel's mine production was behind the planned schedule due to the extended rainy season and challenging ground conditions early in the quarter, which delayed stripping in the Stage 2 north wall and as a consequence prevented some access to higher grade ore. The second quarter was also impacted by low truck availability and a backlog of truck maintenance. However, the second half of the year is setting up to improve. Sentinel hit a record in daily mill throughput in July and progress has been made on preparing the pit for an improved second half of the year through exposure of good volumes of higher grade ore. We have maintained our annual guidance for Sentinel at 250 to 265,000 tonnes of copper, although production is expected to come in at the lower end of the range. C1 cash costs of $1.88 per pound in the second quarter was 27 cents higher than the preceding quarter, reflecting the higher input prices since the Ukraine crisis began. At Khonsanchi, copper production totaled 39,719 tonnes in the second quarter, over 2,000 tonnes lower than the first quarter. The extended raiding season did restrict mining deployments and required supplementing plant feed with low-grade stockpiles. We are currently installing additional pumping capacity, and water from the M12 oxide area is expected to be removed by the end of the third quarter of the year, which will provide access to the scheduled oxide and mixed ore beneath the water there. Additionally, we mine through a higher proportion of vanes material in the quarter, some of which comprise narrower and less mineralized vanes, resulting in higher dilution and lower overall grades to the mill. A new geological approach to these narrower and lower mineralised veins is expected to improve optimisation of the mine plan in the near term. Consanti is tracking towards the lower end of the guidance range of 175,000 to 195,000 tonnes for the year. Like Sentinel, Copper C1 cash costs at Consanti were impacted by price increases in key consumables. the lower quarter-over-quarter production resulted in a steeper increase in cash costs of 37 cents to $1.83 per pound. Speaking on costs, as noted in the last quarter call, the broader inflationary environment has been exacerbated by the Ukraine conflict. Resulting supply disruptions have led to an increase in most of our major input costs, and we have seen fuel, explosives, sulphur, freight, reagents and steel prices increased significantly, although they appear to have stabilised to varying degrees, albeit at elevated levels. Group-wide copper C1 cash cost averaged $1.74 per pound in the second quarter. For the first half of the year, C1 cash cost averaged $1.67 per pound, which is above the annual guidance range of $1.45 to $1.60 per pound. and costs in the second quarter averaged above levels assumed in current guidance. In recent weeks we have seen some of these cost pressures ease, such as fuel and sulphur prices, whilst electricity and explosive costs are tracking below our forecasts. Stronger production in the second half of 2022 should benefit on a per pound basis and as such we are maintaining our guidance from April. However, it should be noted that achieving costs within this range over the next six months will be dependent on the market rates for fuel and other key important supplies, and the market price of gold and our other by-products. Moving on to discussions in our host countries, it was very pleasing to announce that during the quarter, a VAT repayment agreement was reached with the Government of Zambia. First Quantum and the government successfully resolved all points of contention that have been stumbling blocks to progress the S3 expansion and the enterprise nickel project. This included reaching agreement in respect to the outstanding value-added tax receivable sum and an approach for repayment based on offsets against future mining taxes and royalties. With this agreement in place, the board approved the sanctioning of the S3 expansion project and the smelter expansion at Consanchi and the enterprise nickel project near Sentinel, which I will discuss in more detail later in my presentation. In Panama, there has been civil unrest in the country over increased cost of living and unemployment, which has led to protests and temporary highway blockades around the country over the last few weeks. Production at the Cobra Panama mine remains unaffected. We have been able to navigate regular supplies through roadblocks as they lift whilst perils to our site are unaffected. We also receive supplies, including fuel, through our wholly-owned international port, which has not been interrupted. With regards to our workforce, which has not taken part in the protest, we are monitoring labour relations closely and we have transportation plans in place to move our workers safely to and from site. We are also employing effective work-from-home arrangements for all support departments. we will continue to monitor the evolving situation closely. Whilst discussions regarding Law 9 are still ongoing, the finalisation of the agreement has been delayed to an extent as the Government replaced the responsible Minister of Commerce and more recently has been naturally focused on resolving the civil disturbances. First Quantum and the Government of Panama remain committed to a swift conclusion of the Law 9 discussions on the basis of the agreed principles and on ensuring that the new contract and legislation are both durable and sustainable with downside copper price and production scenarios. With the publication of our 2021 ESG report this quarter, we continue to deliver on our commitments on the development of the reporting on our ESG performance to our stakeholders. This is our fifth annual report on ESG and highlights the performance of the company across a range of environmental, health and safety, social and governance areas of our business. We also published our 2021 Tax Transparency Report during the quarter. This report underlines the importance that we place on transparency initiatives which provide stakeholders with clear information on the contributions that First Quantum makes to our host governments. I would also like to highlight the positive impacts that we've had on our community initiatives, particularly the EDGE program which was launched by our Trident colleagues in June. Parts of Africa have the highest rates of gender-based violence, and the goal of this program is to enhance each girl's access to education and training opportunities by helping them to stay in school. At the launch of this program, we donated thousands of essential feminine hygiene projects at Jeundu, and we will continue to do this and see that it is expanded to other schools in the surrounding communities. Working with our local communities continues to be a core value at First Quantum, and I'm proud of the trial team for this initiative. And with that, I'll turn things over to Hannes.
spk13: Thanks, Justin, and good day to everyone. I would like to direct you to the slide titled Financial Overview, which is slide 11 on the website. The company reported significant increases in both net earnings, attributable shareholders, and adjusted earnings. together with a notable reduction in net debt. Gross profit and EBITDA remained robust and were comparable with same quarter in 2021. Net earnings attributable to shareholders of a company of $419 million, or 61 basic earnings per share, and adjusted earnings of $337 million, or 49 cents adjusted earnings per share, showed significant improvement over the comparable quarter in 2021 and benefited from higher net realized metal prices following the reduced hedge profile, as well as a lower effective tax rate together with lower finance costs. Gross profit and EBITDA of $629 million and $906 million respectively were in line with the comparable period attributable to higher net realized metal prices of setting lower sales volumes and inflationary impact on cost. Proper C1 cash cost of $1.74 per pound was 45 cents per pound higher than a comparable quarter, impacted mainly by inflationary pressures seen over the past year, as well as lower production. Net debt has decreased by $476 million this quarter, bringing the net debt leveled down to $5.3 billion as of June 30, 2022, a reduction of $2.3 billion since June 30, 2020. Cash flow from operating activities was $904 million for the quarter, $225 million higher than the same quarter in 2021 due to favorable movement in receivables, working capital at the end of the quarter. On July 26, the company declared an interim dividend of 16 Canadian cents per share in respect of the financial year ending December 31, 2022. Turning to the next slide, financial overview. As I mentioned previously, earnings have increased significantly over the same quarter in 2021, with a lower effective tax rate for the quarter, in line with the guidance, as well as lower finance costs. Gross profit and EBITDA remained at comparable levels over the same quarter in 21, with the benefit of higher net realized prices following the cessation of the H program, offset by a higher cost environment, as well as lower sales volumes. Turning to the next slide, in gross profit against the same quarter in 21, set out in more detail the positive impact of higher net realized prices. This also shows the impact of increased unit costs over the quarter, And I will talk about this in a bit more detail. So turning to the next slide on the copper unit cost. Copper C1 cash costs of $1.67 per pound and all its sustaining costs of $2.32 per pound for the first six months are currently slightly above the top end of our full year guidance. Total copper C1 cash costs for the quarter was 45 cents per pound higher than Q2 2021. as prices continue to increase during the quarter for key consumables, including fuel, explosives, and steel prices, along with higher freight and electricity charges, as well as the impact of lower copper production levels. Oil and sustaining costs for the quarter was 46 cents per pound higher than Q2 last year, reflecting the higher C1 cash costs. Turning to the next slide on debt evolution, With the reduction in the net debt, the company's leverage ratio also reduced and stands at 1.3 times net debt to EBITDA at quarter end. Turning to the next slide on the debt maturity profile. During the quarter, the company redeemed at par the remaining $1 billion of senior unsecured notes due in 2023. $500 million was redeemed on April 5th. and a further $500 redeemed on June 7. Thank you. With that, I want to hand back over to Tristan.
spk06: Thank you, Hannes. Despite the macroeconomic headwinds and inflationary challenges, First Quantum's balance sheet is in a stronger position today, and the group will endeavour to continue to improve in this regard. This will be through operational discipline and, as Hannes commented, continued debt reductions. I will now speak to our brownfield growth projects. Due to the low capital intensity of our brownfield projects, they continue to have compelling economics despite the global inflationary environment and current pricing environment. At Cobra Panama, as you can see from the pictures in the presentation, good progress has been made over the quarter with regards to the CP100 expansion. The project is overall 70% complete. Procurement is 100% complete. with supply X works almost fully complete, and delivery to site will be over 90% complete during August. In terms of the key individual project components, the additional decant water line is well-progressed and is expected to be completed and commissioned this year, with bore mill six and the screening facilities following in the first half of next year. Bore mill six is making good progress, with the mill shells having been installed already. For screening, the vast majority of the modular steel and equipment has arrived on site and the modular nature of fabrication will minimise site construction time, we believe. We remain on target for commissioning early next year to ramp up over the course of the year and exit 2023 at a throughput rate of 100 million tonnes per annum. At the S3 expansion, engineering contractors have been engaged and procurement of long lead items commenced. The longer lead items, including the bore mill, mill motors and elements of the overland conveyor, were ordered in June. While we saw some price movement, I'm pleased to say that pricing these components are in line with our CAPEX budgets. Similarly, orders for mining fleets have commenced and are also in line with our CAPEX budgets. Our current planning estimate assumes a two-year delivery time on these major components, nine to 12 months on installation and first production in 2025. Alongside the S3 project, we will embark on the expansion of the Consanche smelter to 1.6 million tonnes per annum of feed. This project was approved by the Board in July and will provide capacity for the additional copper concentrate from S3 with the planned upgrades to HPL. This expansion is included in the company's three-year capital expenditure guidance provided earlier this year. At the enterprise project, mining contractors were mobilised upon board approval and pre-stripping of the pit commenced in June. The project has the potential to add 30,000 tonnes per annum of nickel production and our current guidance assumes first production in 2023. I was pleased to host His Excellency the President of Zambia and the diplomatic representatives of Canada, the UK and the USA at the groundbreaking ceremony held at Enterprise yesterday. Before we go into Q&A, it is worth taking a moment to discuss the challenges that face the mining industry today and the challenges of bringing on new copper supply. A global slowdown combined with a number of new projects coming into production over the next 12 months has made us cautious on the copper price in the near term. despite continuing tightness in physical inventories. However, in the medium and longer term, we do consider that the outlook for the copper price remains positive as there is a lack of new discoveries and shovel-ready projects in our view. This combined with stringent permitting obstacles, inflationary pressures and the escalating cost of capital, we believe will contribute to an even tighter copper market in the medium to longer term. The current macro weakness and the higher cost of capital will likely further defer approval of new projects that will be needed to supply into longer-term growing demand. Our near-term priority is therefore to drive operational performance and work hard to mitigate the cost impact of inflation. We will also take a cautious and disciplined approach to any new as yet uncommitted capital. A sanctioned decision on the Las Cruces underground project is not expected until next year and Takataka in 2024, at the earliest, and any decision will take into consideration prevailing economic conditions. Over the medium to longer term the outlook remains bright and we remain well positioned with our portfolio of long-lived assets and organic growth opportunities. Thank you. Operator, we would now be happy to take questions.
spk05: Thank you. We will now begin the analyst question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. Analysts are requested to restrict themselves to two questions and are welcome to rejoin the queue if they have more. We'll pause for a moment as callers join the queue. The first question is from Greg Barnes from TD Securities. Please go ahead.
spk12: Yes, thank you. Tristan, notwithstanding the situation in Panama right now, can you give us an idea if any more discussions or meetings are scheduled on the Law 9 situation with the government and what the process is from here forward?
spk06: Sure, Greg. Yeah, so we have been having discussions with government all through this period and there are scheduled meetings ahead of us but naturally they are focused on the civil disturbance in the country at the moment. We have met with the new Minister of Commerce and he's part of those discussions and so we expect them to continue but in the background and obviously our support is to the government in terms of the challenges that they have in the community. The process from here, again, is that we're in the detailed drafting phase and really it's agreeing those along the lines of the agreed principles with a focus on ensuring that the new contract and legislation will be durable and sustainable, particularly during times when we see copper turn off and prices come down or production, and that that drafting of the contract and legislation will then be finalised and I assume main public and then be going into the National Assembly. So the process remains the same and the stages remain the same. It's really just around the delays we've seen with the new minister and then more recently the challenges the government faces with some civil disturbances.
spk12: I just wanted to switch to the VAT rebate agreement with the Zambian government. Is it fair to say, Tristan, obviously based on copper price, that this could evolve over like a 10-year timeframe and you'd get a rebate or a tax offset of $70 million-ish a year? Is that the way we should be thinking about this?
spk06: Yeah, Greg, so the setup is that historic VAT and future VAT can be offset against future taxes and royalties. There isn't a set repayment period and it's in proportion to revenues. So at high copper prices, the VAT receivable will be repaid quicker, and at low copper prices, it will take longer. But certainly the timeframe you mentioned is part of the assumptions, and it's a mechanical formula. So it will come through, and we're assured of the repayment. But at these sort of prices, the timeframe that you mentioned seems appropriate.
spk05: The next question is from Emily Chang from Goldman Sachs. Please go ahead.
spk03: Good morning, Tristan and Hannes. My first question is around CapEx, and it looks like that hasn't been changed for the year. And you've made some progress on the procurement process there for some long lead time items. But what factors are there within that budget could you see potentially drive upside risk? Is labor inflation a key issue for you?
spk06: Thanks, Emily. Yeah, so as I said, and consistent with what we said in the quarterly, the procurement at Cobra Panama, the CP100 expansion is complete and we largely delivered. So it would really only be on remaining freight, but we're confident of our levels around freight and we have seen freight come off from the really challenging time, which is probably a year ago now, and freight rates start to improve, or just the first hint of improvement. So it would really just be on installation, whether it's an overrun or labour. In terms of labour itself, we follow a different model to many other projects in that we largely self-perform. And so that skilled labour really comes from our own existing team. And so, for example, on Mill, installations the team has done the Sentinel installs, the Panama installs and will in fact go on to the S3 installs in time. So we don't have quite the same exposure to skilled contractors or the use of contractors that may be moving up and down at higher rates and so we see less of that as a risk. At S3 we're in an early stage. But so far in looking to place orders and the first orders that have been placed we've been on track with budget and we do see, depending on how sticky these prices are and how long they last, that potentially we will see further improvement in freight and so on depending on fuel prices that we might be able to benefit from given the timetables for delivery over the next two years or so. I don't see any huge risk at Cobra Panama at all, and S3, although there's some exposure, potentially we'll see some unwinding of these higher price levels depending on fuel price and so on.
spk03: Understood. That's really clear, Tristan. Maybe a quick follow-up is just around the economic environment that is driving some of these decisions, whether to proceed or not with these brownfield or greenfield projects, but What do you need to see change? Is it a certain copper price level? Is it sort of balance sheet metrics? What changes the decision-making process from here?
spk06: Sure, Emily. We will be taking a cautious and disciplined approach to new projects. So, you know, CLC, Taka Taka, again, we like those projects. We like the way they stack up. CLC is more capital intensive, but it's a low-cost producer in a good, stable environment. And Taka Taka, we need to manage and understand Argentina, but the project itself stacks up very well in terms of production of copper and the financials around capex and the timing of that outlay. So really the decisions from here are around making sure that we maintain the disciplined reduction in debt And obviously that will be determined by copper price to an extent in terms of the pace of that reduction. But until that reduction does come down, we will certainly be taking a more cautious approach and tempered by copper price certainly as an input to that, but cognizant that in the longer term we do see supply shortfalls, projects that are challenging to get off the ground. you know, unlikely to become, that there'll be much more coming into the copper market over the sort of medium to longer term, and that does provide a good basis for those projects once we get the debt levels to a good position.
spk05: The next question is from Oris Wakada from Scotiabank. Please go ahead.
spk01: Hi, good morning. Given the challenges that the Zambian operations have faced in the first half of the year, I'm just wondering, you seem pretty confident on seeing an improvement in H2, but how should we think about 2023 and 2024? Should we be thinking about similar downside risks to those previous guidance numbers?
spk06: Hi, Oris. Thanks. Let me speak about both operations, Sentinel, where I am currently, and Consentee. Sentinel We've been focused in the first half of the year on getting through a period with lower truck availabilities, but also some wetter areas, particularly in Dam 6. Where we are set up now is that we've been pushing volumes through the plant in order to make sure that we give exposure for the second half of the year and not getting trapped into diving in on grades. So for the second half of the year, what we see is we have broad areas of good grade that are exposed. In the north, there's about two benches of sequence material that needs to come off in the bottom of the pit, but we're in good shape there. And near the Dam 6 area, we're now on hard rock and directly above some good volumes of high-grade material that are in close proximity to the new Crusher 4 station, and so some good efficiencies that we're able to provide there. So we have every confidence in our ability in the second half to deliver at Sentinel. And then looking forward to 23 and 24, the mine is set up well now that it's through that period of getting through Dam 6 and on the north wall, providing that exposure. So Sentinel Oris, we believe, is well-shaped. At Consanche, really the challenge has been around grade and dilution. The copper is there. We're very comfortable. We've been through... a current iteration of the reserves and resource, and that's demonstrated to us an increase in tonnes and an increase in grade. So S3 remains well positioned. But really, the challenge at Consangie is that we've been holding off on that S3 project and the proportion of oxide and mixed material has been reducing. So we're more and more reliant on the sulphides, and the current areas that we're working on in sulphide have been characterised by narrow veins. That's about 20% of the sulphide ore body, but the reality is those narrow veins, we have been seeing a high dilution. The broader sulphide ore body, which is the strata material, is far more disseminated, but that's not the focus of the current work areas. So we have improved our understanding of that model through the course of 2022. A lot of hard work has gone into that, and I believe that will allow us our near-term mine plans to to better optimize production from those areas. And then looking forward into 23 and 24, we've done a lot of work on stripping to provide access to other areas that can provide good sources of feed. And then in addition, make sure that we get the water out from M12, which is a good source of oxide, around 2 million tons of reasonable grade in the very near future.
spk01: Okay, thank you. And just as a follow-up, you mentioned earlier that If the copper price were to weaken or perhaps weaken further, you have some flexibility in terms of reducing capex plans. And I think you said of projects that have not been sanctioned. So I guess in the next few years that specifically would be around Las Cruces. Can you give us an indication, just roughly, like if you decide to just wait on Las Cruces, how much capex would that potentially save you in 23 or 24?
spk06: Yes, so Oris we haven't put Las Cruces into the guidance so there would be no change from the current guidance. What we do see is we will need to be doing some work there on dewatering and that's just in preparation for the underground mine and that continuing work would also defer some of the shutdown and mine closure costs that come through. So that's what we would be doing is pushing out mine closure. in anticipation of a decision and that would have some outlay but we haven't included any outlay for the underground project in our guidance.
spk05: The next question is from Jackie from BMO Capital Markets. Please go ahead.
spk02: Thanks very much. I just wanted to follow up I guess on the comments you made earlier and a bit on Emily's question. When you're talking about procurement and the long lead time items that you're ordering, you said that they're in line with your budget already, which is excellent news, but maybe a little bit surprising given all of the cost pressures we've been hearing. So I was wondering, Tristan, if you wouldn't mind giving us a bit of color on the market or the process that you're seeing right now for long lead items, and is it difficult for you guys to stay within budget, or maybe it's related to the fact that there's fewer projects being built now. How competitive is it right now for CapEx projects?
spk06: Thanks, Jackie. That's a good question. So, look, we placed the order for the mill, and we were Our budget was in the region of 30, 32 million something. Looking at the wraparound drives and so on, they've been around the numbers that we thought they would be in terms of their expectations as we set guidance sort of Q3 last year. And then on input crushing equipment and so on, slightly over, but not that we, you know, dramatically different from where we were setting in Q3 last year. I think that probably is around the delivery times as well and we're flexible in that in terms of the delivery for S3. And then in terms of, John you might comment on mine fleet, but we have seen that some deliveries on mine feeds are definitely uncompetitive and going out a long way, but then In and amongst our capabilities and speaking to different OEMs, we've been able to find, we believe, competitive terms for mining equipment, trucks and loading equipment. John, do you want to comment further there?
spk14: Yeah, sure, Tristan. Jackie, what we have found is that by going to the market, we found that this considerable range, both in terms of delivery and actual capital, for the fleet. So we have spent a lot of time looking at the most practical mix and extension of the current fleet that we have at Kansanshi. And that is making use of existing partners wherever possible so that we can utilize their infrastructure as well as our own. And we have been at this near completion stage, we are very pleased that we've been able to keep well within the capital total that we had set ourselves certainly last year and the year before. So we believe that the mining fleet will be delivered in a reasonable timeline and within capital budgets.
spk05: The next question is from Abby Agarwal from Deutsche Bank. Please go ahead.
spk10: Thank you. Morning, Tim, and thanks a lot for the presentation. I have a couple of questions, please. First question is on Zambia. I didn't hear you mention the great guidance for Sentinel. Are you still happy with the overall guidance for FY22 to be in line with slightly higher than FY21? Yeah, Andy, we...
spk06: At the moment, we're trending towards the bottom end of that guidance, but we're happy with the guidance that we provided, which was 250,000 to 265,000 tons of copper from Sentinel this year, 2022.
spk10: Got it. Okay. My second question is regarding the run rate of C1 cash costs you saw in June and July. During the call, you mentioned you have seen a rollover in raw material prices led by sulfur and fuel. Could you tell us what the run rate of the C1 cash cost was in June and what you've been seeing over the last couple of weeks to help us better understand how the costs have developed?
spk06: Sure, Andy. What I can say is it's volatile. So you mentioned sulfur price, and we've seen it fall from what were extreme highs and really in the last couple of weeks come down a significant runoff down towards $100 a tonne. which is a long way from where we were even a few weeks ago. So certainly volatile in terms of pricing. Fuel, you mentioned, is high and can continue to drift a little bit higher, but we have seen it come down in recent weeks just off the back of energy security relaxation. But I think it's still an area of uncertainty looking forward for the next six months or so. In terms of our other major cost drivers, so as an example we've seen fuel which was perhaps 9% of our cost structure this time last year has increased already to around 13% of the cost structure this year. In terms of other movements, labour which was lagging I think in Q1 has picked up now and we are seeing that inflation on the labour side which was expected. which goes alongside with that labour and spare parts provision at higher levels. But then things like steel bore mills definitely have stabilised and within our guidance numbers. Electricity has actually come off a bit from where we were posting our guidance numbers. Explosives have been... Ammonium nitrate is much lower than where it was when we were posting our guidance numbers. So I think the overall... Picture is one of volatility, a movement up in prices, but in more recent weeks, stabilization and even some reductions from the extreme high levels.
spk10: Got it. Very clear. If I could squeeze in one more question, please. So regarding the ongoing long-line negotiations, so you did mention the focus has shifted obviously to the social unrest. So, I mean, I'm trying to understand, could the scope of the conversation also change? Trying to understand, you know, the government walked back on the deal which was agreed to in Jan and, you know, trying to impose a higher taxation.
spk05: Pardon me, sorry.
spk10: No, Andy.
spk05: Go ahead.
spk06: I can take the question. It's fine, operator. No, Andy, you know, the principles that are in front of us remain the same. and it's really getting, finding out the final items and getting into the drafting, the detailed elements of that that's the focus of discussions. Of the clear natural priority for the civil services at the moment and certainly we support the government in terms of that resolution.
spk05: Next question is from . You can ask your second question. Sorry about that.
spk02: No problem. Thank you. So my second question was going to be on capital allocation. Congrats on bringing the debt down to your net debt target level. That's great to see. And I see you've got another targeted debt reduction level. But especially, I guess, if you are pushing out some of your longer-term growth projects And let's say we assume that the copper price cooperates. Can you give us a little bit more color on where your capital allocation priorities would be? If you had the capital, would you accelerate the debt pay down, or would you raise the dividend up further from the $0.16 that you declared last night? Or can you just give us some thoughts about how you'd lay that out? Thanks.
spk06: Sure, Jackie. Thank you. Yeah, the focus would be on debt reduction. I think that would be the prudent course. And certainly that's been the focus per our commitments to make sure that we reduce that as quickly as we can. And as you mentioned, we have targeted a further $1 million reduction in net debt in the medium term. And if copper prices do come back up, we would focus on accelerating that. In terms of the dividend, it is a cautious start to dividends at 15% of free cash flow. and provide us the opportunity. So the dividend we announced at $0.16 looks back to our performance during 2021 and provides the opportunity for shareholders to share in that performance. But the calculation is done after we've posted capex that's needed for the business and for the guidance that we provide in terms of the brownfield projects. if copper prices did increase from this level and if we had to repay debt, then I'm sure the board would be looking at that as a means to adjust things, but also looking at the opportunities on Greenfield projects in the future. So really the priority is debt and making sure that we do provide sharing of performance with shareholders in the dividend stream.
spk02: Thank you.
spk05: The next question is from Ioannis Masoulas from Morgan Stanley. Please go ahead.
spk09: Hello. Thanks for the presentation. A couple of questions left from my side. The first one on your cautious view on the copper price in the near term. Are you considering or thinking about potential hedging activity, or is that out of the question?
spk06: Hi, Owens. Yeah, so I think the caution on copper price comes from just the additional production we see coming in from new projects such as KOMOA, QV2, KIABERCO, and so on, but also then that uncertainty in terms of offtake and demand in the very near term from China and so on. Although we have seen some easing on the logistics side and the lockdowns, the access for shipping and so on into China very recently, certainly inventories remain very tight. But yeah, to your question, we... We do think that the copper price has some volatility to it in the near term, but over the longer term we see improvements and a lack of supply continuing to mean that demand will outstrip that. So we remain very confident in that.
spk09: So there's no urge to hedge at this point, I guess, based on your comments?
spk06: Yeah, we wouldn't be hedging at the moment. We're not a natural hedger. And we see that in the longer term, the copper price, it's marked by uncertainty in the near term, certainly. But in the longer term, we have every confidence in it.
spk13: Tristan, I might just add that we don't generally hedge. So we hedge when we've got big capital exposure, big capital commitments. and when we had certain requirements to meet governance and cash flow from a balance sheet point of view. Those big projects in terms of Panama is now behind us, plus we've got the additional cash flow coming actually from Panama. So the company is in a much stronger position, even at lower prices. So there's not really that need now for us to go into that.
spk05: The next question is from Carl Blunden from Goldman Sachs. Please go ahead.
spk08: Hi, good morning. Thanks for the time. Just a couple on the balance sheet. Nice to see the reiterated debt reduction target. When you think about the ideal mix there of what debt you'd want to reduce, is it a mix of bank and bonds? Or at this point in time, should we think about it as more focused on the bond, similar to your recent actions?
spk06: Thanks, Carl. Hannes, do you want to take that one?
spk13: Sure. Carl, in the presentation, we've outlined the debt maturity profile. And you will see that this year we've got $228 million of term loan due in December. So we'll pay that. And then there's $455 million in 23 and 24 of term loan. So that will naturally be paid down. The bonds are, of course, callable, most of them, except the 27s. So it will be a mix between the two term loans paid as and when due. And then... utilizing excess cash to pay down bonds as well.
spk08: That's helpful. Maybe getting just a little further ahead, when you think about reaching that debt reduction goal, $1 billion less, should we think about that as the steady state that you'd want even if you go after larger growth projects or at that point in time, could you think about adding more debt to the business if conditions are supportive in the capital markets?
spk13: Absolutely. Carl, I'd like to keep our debt or our bonds profile current. So the only bond not callable is the 27 bond. So at some stage, it's probably worthwhile to add another one, probably not at the current sort of yields. So at some stage, we'll come back to the market just to keep that profile current. It's not that we need the liquidity at the moment. It's a good part of the funding mix. So I think in the longer run, you probably could think about a sort of $3 billion total bond portfolio. Currently, we've got about, I think it's $4.7 billion outstanding. So you would see the bond portfolio still reducing further. But then in the longer run, I do see it as part of the long-term capital structure.
spk05: The next question is from Ed Brucker from Barclays. Please go ahead.
spk00: Hey, thanks for taking that question. So in relation to those questions and staying with the balance sheet, it sounds like you're looking to potentially hoard cash, I'd say, ahead of a difficult environment. But to potentially reduce the total debt level, do you think you'd be able to or maybe think about taking advantage in a difficult environment with the bonds trading at a discount, potentially taking those bonds out in the open markets?
spk13: That's always an option available to us, but not one that I would like to comment on.
spk00: Got it. Thanks. And then my second question, just relations with the Panama communities, given the upheaval that's going on in the country, can you dive in a bit more on what you're doing to help those communities and community relations there, and then the confidence that there won't be disruptions at Cobra Panama?
spk06: Sure Ed, yeah there's been a lot going to working with the communities alongside the mine itself and as I said we're somewhat removed from the main area of civil disturbance which has been focused on really the capital cities, Cologne and Panama City itself, particularly inside the city and so being somewhat removed it's much more about moving our people backwards and forwards from them and we have people that come from all over the country from the west and so on regional areas as well as the capital cities and making sure that we can get those people through the site and as as i said um where necessary particularly in the support um departments such as commercial or finance or um you know hr and so on that we've we've learned a lot from the covert period and working from home And so it's been straightforward to implement that again. So we haven't seen disruption in that regard. But then, towards your question, working with the communities outside, the ongoing livelihood support programs that we had in place during the pandemic, given the curtailment and economic activity, continue to be valid. And so we're focused on supporting those communities. in terms of outreach directly into their livelihoods, emergency funding when necessary, but then making sure that they have access to education, healthcare and so on. So we've been, for example, providing radio education to school children and so on, and those programs continue on. But then I think really the strength has been that the communities around us, because of the economic activity of the mine, have seen the benefit to that and remain strong supporters notwithstanding the situation in the larger centers such as Cologne and Panama City.
spk05: The next question is from Jetsinder Goel from Exxon BNP Paribas. Please go ahead.
spk07: Thank you, operator. Good morning and good afternoon. I've got two questions. First one on distribution to shareholders. You've got 15% of cash flow distribution policy with a minimum 10 cents. Is there any flexibility within that to go for buybacks as well, especially given how the share has traded more recently? Or would you not do a buyback until you can commit to a much larger sum, which can be much more effective in terms of buyback? That's the first one. The second one, on Las Cruces underground, given European power and gas prices and the visibility that we might have, Is early 2023 still realistic to make an investment decision there? Thank you.
spk06: Yeah, thanks, Judson. So firstly, in terms of a buyback, we do understand and we see that that's another option, another string in the bow in terms of shareholder returns. But as I've been saying, the focus is on and our prioritisation is on repayment of debt. We want to see that come down. We're targeting that billion-dollar mark from moving on from what we have achieved at the end of the second quarter, which was a $2 billion reduction. And so that's the focus and the commitment. I think once we get to lower debt levels, then we would look at that in line with and depending on the copper price. But at the moment, it's been a cautious start to dividends, which is appropriate. And we believe that that capital return policy will remain in place, particularly as we look and weigh up opportunities around capital projects. You mentioned CLC Underground in terms of the timing. Yes, we're not adjusting the timing at the moment. Certainly, given current market conditions, we will be cautious and disciplined around that decision and it may be appropriate to defer that depending on copper prices, but at this stage we're not moving the timetable for that decision. We will weigh that up and the circumstances in the macroeconomic environment when we get to that point in time.
spk04: Operator, we're coming up to the hour, so this will be our last question, or the last analyst we'll take questions from.
spk05: Thank you. Thank you. The final question is from Dalton Barreto from Canaccord. Please go ahead.
spk11: Great. Thanks for squeezing me in, guys. Tristan, just one question for me. You've talked a lot about consumable pricing and how that's impacted your cost, but I wanted to ask about wages and labor costs, just given what's going on with cost of living in some of your host countries. And I'm just wondering, A, are you under any pressure to hike wages? B, is any of that baked into your estimates? And C, how much will that impact your cost going forward? Thank you.
spk06: Thanks, Dalton. Yeah, so... Wages certainly were lagging, labour costs were lagging through Q1 and we are starting to see that catch up now. It's different at different sites. In Zambia we have certainly seen, because of the movement of the exchange rate from the low around 22, 23 up to its current levels, that has had an impact on the US dollar cost of our labour in Zambia. We did go through the CLA negotiation earlier this year at Sentinel, and it's now brought in line with Consanti around timing. So we'll go through the CLA negotiation for both mines, due in 2023, and we'll start that discussion towards the end of the year. I would expect that there'll be some inflation in that, given where... input costs for families and for our employees are fuel prices, their food prices and fertiliser prices and so on, which really are the large component of the basket of goods in Zambia. In Panama, we're not due for wage negotiations. We have two unions there and the wage negotiations will be in 2023 and 2024. But I think that, again, we will see some inflation. It's US dollar denominated, so we don't see the exchange rate movement. But certainly inflation in Panama has been around the levels of the US, if not a little bit higher. And so we'll manage that through the course of those negotiations. The other element there in terms of... labour negotiations is really around overtime and certainly in Panama that's been higher because of the restrictions on numbers on site but it's starting to ease now and so I think we'll be able to offset some of that cost in terms of reducing overtime. But in terms of the overall impact in our business This quarter labour was around 17% of the cost of the business and also a major component of our contractor cost which is perhaps around 11% of the overall cost structure of the business as an indication of where it stands. I'll just add that in certain markets it's very different. So in Turkey inflation is currently around 75-80% in Turkey year on year. And so that's an area where we've intervened directly in order to make sure that our employees' standard of living is maintained. And if we need to intervene there again, perhaps in the next six months, if things continue at those rates, then we'll certainly look to do so. We've seen that in Argentina as well in terms of the project and some of the people working there. inflation has been pretty dramatic. And if we need to intervene, we will do so.
spk11: That's great. Thank you for that, Collier. So just to clarify, though, in Zambia and in Panama, you don't intend to address wage rates until the negotiations are due?
spk06: So we cover that each year in any event. So the ongoing CLA, those are programmed in. And they're running at just below the level of inflation at the moment in Zambia and in Panama and will be addressed in the course of next year.
spk05: This concludes the question and answer session. I would like to turn the conference back over to Tristan Pascal for any closing remarks.
spk06: Thank you, Operator. I would like to thank everyone who joined the call today. The markets have certainly been very volatile recently and I'd like to thank our shareholders for their continued support through these uncertain times. Please enjoy the rest of your day and the summer and we look forward to speaking to you again at our next quarterly update. Thank you.
spk05: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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