First Quantum Minerals Ltd (OTCPK:FQVLF) Q3 2020 Earnings Conference Call October 29, 2020 9:00 AM ET

Company Participants

Clive Newall – President and Director

Philip Pascall – Chairman and CEO

Hannes Meyer – Chief Financial Officer

Tristan Pascall – Director Strategy

Juliet Wall – General Manager Finance

Simon MacLean – Group Reporting Controller

John Gregory – Group Consultant, Mining

Conference Call Participants

Greg Barnes – TD Securities

Orest Wowkodaw – Scotiabank

Jackie Przybylowski – BMO Capital Markets

Matthew Murphy – Barclays

Matthew Fields – Bank of America

Ian Rossouw – Barclays

Lawson Winder – Bank of America Securities

Jatinder Goel – Exane BNP Paribas

Ioannis Masvoulas – Morgan Stanley

Operator

Hello and welcome to First Quantum’s Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. Thank you

I will now turn the call over to Clive Newall, President and Director at First Quantum.

Clive Newall

Thanks, operator, and thank you, everyone, for joining us today. Joining me on the call today are Philip Pascall, Chairman and CEO; Hannes Meyer, CFO; Tristan Pascall, Director, Strategy; Juliet Wall, General Manager, Finance; and Simon MacLean, Group Reporting Controller.

As usual, before we proceed, I will draw your attention to the fact that over the course of this conference call, we’ll be making several forward-looking statements. And as such, I encourage you to read the cautionary note that accompanies our 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 and on SEDAR. A reminder that the presentation which accompanies this conference call is available on our website.

So, as usual, I’ll get started with some opening remarks, and Tristan will provide an update on Cobre Panama, before Hannes’ review of the financial results. We will then open the lines to take your questions.

So during the third quarter, we, together with the rest of the world, have continued to deal with the impacts of the COVID-10 pandemic. Although in some jurisdictions there has been some easing up of restrictions related to the virus, in others, new or tougher restrictions are being put in place, as we now are seem to be dealing with the second wave.

However, despite these continuing restrictions, the third quarter was solid operationally and financially overall. Kansanshi performed well with higher throughput across all three circuits but with production being impacted by lower grades and recovery on the oxide circuit.

During the quarter, we filed an updated 43-101 technical report for Kansanshi that showed an impressive increase in mineral reserves and resources and the potential of an expansion that would maintain or enhance product levels increase mine life. I think this report highlights the genuine quality of this great asset.

Over the next few years, we will continue to refine the expansion before making a formal construction decision when balance sheet fiscal issues allow.

Sentinel performance is exceptional as we had alluded to in our release just prior to the end of the quarter. Higher throughput and grades at the record production which drove record low cost though a weaker quarter and lower fuel and maintenance cost did help.

At Cobre Panama, early in July, we began the process to resume normal operations, a bit part of which was bringing a large number of people back on the site without compromising COVID safety. The ramp back up was completed in early August ahead of schedule and we are very pleased that Cobre Panama continues to be virus free.

Tristan is here to provide more detail on Cobre Panama ramp up and the increase in our expectations there. We delivered another quarter of improved production costs and have revised our expectations accordingly. Hannes will provide more on our updated guidance for production and costs shortly.

Late in the quarter, we took advantage of an opportunity to continue to manage our debt profile with a successful senior notes offering, the proceeds from which have been used to extend our debt profile.

Through the quarter, we, of course, continued with the various protocols and measures that we have in place to protect our employees and communities. We will continue to practice the highest standards of health and safety protocols and to focus on measures to prevent and manage the transmission of COVID-19 amongst the work workforce in those communities.

Although the impact of the impact of the pandemic at our operations has been manageable so far, and have had relatively modest impacts operationally, I do need to acknowledge the impact of the pandemic continues to have on our workforce, many of whom are far away from their family and homes for extended periods as a result of quarantine requirements, rotation timings, travel restrictions, cetera.

So on behalf of the entire company, I’d like to thank all of those people who have made these personal sacrifices and we recognize the significant contribution they continue to make to the ongoing success of the business.

So, without any further ado, I’ll hand over to Tristan to talk about Cobre. Thanks, Tristan.

Tristan Pascall

Thanks, Clive, and thank you to everyone joining the call. As Clive mentioned there, the performance at Cobre Panama was very strong in quarter three as the mine ramped back up to running on all three trains from the period of preservation and safe maintenance in July. So back to full production in August slightly ahead of expectations.

Copper production at Cobre Panama in the quarter was 62,054 tonnes in concentrates, significantly higher than in the same period in 2019. The cost of production at Cobre Panama in Q3 were also pleasing, especially given the ramp up phase in July and August.

As we stated in the MD&A for the Q3, the C1 for the quarter was $1.06 per pound and all-in sustaining cost were $1.31 per pound at Cobre Panama. The success of the ramp back up to operation on all three trains is testament to our people and the efforts put into the preservation and safe maintenance regime.

In Q3, the site was reduced to around 800 personnel due to the impact of the COVID-19 health protocols, but we were nonetheless able to keep the assets and our environmental and safety performance in good standing and this paid off in Q3 in terms of our ability to reestablish quickly and smoothly.

As Clive said, we would like to recognize the many employees who went above and beyond their duty in terms of the efforts to support the operations, including some staff who were on site for long periods away from their families.

In October, Cobre Panama reached a milestone of 10 million man hours without a lost time incident representing a period of more than eight months. Although we have achieved this milestone previously in the project phase, this is the first achievement in the commercial operations phase of the mining, a testament to all the employees on site.

Nonetheless, our effort on safety, you’ll recall, is continued vigilance and reinforcement. As in quarter two, the site continued in Q3 under the new normal health and sanitary protocols. No new cases of COVID-19 have been detected on Cobre Panama more than five months since early May. By October, Cobre Panama had reached 3,400 personnel on site, which is the full capacity of the site under the new normal health and sanitary protocols.

In this respect, we continued to receive strong Government of Panama support. On the 4th of October 2020, the Ministry of Health issued Resolution 3096, which underlines the current staffing capacity is mine and that we continue with our current health and safety sanitary protocols with respect to the control of COVID-19. The cost of these measures are not hugely material to the cost structure of the business, and they will remain in place in order to underline the stability of the site.

We’d like to thank our many local and international suppliers who have also support to these health protocols on the site and have supported our efforts to manage our supply lines and reduce input costs across the period. We are also continuing to help in the communities around us at Cobre Panama. In October, the Cobre Panama Foundation signed its first contracts in the establishment and start-up of this foundation, and the operations phase of the mine honors our commitment to Panama under the ESIA for the life of operations.

We have transferred and extended our previous arrangement for infant nutrition in our surrounding communities this month into the newly established foundation. We continue to provide medical and PPE support to the Government of Panama as a response to the pandemic and the wider community.

Reflecting the strong operational performance since ramp up from the preservation and safe maintenance regime, Cobre Panama has increased the copper production guidance for the full year 2020 to between 119 to 205,000 an increase of 10,000 tonnes to the lower end of the range and 5,000 tonnes to the upper end of the range.

This underlines our confidence in the operations for the remainder of the year. Gold production guidance for the full year 2020 has also been increased to between 75,000 to 85,000 ounces, an increase of 5,000 ounces. This month, October we’ve undertaken a fairly major shutdown for the first change out of the crushed ore stockpile shoot liners.

This maintenance is part of a normal course of operations that is infrequent, being underneath the crushed ore stockpile and required seven days of closure at both Train 1 and Train 2 at the milling area. The stockpile shoot liner work was completed on time and we are now back up and running on two trains, with the third train expected to come online this Sunday.

The shutdown will have an impact on our cost and production for this month of October. However, expect November and December to be solid months in terms of continuing our ramp up to consistent achievement of the 85 million tonnes per annualized throughput rate at Cobre Panama.

In addition, we continue to look at the expansion project from 85 million to 100 million tonnes per annum and this is dependent on the decision to proceed with the capital expenditure across the period ‘2021 to 2023.

At this stage, we remain confident that the timetable, as set out in the NI43-101 technical report, to achieve the 100 million tonnes per annum in 2023 is achievable. A decision on the capital expenditure program will be made later this year or early next year.

And with that, I will now ask Hannes to take you through the financial presentation. Thanks, Hannes.

Hannes Meyer

Thanks, Tristan, and good day to everyone. I’d like to direct you to the Slide titled Overview. I think it’s Slide 8 in the accompanying presentation. As Clive have said, record copper production at two of the company’s largest operations drove the strong operational performance in the quarter, which coupled with the increased metal prices and favorable operating costs, meant that the company achieved a significant increase in EBITDA and a return to positive net earnings inclusive of net finance expense, as well as started to reduce its net debt position.

The resilient and robust operational and financial performance of the company’s operation has resulted in increased total copper and gold production guidance and improved cost guidance. Total copper production was 10% higher than the same period in 2019, with record production at both Sentinel and Cobre Panama.

Excluding last year’s pre-commercial production, total copper was 36% higher than the comparative quarter. It was another exceptional quarter for Sentinel producing 71,000 tonnes achieving its highest-ever quarterly production and record-low cash cost.

Cobre Panama performance was impressive as it ramped up from preservation and safe maintenance in July to improved production levels in August.

Cash cost of production was at its level in four years with almost all copper operations delivering a reduction, but notably lower C1 and all-in sustaining costs achieved at Sentinel and Guelb Moghrein. Comparative EBITDA of $641 million increased by 81% from the same period in 2019 with higher commercial production volumes and a 6% increase in the realized copper price, as well as lower costs and favorable foreign exchange.

During the quarter, the company’s net debt reduced by $113 million to just over $7.5 billion. On September 18, the company issued a redemption notice for their $850 million senior notes due in 2020 with the company completing the offering of the $1.5 billion senior notes due in 2027 on October the 1st.

Turning to the next slide on production, total copper production for the quarter of 211,000 tonnes was 10% higher than Q3, 2019. Sentinel’s performance as mentioned earlier was exceptional achieving 71,000 tonnes, 25% higher than the same period in 2019 with higher throughput and higher grades and surpassing the previous quarterly record production set in Q2 2018 by 16%.

Performance at Cobre Panama was strong at 62,000 tonnes, that successfully ramped up to full production levels in August. Copper production in the quarter was 10% higher than the same period in 2019 and this includes the pre-commercial portion of the production. Production also benefited from Las Cruces operating at normal throughput levels, compared to the impact of the land slippage and 2019 and their robust performance at Guelb Moghrein.

Kansanshi delivered consistently throughout the quarter, while throughput was higher, copper production was slightly lower from reduced grades and recoveries. Gold production was 17,000 ounces, it was 4% higher than the same period in 2019 reflecting the full production levels at Cobre Panama.

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Turning to the next slide on quarterly unit cash cost. Higher production, lower cost and favorable foreign exchange have driven unit cost to their lowest level in four years. Copper all-in sustaining cost was $1.48 per pound and C1 cash cost was $1.07 per pound for the third quarter of 2020. At 2019, – cents per pound – and $0.38 per pound decreased respectively compared to the same period in 2019.

Lower C1 cost reflects the particular a favorable cash cost at Cobre Panama, higher production at Sentinel and lower Zambia fuel and maintenance cost with favorable FX movement, as well. Lower all-in sustaining cost reflects the lower C1 cost combined with lower sustaining CapEx at Sentinel and Kansanshi.

Sentinel achieved a record low C1 cost of the $1.25 per pound and record low all-in sustaining cost of $1.77 per pound. Guelb Moghrein achieved its lowest C1 cost for over a decade of $0.24 per pound with lower mining cost fuel prices and higher realized gold prices and its lower ever reported all-in sustaining cost. Cobre Panama’s contribution to total C1 cost was $1.06 per pound.

Turning to the next slide on 2020 guidance. Following a strong performance this quarter, guidance has been increased for copper production to a range of 750,000 tonnes to 785,000 tonnes, an increase of 25,000 tonnes to the lower end of the range and 15,000 tonnes to the upper end of the range.

Cobre Panama’s guidance has been increased to 119,000 tonnes to $205,000 tonnes as Tristan stated earlier, while Sentinel’s copper guidance has been increased to 240,000 tonnes to 250,000 tonnes of copper.

There has also been an increase to Las Cruces and Guelb Moghrein’s copper production guidance. Gold production guidance has been increased to 245,000 tonnes and 260,000 ounces, an increase of 15,000 ounces to the lower range and 10,000 to the upper range. Increased production, higher gold prices and our lower operating cost environment with favorable foreign exchange has allowed improved copper cash cost guidance.

All-in sustaining cost has been reduced to $1.60 per pound to $1.70 per pound, whilst cash cost guidance including Cobre Panama has been narrowed for C1 cash cost to a $1.20 per pound to $1.30 per pound. Guidance at Ravensthorpe production has been reduced to 13,000 tonnes to 15,000 tonnes of nickel.

Total CapEx to guidance remains unchanged at $675 million. Guidance on the underlying effective tax rate, excluding Cobre Panama interest has been revised to allow for non-deductiblity of hedge movements.

Turning to the next slide, financial overview. Comparative EBITDA of $641 million in the quarter was $287 million or 81% higher than the same period in 2019. EBITDA benefited from higher commercial copper and gold sales volumes from Cobre Panama, higher realized copper and gold prices, lower operating cost and favorable foreign exchange.

Comparative earnings per share of $0.09 in the quarter include net finance expense of $179 million, compared to $59 million expense in the same quarter in 2019 when an additional $146 million was also capitalized to Cobre Panama during the pre-commercial production phase. Net debt reduced by $113 million in the quarter with higher comparative EBITDA and lower CapEx.

The next Slides showing comparative EBITDA and largest changes there reflects just the movement in the commodity price as well as the increased production levels and then sales levels.

Turning to the next slide, the net debt and liquidity profile. The company ended the quarter with $915 million of unrestricted cash and cash equivalents and was in full compliance with all financial covenants. On September 17, the company announced the offering and pricing of $1.5 billion of 6.875% senior notes due in 2027. The settlement took place on October the 1st.

On September 18th, the company issued a notice of redemption of the outstanding senior notes due in 2022 to be redeemed at par. Proceeds of the new bonds were used to partially repay the existing revolving credit facility and redeem in full the company’s outstanding senior notes due in 2022 on October the 19th, the next business day following the redemption date.

Taking into account forecasted operating cash flows, capital expenditure outflows and available cash and committed facilities, the company expects to have sufficient liquidity through the next 12 months to carry out its operating and capital expenditure plans and remain in full compliance of financial covenants. We continue to take action to manage operational and price risk and further strengthen the balance sheet.

Turning to the copper aging program outlook approximately half of the expected copper sales copper sales in the next 12 months are hedged. The bar chart presented here shows you the split between swaps and collars. At 28th of October, the company had unmargined copper forward sales contracts for 204,000 tonnes at an average price of $2.82 per pound and outstanding with periods of maturity to December 2021.

In addition, the company had unmargined zero cost collar sales contracts for 207,000 tonnes at an average price of $2.76 per pound at the bottom-end to $2.99 per pound on the upper end outstanding with maturities to December 2021. The company also has just over 4,800 tonnes of unmargined nickel forward sales contracts at an average price of $6.75 per pound with maturities to February 2021.

Thank you. And I will now hand back over to Clive.

Clive Newall

Hang on. Sorry. Thank you very much, Hannes and Tristan. And so, operator, could you now open the line for questions?

Question-And-Answer Session

Operator

[Operator Instructions] Your first question comes from Greg Barnes with TD Securities.

Greg Barnes

Yes. Thank you. Hannes, you just ran through the copper hedge book. I understand why you had that in place. But is it time to let that stuff wind down given where the copper price looks like and Cobre is back up at capacity?

Tristan Pascall

Hi, Greg. Look, it’s the copper market is in a much more positive environment at the moment. However, there is more still uncertainties around in the world just given the current stake in COVID and alike, so. We – as stated previously, we’ve put a high leverage at the moment and we want to secure sort of a – predict the downside risk in the company, and therefore, we sort of typically go in about half and half in terms of collars and swaps.

And as it rolled off during the quarter, we just replaced it with sort of newer and higher prices and the current process. So, it would likely to continue for a bit longer. Philip, I don’t know if you’ve got something else to add there?

Philip Pascall

Hi, Greg. Thanks for that question. We have policy historically of not hedging and the exception for that was when we needed to borrow money to ensure that we could undertake our capital works. And much of the way – same way as a bank would require as if they were lending us money. And of course, in a rising market, we were slightly behind and that it looks disappointing.

But the key to it is retain that until you’ve been passed some peak along the way and you can’t predict balances you gone past that. And further long as our debt and our leverage is, and that’s the way that Hannes was commenting on it. The policy will be that we will hedge. But we could imagine that in the next few years that leverage requirement and then the debt requirement on the servicing costs would have dampened somewhat and then we could move away from the same level of hedging, maybe we have a small level of hedging to protect outstanding.

And then, ensure with very little debt and alike, I think it would be nice to go back to the policy where we didn’t hedge at all lower the market as it goes up and down.

Greg Barnes

Okay. Okay. Fair enough. While I have you Philip, just on Kansanshi S3 or the expansion, whatever you want to call it now, what do you need to see from the government I suppose, in Zambia to make a go decision on that project?

Philip Pascall

Certainly, stability and we expect between the quarters next year we’ll have the opportunity to liaise with government and resolve a position that will give us some security going forward. The capital expenditures of that sort can be easily made victim later on of changes to fiscal policy and alike that should then damage the assumptions made at the beginning and that’s what we want to try and get passed.

Our dealings and our position with government at the moment are very benign and certainly they have been very cooperative and helpful through the period of COVID and a number of other times, and our power supply has been in good shape. So, it’s a relationship that we are build on and at what is a difficult times for them to give us nothing more than a certainty as to how we go forward over the next decade or two.

And that’s what you need for that investment. And that’s a large part of it, because I think we have that kind of confidence on our shareholders will feel happier about that increased exposure which just replaces some of the debt replacement that would be going on.

Greg Barnes

Okay. Thank you. That’s it for me.

Operator

Your next question comes from Orest Wowkodaw of Scotiabank.

Orest Wowkodaw

Hi, good morning. Really impressive cash cost at Cobre Panama there in the third quarter, especially as you are ramping up over $1.6 per pound at C1. I am just curious if we should anticipate those to start normalizing back up starting in Q4 and beyond as grades come down and we should still be thinking about kind of that $1.20 a pound to $1.30 a pound range as kind of a more sustainable cash cost number? Has something actually changed here?

Hannes Meyer

Hi Clive, I can take that one.

Clive Newall

Yes. Yes. Thanks.

Hannes Meyer

Yes, thanks, Orest. Look, there wasn’t anything particular in Q3 to really pull down cash cost at all. I think – and I was particularly pleased in given the ramp up. So, we didn’t have the sort of first half of August of production to assist reverse cash cost.

But we – I think we’d like to say a little bit more and a little bit further, particularly into some areas as we get into Botija and then into Colina as part of the $100 million before we remove away from the guidance that we provided. I think what you are seeing though is, is the potential for Cobre Panama to perform and so, it’s exciting for us. But at the moment, we would stick with the guidance that we’ve provided.

Orest Wowkodaw

Okay. It sounds like you are actually though indicating there could be some upside to the guidance in the future which is great. And then, just changing gears with respect to more corporate policy. Can you give us an update on where things stand or whether the discussions have resumed? And whether it’s a priority with respect to a minority interest sale at – in either Zambia or at Cobre Panama?

Tristan Pascall

Sure. Clive, I can take that one again. Look, as Clive and Hannes has pointed out, the Zambian assets continue to perform very well in Q3 and combined with the ongoing rebound in copper, gold, nickel prices, and indeed the uplift in resources in the Kansanshi 43-101 technical report, we really believe the Zambian assets to make a compelling value proposition. Orest, the minority stake as our prices continues, but there is no further update from Q2 from what shared last time.

Orest Wowkodaw

It is still a strategic priority though in terms of accelerating the deleveraging through that kind of transaction?

Tristan Pascall

Orest, we continue with it on that basis, but we are working with the copper prices in particular very closely. I think the outlook continues to brighten for copper, then we will continue to look harder at that. Yes.

Orest Wowkodaw

Thank you.

Operator

Your next question comes from the line of Jackie Przybylowski, BMO Capital Markets.

Jackie Przybylowski

Thanks very much. I guess, I’d just maybe circle back on the question about the expansion of Cobre Panama to 100 million tonnes a year runrate, can you give us a sense, because I think the last few times the company has commented on this, you said you are pretty optimistic that there might be some debottlenecking you could do, which might bring down the ultimate cost of that expansion.

Can you give us a sense like, I know it’s been early and you guys have kind of just restarted, but how are you seeing the progress to that 100 million tonne a year runrate? And do you have any sense that you might be able to have some cost savings in your plan to achieve that rate? Or is there any maybe equipment that you had baked into those estimates that you maybe don’t need at this point?

Philip Pascall

Tristan? You want to do that?

Tristan Pascall

Sure. Thanks, Jackie. No, I think it would be too early for us to go out on a limb there in terms of a reduction to that capital cost. What we shared in the 43-101 was in the order of $300 million to $400 million for that expansion and we just stick with that. The principal components of that are the stripping at Colina is included in that.

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And some upgrades in the process line, which is essentially the conveyor – conveying system and a ninth mill, a ball mill, the six ball mill and then mining fleets. And those three elements remain in place in terms of what would be required to go to a 100 million.

And we would really need to go through to think how the engineering is to get any further refinements on those numbers. And that will be – that’s the sequence we will go through in terms of the 10 million expansion, but we are not there yet in terms of detailed engineering.

Jackie Przybylowski

Is there a chance that you could complete some detailed engineering over the next sort of few months or however, over the next period where you are maybe maximizing the throughput of the existing mill configuration and at that point, but still a possibility that that might be an opportunity for you? Is that still possible?

Tristan Pascall

Yes. I think our key focus in the milling circuit is to understand the combination on the primary as we deepen down Botija. So we got a good view of what the Botija ore looks like and its analogies across Colina. So that will give us a lot of information towards that point.

Jackie Przybylowski

Got it. Okay. Thank you. And maybe if I could just switch gears and ask about Ravensthorpe, I mean, the results in the quarter was probably the – I guess, the most negative spot in your whole earnings update. And I know you guys are still working on Shoemaker Levy there. Is there – can you give us an update on Ravensthorpe? Is it all kind of going according to plan?

And maybe also, if you could just talk a little bit about strategic investors and strategic options that you are seeing there. Is it still too early to comment on that? Do you need to see Shoemaker Levy in production before you would entertain a strategic partnership at Ravensthorpe? But like what’s the current thinking on that?

Clive Pascall

Philip, do you want to do that one?

Philip Pascall

Yes. Okay, Clive. To be – let me start it up again at Ravensthorpe. We are also starting a new ore body or an ore body that we’ve only taken a certain amount out of the core, which is how about that we just prove to be more varies and we don’t just start it. And I think one of the factors of care and maintenance is that there are elements of the plant that after you start to run demonstrate a need to be changed or modified and that’s what’s you are seeing in those results.

So that’s getting up and happening anyway. With the start of the strategic view goes, meaning Shoemaker Levy which is a much more consistent and much larger long-term ore body is one that we think be useful to be showing us in production before we move forward with. But our compensations with that are not waiting for it. And I think that there is nothing in what we’ve been doing which is different from the expectations that we had made public to that, that we were talking about.

Jackie Przybylowski

Okay. That’s great. That’s all the questions I have. Thank you.

Operator

Your next question comes from the line of Matthew Murphy with Barclays.

Matthew Murphy

Hi. I just had one on Zambia. It seems like the country is headed for a default and just wondering if there is any implications for yourselves on the ground? Any impact? It looks like you’ve had some ForEx benefits. But are you seeing inflation? And are you anticipating any government measures in response to that?

Philip Pascall

Hannes, do you want to do that?

Hannes Meyer

Sure. Look, it’s fair to say that since the new Minister of Finance and Honorable Bwalya Ng’andu, came in 16, 17 months ago said, we’ve had a fairly stable tax regime. So therefore taxes have not increased and we’ve also been able to offset VAT. So that’s been all good. Again the tough decision to actually now embark on this program where they, I and them speak to our stakeholders and addressing the government’s debt, which I think that that’s something that you have to do and you have approve it and we are taking those steps.

We are simply seeing a little bit high inflation in Zambia. So that is filtering through, but at the moment, we are not seeing any negative impact on our operations. So, on a fiscal side, we operate fine and power-wise, we get all the power. So, operating environment is actually pretty positive and pretty good. So, it’s been a good and constructive environment. All we see, you’ll have to go through the details and see what eventually happens. But, I would not like to speculate on what may just will be introduced if and when.

Matthew Murphy

And then, maybe just as a slightly longer-term view on that. I am just interested in Philip’s comments that maybe in the next year, you get some more clarity around the long-term fiscal picture. And just wondering what, if there is any sort of events that are planned or discussions planned that gives you the confidence you might get that clarity on that kind of timeframe?

Philip Pascall

I think, my only view on that that I would express is that, in the discussions that we have had with the Ministry of Finance, particularly is a recognition of – that’s what mining companies need and that’s positive.

And therefore, it’s going to end up being the detail we made sure how one puts that in place. In other words, we are not – we are pushing against a door that is reasonably may not open and then we can go and talk about to entrench it and as Hannes said is, nothing we have seen in the current activities that changing them from a policy of keeping that stability.

The purpose of what we want to do though was substantial that that perpetuate through various governments because of the timeline that we need for an investment of that sort. And that’s what the compensation that we are going to have to have in the New Year. This year it has been an easy time for anyone, because obviously there were so many restrictions that really expect that towards the second quarter of next year as we will have an opportunity to start some of those conversations.

Matthew Murphy

Got it. Thank you.

Operator

Your next question comes from the line of Matthew Fields with Bank of America.

Matthew Fields

Hey everyone. Just wanted a couple balance sheet questions for me. So I noticed you paid down another $100 million of debt in the quarter. So we are down kind of from that $8.8 billion total debt high watermark in 1Q 2020. You’ve often talked about reducing total debt by $2 billion. So was that $8.8 billion kind of the high watermark that we should think of, so the $6.8 billion is far around there as kind of the target for where total debt is supposed to go?

Hannes Meyer

Hi, Matthew. I mean, the tables you saw earlier in the year, that’s certainly the high watermark in terms of that. And I mean, what you should see from now going forward is just the deleveraging effect on that, a reduction of the absolute to-date numbers, as well. Obviously the current higher copper price and strong operational performance should accelerate that and that’s in the absence of any potential strategic deal that we talked about earlier on minority stake, so.

Matthew Fields

And is there a target sort of where you are and do you want to see that number go?

Hannes Meyer

Let me sort of the net debt to EBITDA number of sort of around 2 or below that would be the target. I think if you then – if you also could look at the absolute amount of debt in that or they may say some but in total that, so, it should be reducing it by $2 billion would be – that should be a priority and that’s what we are working on and focusing on.

Matthew Fields

Okay. Thank you. And then, on that minority stake sale potential, is the use of proceeds in your eyes most importantly going to deleveraging or is there some kind of capital returned to shareholders in this copper price environment or even some M&A as a buyer of some development projects out there. Can you just talk about sort of capital allocation in any potential minority stake sale proceeds?

Clive Newall

Tristan, do you want to take do that, take that one or Philip.

Philip Pascall

Yes. Look, there were several different questions in that. Certainly, our priority is reduction of debt and that will be largely with the funding of any of that approach would be to reduce our debt. We do know we recognize that in within next year or two, we will need to review our dividend policy. And start to return something to our shareholders.

As far as capital works concerned, certainly, there is no intention for us to go and make acquisition of any projects we won’t need to. We have a number of projects that are quite interesting but have been a subject and our ongoing subject of studies and evaluation.

And that’s the kind of work that I will do. So that’s in a few days time, in a couple of years time, at least, we would be in a position if we want to expand or change and as other operations, we would be in a position to do so. And addressing that, we are mindful of both of the debt that currently exists, but also in a couple of years time, we have a number with a small operations will get to the end of the operating life.

Matthew Fields

That’s very helpful. Thanks and good luck.

Philip Pascall

Thanks.

Operator

Your next question comes from the line of Ian Rossouw with Barclays.

Ian Rossouw

Hi, guys. Thank you. And I just had a question on the external liability that sits, so that Cobre Panama or is KPMC. It looks like you are still accruing interest on the balance sheet for that. The Cobre Panama now is likely to be in a strong cash flow generation position going forward.

When will you start paying that liability? And can we assume or can you give some details around that payment? I mean, can we assume all free cash flow goes to pay down the intercompany and that liability first before Cobre starts paying dividend?

Tristan Pascall

Hi, Ian. Yes, maybe – so, remember we own 50% of that KPMC debt, as well or a little bit more than 50%, but let’s go with 50%. So that debt and that interest half of it accrues to o ourself as well in that regard. And in Panama, I mean, we’ve got various shareholder loans in and so, yes, I mean, we will repay shareholder loans, but then, yes, so, it’s just the fact. Through time, we will reduce our shareholder loans.

Ian Rossouw

When you pay KPMC, can we assume half comes immediately back. So it doesn’t sits on the KPMC balance sheet?

Tristan Pascall

Correct. We can assume that, yes.

Ian Rossouw

Okay. And then, just a couple of follow-ups on Zambia, just on the expansion and Clive mentioned at Kansanshi that you are looking to refine the expansion before making a decision. Could we expect then a decision earlier than in 2022, 2023? And then maybe just I don’t know, how does this arbitration with the government sort of play into that? Is that a prerequisite for that to be resolved before making a decision?

Tristan Pascall

Do you want to take that, Philip?

Philip Pascall

Just repeat the first part of that.

Ian Rossouw

So, just wanted to get an idea of the timeline for the decision for the Kansanshi expansion.

Philip Pascall

Okay. In our 43-101 we address two options. One was that it would be running at the end of 2024 and the other would be running at the end of 2023 and that was during 2024.

And a second scenario there was in the event that we had brought in a partner for a proportion of the asset and that together, we were happy then to fund it a bit sooner. But otherwise, our program is to meet completion in this 2024 and the rationale for that simply is that, Kansanshi’s production begins to be quite difficult rather than as it moves into more and more sulphide ore and this is a high-grade primary oxides and alike.

And that was the first part and I think your second part has to do with arbitration and we don’t make any comment about that arbitration at all.

Ian Rossouw

Like, can you approve that project irrespective of the timelines of arbitration?

Philip Pascall

I would try to not relevant to that subject.

Ian Rossouw

Okay. Thank you. And then, maybe just lastly on Sentinel, you are exporting some of your concentrates for this quarter. Is this just a one-off, can you maybe just comment this third-party smelting constraint?

Philip Pascall

It’s a very interesting question. In that, there are two components to the answer. First of all, Sentinel’s production has been extraordinary and the result of that is that we generate a lot of concentrate. And the second part is that the smelting capacity within the country has been slightly limited as a result of the various actions we’ve taken by Mopani and the like and the solution to is one that we are working on, which we will see the benefit of within the next year or so.

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And that is we are beginning to produce higher-grade concentrates, first of all at Sentinel and due course at Kansanshi. And as we make those changes, that impact is quite dramatic. So that the capacity of our own smelter and that the other facilities maybe having that are likely crushes each. We’ll increase substantial amount of material that the amount of copper outputs we put it that way, because the grade of the concentrate will be that much higher.

Ian Rossouw

Okay. Thanks. So that’s as you would say this is more a one-off exporting?

Philip Pascall

As far as we can see now, I mean, we are still producing a lot of concentrate, but the grades are pretty good and we envisage by next year that to be able to get those concentrate grades higher.

Ian Rossouw

Okay. Thanks a lot. Thanks guys.

Operator

[Operator Instructions] Your next question comes from the line of Lawson Winder, BofA Securities.

Lawson Winder

Hi, everyone. Thank you. A question on Kansanshi on the sulphide grade, just vis-à-vis the technical reports you published in September, would it be fair to say that the grades are performing slightly below expectation and if so, what will be driving that? Thanks.

Clive Newall

And that’s copper, I must say. John, have you got a view? Okay, can you go ahead?

John Gregory

Yes, Clive, at the current operations, we are mining from certain sulphide areas that are more than control and we are working on means of the mining dilution. As we look forward to the larger disseminated turns, the impact of the inside mine will be minimized and we will deliver on the grades that we have projected in the 43-101. There certainly is a lot of activity at present to enhance mining efficiency, minimize dilution through enhanced blasting techniques and ore grade control systems which we are improving at present.

Lawson Winder

Okay. Great.

Clive Newall

Is that okay, Lawson in answering that?

Lawson Winder

Yes. No. That’s perfect. Just moving to Cobre then and looking just to Q4, other than the rainy season, is there anything you would highlight such as maintenance shut downs that that could impact throughput there?

Clive Newall

Tristan, will you do that?

Tristan Pascall

Thanks, Clive. Thanks, Lawson. The mine one with this shut down on the on the crushed ore stockpile shoot. So as you can appreciate, that lies underneath the main feed stockpile to the SAG mills. So it’s quite a big job to empty the stockpile all the way out. You sort of have to run it down as a course of two or three days and then do the work.

And so, that one has been and gone. It finished as of the end of last week – the latest week. But that’s the main impact. So that will have impacted October’s production, but it has no – looking forward, there were some catch up work to be done on maintenance. It’s largely being scheduled in and it’s not sort of frontline key to operations.

So, no, we don’t see any risks on the operational side, or don’t took a maintenance by and large during the preservation and safe maintenance. The guys did a good job – with very limited personnel on KP on top of that and then any backlog since then has already been completed. For example in the trucks are scheduled to be completed as normal course of operations.

Lawson Winder

Okay. Great. And if I might just ask one final question on cost, just to get a little more granular on your prior comments. The – just on the mining cost per tonne, obviously it’s come down since Q2. But it’s still running above the very low levels you achieved in Q1. Are those Q1 levels, in terms of mining cost per tonne on total materials was something you see is achievable going forward? And what sort of the timeline on that? And that would be it for me. Thank you.

Clive Newall

And Lawson, that’s specific to Cobre Panama?

Lawson Winder

Yes. Exactly.

Clive Newall

Yes. So, look, the impact there was – why we were still coming under COVID and then after COVID, there was some catch-up on mine planning in terms of the volumes we were able to move. And yet, as we get into a much steadier regime, particularly on the waste side, total movements will be much larger and therefore the denominator of that equation will be larger and we’ll see a low unit cost in the mine. So, yes, I think we hit down to those numbers and below as we move more material, particularly on the waste side.

Lawson Winder

Great. Thank you very much.

Operator

Your next question comes from the line of Jatinder Goel of Exane BNP Paribas.

Jatinder Goel

Good morning. Thank you. A couple of questions, please. Just broadly on Zambia, it sounds like you are prepared to invest in Kansanshi expansion even if there is no minority partner introduced to that operation. But think about country risk, should we look at what’s happened to all is in process with KCM or Mopani or even Anglo American being dragged into an old case?

Are those just individual instances happening – just happening in one country or does anything make you worried about developments on ground? And related to that, just a question on Mopani, you own just under 17% of the asset. Do you have any first right of refusal?? And do you have any thoughts on how you would want to deal with if f Glencore puts it up for sale, which apparently media suggests there is offers? Thank you.

Clive Newall

Philip, is that one for you? Thos two for you?

Philip Pascall

I think the circumstances of KCM and Mopani are different and they are best able to answer them. So, clearly, KCM was the first situation and was – situation would be political approach taken by the government and in respect of actions and debts or whatever as of KCM was a result that certainly will not apply to our operations.

And in the case of Mopani, which is very different, but if you recall Glencore had said they wanted to put it on care and maintenance and stop it and the nature of mining licenses remain low that we do have to go through on justification to be able to do that with the government and then explain why the economics don’t work.

And clearly that again, but not really relevant to our operations of both Kansanshi and Sentinel. And so, there is no reason to expect any of that would arrive the total. Firstly, answer to the first part of the question and parallels on that all in mining operations in Zambia vary. I mean the miner is different again.

And the second part of your question?

Jatinder Goel

Your thoughts on Mopani ownership?

Philip Pascall

We own a share of the parent that holds it through, if Glencore holds and it’s a minority share of something therefore it really has no share in it. But our general view quite simply is that, we will reserve our funding to do projects that we currently have in various places, including what we have in Zambia, but elsewhere and that the funding requirements for Mopani or purchases in time on that funding we’ve expressed any interest in. And we wouldn’t be having any discussion at all on that subject.

Jatinder Goel

Thanks a lot, Philip. Very clear.

Operator

Your next question comes from the line of Ioannis Masvoulas, Morgan Stanley.

Ioannis Masvoulas

Yes. Hi. Good morning. And thanks for taking my question. So, just two left for my side. The first, just shorter term. Looking at the copper production guidance for Q4, it would seem to me to be quite conservative. I guess, on Cobre, you suggested that November, December, you shouldn’t see much of an impact and maintenance was already completed in October. I guess, can you give us a bit of an indication on the September runrate?

I think, for August, you said, you produced 25,000 tonnes. I think having that September number would give us some visibility on the exit rate. And then, related to that, on Sentinel, how should we think about Q4 relevant to Q3? And what are the, I guess the moving parts on production, because you have already made some comments and you say is it just something on the production side? Thank you.

Philip Pascall

Tristan, would you like to take that?

Tristan Pascall

Yes. Sure. The first part of the question, the runrate in September at Cobre Panama, we produced 25,100 tonnes of copper in Sentinel. Sorry, at Cobre Panama for September. So, a little bit more than August and that’s about the level we need to run at. We stick to that consistent level through November and December, just October that was impacted. We probably have slightly lower grades to the end of the year, but not that will impact on anything against that. So the guidance is that right, in terms of where it will be by the end of the year.

And sorry, the second part of the question, was it relating to Sentinel piece repeat that.

Ioannis Masvoulas

Yes. Just in terms of Q4 versus Q3, in Q3 it has been very strong and the reason to expect that Q4 to be – will be weaker sequentially?

Tristan Pascall

No. Nothing that we see at the moment or that we’ve been at – really, the job at Sentinel, really next year, we are looking forward to putting the fourth crusher in and that project remains on track with that. And that makes a big difference to see through the process plan, but Q4 should be in line with it as previous quarters of the year, which is I think very significant.

Juliet Wall

Yes, we could just sort of highlight, obviously the maintenance shutdown in the outlook. So we have noted that for Sentinel as well.

Ioannis Masvoulas

Yes. For sure. Sure. Now that’s clear. And maybe just – and maybe a separate question in Zambia. You talked about the operating environment being pretty good right now. I was trying to figure out in terms of cost development, how much of the positive effects of the weaker currency you see relative to the rising cost inflation in the country? I mean, are we going to see a catch-up where the inflation rates start to improve during the coming quarters? Or do you expect that to be largely offset by a weaker currency?

Tristan Pascall

Hannes, have you got a view on that?

Hannes Meyer

Yes. I think, you will see some other cost the inflation coming through obviously in terms of labor is quite a large component of our low kwacha-denominated cost and that sort of a subject to annual agreements. And you know that, other than that, I don’t want to comment on where we might end up on that. But so that – we see that we’ll catch-up to sort of the appraisal rates so closer to that. Some of your other local cost would catch-up to inflation rates, but I mean, we are not seeing much at this stage coming through.

I mean, some of it’s coming through, but there has also been a big drive in terms of efficiencies and higher throughput also, obviously adds to the underlying cost. But, yes, it’s fair to say that these are higher inflation environment and that eventually in time, you should assume that local costs will increase somewhat.

Ioannis Masvoulas

Okay. Great.

Philip Pascall

And then just a comment on that, really could give you some is that, obviously labor has to catch-up with inflation regularly, because, that obviously that we have to turn ensure that people that – our employees are okay. But a lot of our costs in Zambia are designated in U.S. dollars including charges from government entities, I mean, I mean Zesco’s price is in U.S. dollars.

So, much of that doesn’t have a great impact. We did a few months ago, take a hedge on the oil price. It’s actually heating oil – New York heating oil index, which is used as an index in a number of areas, both in Panama and elsewhere. And that was to try and lock in for a 12 month period. The sort of benefits that were around in the oil price and, obviously, quite significant for us and – but of course those costs us as time goes by we’ll move again with the oil price.

So, you could probably answer the question better than that, by looking to what might be changing in a world at large and impact the U.S. dollar cost of many of the components for us.

Ioannis Masvoulas

Sure. And I guess, it’s fair to assume that above 30% of OpEx is local currency-denominated?

Hannes Meyer

No, it’s a smaller number. It’s about one six of the cost, it’s about 15%, 16% of the cost that’s local currency-denominated. So, as Philip said, a large portion of it is actually dollar-denominated.

Ioannis Masvoulas

Understood. Thank you very much.

Operator

There are no questions at this time. I will now turn the call back over to Clive Newall for closing remarks. Ladies and gentlemen, this does conclude today’s conference call. Thank you for participating. You may now disconnect.



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