Q3 2019 Earnings Call

October 24, 2019

Participants are in listen only mode.

After the speakers presentation, there will be a question and answer session.

If you'd like to ask a question during the session you will need to press star one on your telephone keypad.

Please be advised the today's conference is being recorded if youre acquiring any further assistance. Please press star zero. Thank you and I like to hand, the conference over to your speaker for today Brinkster President and CEO . Please go ahead.

Thank you operator, and thank you everyone for joining lundin mining third quarter 2019 results call.

I would like to draw your attention to the cautionary statements on slide two as we will be making several forward looking statements throughout the course of this presentation and most likely in the queuing <unk>.

On the call to assist me with a presentation and answering questions our journey, making it our senior Vice President and Chief Financial Officer, and Peter Richardson, Our senior Vice President and Chief operating Officer.

Just a few comments before I turn the call over the journey to run through our financial results.

We're very pleased with our overall results for the quarter collectively our minds are achieving strong operational performance.

I can't malaria copper production increased and cash cost decreased significantly over the last several quarters. The capital outlay of our reinvestment initiatives are starting to wind down and we are beginning to realize the benefits of these investments in our result.

The acquisition of to Potter was successfully concluded an integrated.

<unk> evidenced by an excellent first quarter at the Lundin mining operation.

Earlier. This this month, we filed a 43 one on one technical report for the mine to support the updated mineral reserves and resources as well as make clear than their near term operating plans as we evaluate potential expansion scenarios and do work to understand the potential for expanding the resource.

We continue to make meaningful progress on the zinc expansion project at never score, though both underground and on surface.

Project is advancing on track for stage commissioning next year with phase ramp up to full production by the end of the year.

As can be seen in the picture on this slide development of Eagle East achieved an important milestone with first or extracted at the end of September the team successfully achieved this ahead of budget and schedule.

The investments we have made during the last two years how position the company for multiple years of production growth decreased cash cost of free cash flow generation. The strong performance up this quarter is the first step and realizing these efforts with that I will turn the call over to Gen. He to highlight the third quarter financial result, Tony.

Thank you Mary.

In summary, other results on slide four as much in our operations had a strong quarter in aggregate, we produced over 120000 tons of base metal.

Particular note copper production increased 56% over last quarter. It wouldn't include Canada, and the 21 present increased cheez it candle area.

We sold over at 106000 kinds of handle base metals and total revenue of $539 million.

539 million dollar revenue could provisional price adjustments from prior periods sales, which were more muted this quarter than last overall, there was a negative impact on revenue of $6 million or one cents per share as negative copper and zinc adjustments are partially offset by positive nickel settlement. A detailed breakdown is included in our mdna.

Tom Your sales also had a slight negative impact on revenues. This quarter due late arrival of an incoming vessels, but just popped up push to plan concentration me into the fourth quarter.

Copper January to 68% up our revenues in the quarter with the contribution up unencumbered gold production from Japan, and the increase in the gold price gold contributed to increased 13%.

Zinc nickel and let contributed a combined 17% to total revenue.

We remain for DAMI lovely to copper and well diversified geographically.

Slide five presents a summary of the quarter's financial result, the details of which are not financial statements and Mdna issued last night.

Early in the quarter, we completed the acquisition of Jakarta. This has had a dramatic impact on a comparative changes a third quarter of last year presented in this table.

Third quarter revenue was higher than the same period last year, mainly due to the acquisition of that you've had a mine in the quarter as a higher copper sales volumes, mainly from Canada, there, yes discussed.

Similarly, gross profit for the quarter was higher when compared to the third quarter of 28 team and last quarter, primarily owing to the acquisition of Japan.

Attributable net earnings from operations was four cents per share included in those results or something noncash nonoperating expenses, which had a negative impact on reported earnings of four cents per share.

We generated $112 million in cash from operations and operating cash flow before noncash working capital adjustment of $155 million, a 21 cents per share.

As we will discuss our capital projects progressed in line with plan during the quarter and expenditures on a cash basis, we're hundred $67 million, we ended the quarter with $185 million in cash and equivalents and net debt of $185 million, which reflects the acquisition of Japan.

Just how does not purchase price of $757 million, what's been different cash on hand, and a drawdown of $285 million on the companys revolving credit facility.

Our board of directors approved a regular quarterly dividend of three cents Canadian per share for annual dividend of 12 cents Canadian per share.

And lastly, as of October 20, Threerd, we had cash and net debt balances up approximately $67 million and $192 million, respectively. We remain in a strong financial position.

Ill now turn the call back to write to discuss our operations the projects.

Thanks Jenny.

Moving onto slide six candle area performed very well and border production and cash costs improved does plans, primarily on more or being sourced directly from the open pit no throughput limited what could have been an even stronger quarter, an extended maintenance stop while changing the motor on the line to ball mill and were fragmentation.

In the mill feed it impacted our throughput.

Operationally, we are on track to meet full year production and cash cost guidance. However, as you are likely aware, Chile has been experiencing widespread civil unrest. The started in Santiago late last week and has spread to other regions, including out of Canada.

Our operations continue with a focus on maintaining the safety and security of our employees as well as the environment and our facilities. So far there has not been immaterial impact on our operations those situation in Chile continues to evolve.

We made good progress on a benching advancing our reinvestment initiatives. This quarter, we delivered a key milestone with the handover of the candle area sell sector underground mine to be operations team ahead of schedule. The south sector is currently achieving approximately 1000 tonnes per day and ramping up towards 4000 tonnes per day.

Handle area North sector is producing at approximately 11500 tonnes per day.

Our targets are generally produce up to 11000 tonnes per day from the north sector and up to 4000 tonnes per day from the south sector. So that in aggregate, we can be sure to meet them Herman limit of 14000 tonnes per day from both mines.

The mill optimization project is progressing well is now forecast to be complete my early in the first quarter of 2020, it and that's changed from late Q4 of this year and the schedule is optimized correspond to the expected mill maintenance stops and that is to minimize the disruption to production. The first of all motor was installed during maintena.

Downtime in September installation of the second is underway as part of a planned down and as progressing ahead of schedule. Overall construction was approximately 60% complete at the end of the third quarter.

Our mine fleet reinvestment initiative is continuing very well all new pieces, a major equipment expected this year and now on site 2019, Capex guidance for the mine fleet reinvestment of 75 million has effectively been completed barring external impacts candle areas on track to deliver annual production and cash cost guidance.

Moving on to try to the integration has progressed extremely well and the third quarter results speak to that the acquisition closed in early July and cash cash consideration was 757 million net of cash acquired and working capital adjustments.

Well, if copper and gold production exceeded expectations as a result, a better than planned head grades and throughput lower than expected maintenance downtime and softer ore drove better than expected mill throughput.

Corporate cash costs of 35 cents per pound were better than expected benefiting from higher byproduct credits and a favorable Brazilian real exchange rate in addition to lower operating costs.

Cash cost guidance has been lowered by 28% to 80 cents per pound of copper on this performance as well as a higher precious metal price and revised exchange rate forecast.

Sustaining capital guidance of 25 million for the second half a year and exploration investment a 4 million Bucks remain unchanged.

In early October we filed the technical report from Chicago to support the mineral reserve and resource estimates announcing some in September as well as make clear our near term operating capital expectations for the mine, we are continuing to optimize the production schedule at the current 24 million tons per annum throughput rate while evaluating options.

For future mine and plant expansions as well is working on prioritizing exploration programs and understanding the potential for resource expansion.

Slide eight presents the life of mine copper and gold production profile of Japan based on the current 24 million tons per annum throughput similar to the incremental and Edward of improvements that we have been able to achieve a candle area. We believe there are significant opportunities to create value at takata with aggressive copper focus.

<unk> exploration, leading to improved mine plans and production improvement I.

A significant increase in exploration efforts are underway largely focused on near mine targets with results to be incorporated in any expansion plans.

On slide nine never squirrel had an excellent operating quarter as well copper production increased 25% and cash cost reduce 15% over last quarter on improved copper recoveries and plant throughput.

Copper recovery improved quarter over quarter and was over 80%.

Stopper copper or comprised a greater proportion of the mill feed and ore types were more effectively separated in the mine, allowing for better control blending on surface.

Those in production was in line without a recent quarters recovery increased to over 80%, we improve zinc concentrate reground, which allowed for greater liberation of pyrite from salary and we were able to recover more think.

Cash costs of $1.60 per pound of copper, where a 15% improvement over last quarter. Despite a lower zinc byproduct credit as gross operating costs were better than expected helped by favorable Euro U.S. dollar exchange rate.

The operation is on track to achieve the tightened zinc and copper production guidance as well as to reduce cash cost guidance for the year to think expansion project advanced well in is tracking on the revised schedule and budget announced with the Q2 2019 results total preproduction project cost estimates are unchanged from our last update.

As is the 2019 guidance through the third quarter 230 million or a 197 million euros had been capitalize on the project I'll turn the call over to Peter to walk through this up progress and a little more detail Peter.

Thanks, sorry, we have made good progress advancing the undergone aspects of this project set earlier this year slide 10 shows some of the progress achieved on the quarter materials handling civil works progress well and are nearing completion. This can be seen in the picture on the left of the steel works nearing completion and transfer tower and number two.

As seen in the federal photograph civil works on the Crusher Chamber is complete and mechanical installation of the chalk crusher is underway.

Lastly, remaining capiq work progress well through the quarter, including or stories, Tyler's us can be seen pretty poor and the photograph on the right side of the slot.

Not shown in these pictures conveyor systems mechanical electrical equipment installations are well advanced well.

And again not shown on this slide mine development of the lower Stopes is continuing with development of the first sub level access as ongoing in the lower mom with ore body.

On slide 11 surface construction continued to advance during the quarter with particular focus on to step up com tractor management and the people.

Work focused on mechanical and electrical installation of the surface material handling system as well as continuing installation of the Sag mill flotation circuit tailings and water supply piping systems.

This can be seen in the photographs in the center and the right hand side. The backfill Cyclo station has been installed not shown a reduction of the news zinc filtration building commands and advanced well during the quarter in summary, we continue to make meaningful progress underground and surface.

Overall Zap is advancing on track for commissioning to commence and the first quarter of next year and under a phase approach ramp to full production by the end of the here 2020.

Well now turn it back to where we go through a remaining operation some project.

Thanks Peter.

Eagle performed well during the quarter with production trending lower reflecting planned lower grades due to mine sequencing ahead of Eagle East coming online while gross operating costs were lower than second quarter of 2019 and better than our plans cash cost were above recent quarters on higher per unit operating costs, resulting from the lower sales volumes of both copper nickel.

[noise] development of Eagle East reached a significant milestone with first or extracted at the end of September ahead of budget and schedule first order was successfully process at the Humboldt Mill on October 120 on team axis ramp development and vertical development for ventilation and the emergency egress system progress during the quarter end are ongoing.

2019, expansionary capital Diamonds remains $30 million with approximately 4 million remaining to be spent in the fourth quarter.

After significant investment in the last several years the regional exploration program at Eagle was concluded during the quarter definition drilling around the Eagle East ore body continues eagle is well positioned to achieve annual production and cash cost guidance looking forward with the easily its expansionary capital investment, mostly behind unexpected increase in nickel and copper production.

And Eagle is well positioned to generate significant free cash flow in the coming years.

And lastly, I'd think grew then.

I think production was lower than recent quarters, as big or availability on surface as well as no maintenance impacted throughput during the quarter zinc or short fall was largely a result of availability of the loader fleet and stope availability both issues have been addressed with the full fleet achieving standard availability since mid September and a backlog in drilling and production delays.

In a major stope now recovered.

Mill throughput was lower than expected on this inquiry availability as well as maintenance there are no ongoing issues as actions taken have address any issues improve zinc recovery, partially helped to offset this lower mill throughput.

Led production was in line with recent quarters as higher realized grades largely offset the or shortfall and copper production was much higher than recent quarters on a combination of higher mill throughput as more copper ores were processed when the zinc or was in shortage as well as improved had had grade and recovery.

[noise] thinking zinc driven remains on track to deliver annual production and cash cost guidance of 76000 to 81000 tons of zinc and 2000 to 3000 tons of copper at a cash cost of 40 cents per kind of zinc.

Exploration efforts continue to target Dalby, which remains a high priority exploration drifting progressed ahead of schedule than Dalbey mining concession was granted in July conceptual mine design work is ongoing over 16000 meters were drilled in the quarter from six surface and three underground rigs, we expect to drill approximately 65000 meters in grew.

Affected throughput as well Peter I don't know if you have anything down at all.

I mean anything more more operating hours.

Okay, how much about maintenance impact for Q1 is that like a week long thing or.

Peter That's correct and also as you said will be replacing the two ball mill Molders beginning of next year too so that those will be in conjunction with the Sag mill down.

Okay, and then just shifting gears touch Potter I was really I'm impressed with the up production there and your first quarter of ownership and you should we I mean your guidance would imply a big pull back in Q4 versus Q3, given your half. Your guidance is are you just being conservative there or or do you anticipate a big shift down in grades.

I had obviously, an increasing costs to get your got it.

Yeah. So we were also a quite impressed with the first quarter and the guys worked really hard I think to deliver a good first quarter fourth we did have a above expectation on the grades there as a material is quite soft were able to run through it quicker than normal. So the throughput was very high so combination of.

I don't know if there's anything else Peter but a you know rely on the guidance is everything.

Okay sounds like you're being conservative thank you.

[laughter].

Ralph proceeding with capital your line is open.

Great. Thanks, very much I've two questions. The first one is on on came to Larry I see that you're going to hit 14000 tonnes per day is that still the permitted limit for the underground are there plans to increase that or are you finding that 40000 tons. A day is kind of the optimal rate.

Yeah. So 14000 is the permitted rate and we do have a study ongoing to expand that and you know above 20000 tons. So we're looking at those studies and carrying them forward continued to do them next year. So I wouldn't see any kind of you know result or announcement on any expansion.

In the near term, but it is something that we're studying.

Okay.

And products come back to the Fisher part a technical report.

Is there no downtime expected as you relocate or the infrastructure because the technical port maintained 24 million tons, a year through the plant how's that going to be managed.

Yeah, Peter I'll hand that whenever you. So we're still evaluating all the extra expansion alternatives to go through all that detail going forward that it's not all those details haven't been ironed out yet.

Do you how do you actually have a location chosen for for the infrastructure yet.

Yeah. The locations are detailed in the technical report, there's actually a draw out pictures that show where things will go. However, we are not sure that that will be our ultimate plan. So that is the plan that has in place now that that was in place out acquisition, but we are looking at different scenarios and.

We feel that we need to do a some more drilling before we make final decisions on that.

And assuming that that's just the sterilize the area.

Yeah, I I'm not sure there's anywhere that could be sterilized in the area to be honest I think older buildings are on a mineralization, but you know we need to figure out what we have there we need to do a lot more work on that on the drilling okay.

All right that's it thank you.

[noise], Jackie preschool asking with BMO capital markets. Your line is open.

Thanks, very much of it maybe just to watch a start awful I'll follow up on the real last question. You just mentioned that you're doing some more studies and some more drilling entre part of.

It is it possible for you did talk maybe a little bit about what the timeline might be on those are we expecting more info.

In early <unk> mid 2020, and do you think you'll be able to speak a little bit more to that on the upcoming site.

We'll be able to tell you what we're doing on the exploration side of thing, but until we do a lot of that drilling and that's going to take some time, we won't have answers. So I would say any expectation of a near term news story is a is is a little premature we need to do our homework. So.

We have a lot of work to do in order to two sat thanks, Peter I don't know if you have any expectation on that got to drill understand what that of course.

Okay and on onshore <unk> again, the tax rate that we saw in Q3 was a little higher at least than I expected and I understand there's a there's some sort of.

Non cash items in there can you can you just talk a little bit about how we should be maybe thinking about a boat shoe part as tax and the and the impact of FX adjustments on that going forward or how we maybe able to us or better model that.

[laughter] I, Jackie sort of statutory tax rate in Napa deal is 34%. So I would say, it's you know back to assume that I'd be as a normal tax rate I think in any given period, there will be adjustments and she loves but those are really hard to Megan.

Good day town, you know on me I'm adjustment that we had to choose to read which really just wine exchange translation. It's you know because our financial statements on U.S. dollar and our tax is our paid in Brazilian <unk>. There's eight why exchange translation that is done and again those.

They are hard to predict a period over period, So again I think at 34% task.

So is the way to go.

Fair enough and and if I could just body for one more question I know in Q2.

We talked a lot about never Chicago and in zinc expansion and I know you guys were doing a lot of work to get that back on track and bringing in some people from candle area and elsewhere can you maybe give us a bit of an update on how how that's going it sounds like it's going a lot better and you're right on schedule. So maybe can you just give us an update on what what steps you've taken.

The team or the progress well no. We were one thing that we will but were identified a crucial items and we'll focus on those and getting those Don and also working hard on the pays approach. So we need to do the things on paid first the first phase to get that Don So privatizing the work.

Going to come over a day, it's going to be a gradual ramp up.

Would you expect bite into next year that the candle area mill will be close to 79000 tons.

Youre port was impacted by that at all and then just any color that you might have on a on how things have progressed.

Yeah. So overall in the country. This the stevedore as our on strike regardless of where they are so the issue is with a boat docking and leaving so this when the Steven Steven always are striking that nobody's unloading or loading so our port operations as as it pertains to.

Listen it's a it's clear to go.

Announced a number of social programs and changes that people are demanding.

It has been some parties deem it not enough. So today will be interesting there's been a call for general strikes in demonstrations across the country and I think that will set the tone for what happens in the next few days.

Greg Burns with TD Securities. Your line is open.

Yeah. Thanks that was a step change in recoveries and I've asked this quarter up to 80% on a couple of side. This is that.

Uh huh.

Exactly fifth or <unk> or a combination would have on the copper.

The mix combination will see better yeah. So sometimes we haven't or type called M.C. said and basically it'll have a high highs didn't content. Although it is a copper or Nicholas copper planted how it will have high thinking we typically get lower recoveries on that type of war. So it will vary I would stick a 8% going forward.

All right.

Okay, well, we had <unk>, but we haven't had more challenges with larger chemistry, there as well and recoveries and stuff.

His old.

Yeah, well you know it will be resolved as long as we continue regular maintenance and make sure that we get the gun kind of the lines and are able to to make sure that we keep the the real recycle water clear.

That's essentially it is that we need to maintain regularly but I think the water chemistries and improved quite a bit water treatment.

Okay. Thank you.

Great. Thanks, very much guys just shifting over to Michigan, just a you know sounds like the regional exploration program is done there now and the ones maybe spend a little bit less than you Didnt. Initially expected just just wondering did it bearing the fruit and a you know what do you plan on putting any of those results out or talking about in the news results in the future and where are you seeing a sight line to sort of life in Michigan beyond 2025.

Yeah. So I guess the results a that a borrower are reflected in that the new reserve statement, where we added a you know another year to the life of mine, there, which was a great success. So we're going to continue to do the underground definition drilling where we curtail the program was in the region.

All exploration programs and budgets there so and that's just a in evaluation of you know the likelihood of finding something that we would be able to you know find drill study and put into production by the time Eagle would just run out of or.

The likelihood of being able to do that within that five to six year timeframe. It was not likely for us so weve redirected the exploration dollars elsewhere.

Yes, it's only need to see the equations and she bottle.

How are you thinking about the wall, returning cash to shareholders, which equals.

EBIT potential for another acquisition in the current Mark Rittenbaum.

Hard to look for opportunities.

On the give it out and buyback we do have the buyback in place still and we did exercise.

Well, we have the I think six or seven days at side, and then gosh I at least a month that the work. So we can start total at around 60000 tons. We can store total both fight and the board. So we're we're still we still have.

You know this keep business units spread remarkable.

Well, it's it's not just us that's affected I mean, there's a list of all the.

Everybody is affected by what's happening. So you know the types of things that we've done and a you know fell dominant and team have done a remarkable job there in a very short time of.

And most of the mining companies other than those that are in legal strike position in a separate collective bargaining process have continued to work.

Well I'll walk you sold to cool all right.

So we you know, it's the Stephen ours, or it's not up to us to negotiate with them the national Union will.

Yes, that's it's understood. Thank you very much noise.

Hi to I was just hoping you could comment on some of the mismatch between production reported on sales and the quota, especially for more generally those especially for for thing Canexus.

Sales were lower than the production. So my comments I don't see posture of us next quarter.

Oh, okay. So some of the some of that is just pay abilities. So we're never going to have the amount of payable sales because the pay abilities on think are much lower than copper. So typically in the mid eightys as opposed to being over 95%. So you'll always see a disconnect between the produced.

In the payable but a in addition to that we had to I think one think shipment was postponed that never score Beaumont and not just you know transportation related and and degrees and we also had a thing shipment that was pushed to October and that was a railway.

The bridge needed to be repaired. So we did not get those shipments off so expect those to come in the fourth quarter.

Okay, and then for for the other commodities copper gold.

Yeah, I should I expect this is an addictive coursa, so that would not having a timing issues. So to speak no and chip how do we mentioned earlier that the there was a shipment pushed into October that we had originally planned for September so the copper gold at your part I wouldn't be a bit lower at we are carrying.

On a bit higher inventories than we typically we carry over a quarter end.

But the those are the other ones I mean, I cant Larry all the shipments were executed as planned.

Eagle I think one of part of one of the shipments and plan for Q4 was actually brought forward and then a another shot other than that one thing shipment the copper shipments all went as planned.

Our commercial dice are motivated to try to reduce our quarter in inventories so.

We are going to do keep it on a.

Hi, Thanks for taking my follow up just a strategic question I'm just curious.

How much of our priority it might be for you to out or Greenfield project for the portfolio is it a nice to have or something that you're pushing hard for.

Oh, we're not pushing hard for anything that doesn't give us a good return in a reasonable amount of time. So you know if it's a greenfield project, where we invest a billion dollars and then don't see a return for the next 15 years, then that wouldn't be something we're interested in so I would say, we're pushing hard for a good off at the.

Make sense, but it doesn't necessarily have to be a greenfield project.

Okay, I sleep and I'm, just a sort of an accounting question with trip how to now in the portfolio can you give us a sense of what the depreciation might look like for the company next year.

Well, that's a tough lunch and he I don't see that [laughter], that's a mix and match a lot different variables that will go in there. So I did you I guess, if you consider just part of that for one that's a huge less this quarter depreciation the quarter was pretty much in line with what we would expect so if you.

Use that as the basis for future production I got to give you a a pretty good basis.

Okay. So that's 17 million at your powder, that's that's a decent run rate per quarter.

Good runway.

It is higher this quarter than it wasn't prior quarters in this quarter. You know we had faced 10 brought in so that additional amortization also.

Chris I think that's it operator, we'll we'll call it.

We'll take one more color one more question sorry, and then we'll conclude the call.

Certainly Lawson Winder with Bank of America. Your line is open.

Investments in the assets and then dividends and buybacks. Thanks.

Yeah. So we do have a that's similar to the response to ours, we do have our discretionary issuer bid and we'll be making or a recommendation to our board in November as to what we do in terms of buyback and whether to extend that or increase the amount.

We can buy and also we'll be looking at our dividend policy. When we have our budget in five of man presentations to the board in November so I'll be able to give a little more information on that when we do our quarter Oh, sorry, our outlook news release at that time.

Good thank you.

All right. Thank you, everyone and I look forward to talking to you all in the next call.

Thank you for your participation you may now disconnect.

Q3 2019 Earnings Call

Request a DemoDemo

LUN

Lundin Mining

Earnings