Ladies and gentlemen, welcome to the First Quantum Minerals Quarterly Results Conference Call. I would now like to turn the meeting over to Ryan McWilliam, Director, Business Development and Investor Relations. Please go ahead, Mr. McWilliam.
Thank you, operator, and thank you, everyone, for joining us today to discuss our second quarter results. Before we begin, I'll draw your attention to the fact that over the course of the call, we'll be making several forward looking statements. And as such, I encourage you to read the cautionary note that accompanies our most recent MD and A and the related news release as well as those risk factors, particularly to our company, which are detailed in our most recent annual information form and available on our website and on SEDAR. And a reminder that the presentation, which accompanies this conference call, is also available on our website. On today's call, Tristan Pascal, our Chief Operating Officer, provide an overview of operations and performance during the quarter and share his perspective on the company's outlook moving forward.
He will be followed by Hannes Meyer, our Chief Financial Officer, who will review the financial results. Tristan will then wrap things up with an eye to the next quarter and an overview of our key strategic priorities. After that, we'll open up the line to take questions. With that, I'll turn the call over to Tristan.
Thanks, Ryan. Hello, everyone, and welcome to the call. Q2 was another strong quarter for First Quantum. Debt reduction remains a key part of our focus, and I'm proud to say that we're well on our way to achieving our target of more than $2,000,000,000 reduction in gross debt, as a result of strong operational cash flows and robust commodity prices. The tapering off of the hedging program will further benefit financial results in the remainder of this year.
And the expected close of the sale of 30% stake in the Ravensthorpe operations to our new partners, POSCO, for USD $240,000,000 in Q3 will also contribute to our debt reduction program. Copper production was just shy of 200,000 tonnes in the quarter, an increase of 18% from the same period in 2020. This increase was due primarily to strong production at Cobre Panama, which was nearly four times the rate of the COVID-nineteen impacted second quarter of twenty twenty. Cobre Panama continued with a ramp up to the target throughput rate of 85,000,000 tonnes per annum in 2021, with stronger throughput being somewhat offset by higher maintenance during the month of April and slightly lower grades compared to the previous quarter. However, production throughput in May and June was pleasing with a new production record of approximately 7,500,000 tonnes processed in the month of June.
This resulted in quarterly production of around 82,000 tonnes of copper in containing concentrate. Early this month, the Government of Panama announced the appointment of a High Level Commission of Senior Government Ministers and Officials to deliberate on Law nine, which sets the fiscal regime for Cobre Panama. The public acknowledgment of these ongoing discussions ensures transparency in the outcome of the process we've been speaking about. The Ministers of Commerce, Finance, Labor and Environment were confirmed as representatives on the commission. The company welcomes the appointment of the commission and the opportunity for all stakeholders to resolve this matter in the medium term.
Also in June, the Supreme Court ruled on the clarification motions presented by the company to the court in relation to its Law nine decision announced in September 2018, which have not yet come into effect. The Supreme Court upheld its ruling, and the company understands the decision will be enacted once published in the Gazette of the Supreme Court in the near future. The company is reviewing these developments and expects the government announced process to result in a mutually agreed new law to be presented to and approved by the National Assembly. In Zambia, operations at Sentinel experienced weaker grades as we guided to in last quarter's report, but throughput was higher assisted by softer ore and higher availabilities. This resulted in record milling rates during May.
Installation of the fourth in pit crusher continued as planned with installation in Q3 and commissioning in Q4. This will enable the plant to ramp up throughput to 62,000,000 tonnes per annum in 2022. Kansanshi saw improved throughput following the end of the dry season at the April, which was offset with lower grades. The lower grades are anticipated to remain through the balance of this year as reflected in the change made to Kansanshi guidance in this quarter. Scheduled smelter shutdown at Kansanshi occurred as planned in June, with the smelter coming back online in early July on schedule.
In respect of Zambia, we are no longer in discussions to sell down the stake in that business. The strong performance of the copper price and continued solid operational performance has meant that the prices offered by counterparties were too much of a discount to the strong earnings that the business currently generates. Nickel production in the quarter was 4,543 tonnes at Ravenclaw, while construction of Shoemaker Levy continues to advance with all civil works now predominantly complete. Pre strip at Shumako Levy continues with the first mining area cleared. We look forward to moving on to better quality feed from Shumako Levy and anticipate first ore delivery in this third quarter of twenty twenty one.
Across First Quantum, all of our established COVID-nineteen protocols at each of our mines remain in place. The health and well-being of our workforce and the surrounding communities continues to be our priority. We continue to work closely and support the various levels of government and health authorities in all the regions we operate to reduce transmission of the virus and to deal with outbreaks and infections as they occur. In Panama, the company supports the work of the government with aerial transport, food, medical supplies and other facility based needs, including support to the Gorges Institute laboratory testing facilities. In Zambia, the company has provided COVID-nineteen testing equipment and treatment and isolation facilities for the community and continues to implement COVID-nineteen protective measures across all operations.
Vaccination programs have commenced in most of the host countries for the company's operations, and First Quantum is supporting rollout of vaccination programs as appropriate to each country. In Panama, the rollout is reasonably strong. And by mid July, '3 thousand '9 hundred and '20 '8 employees had received their first dose vaccination. In Zambia, the rollout was slow to start, but has been increasing steadily and by mid July, '3 '60 '6 employees had received their first dose vaccination. On ESG, the company has always been committed to extracting resources as responsibly as it can, and sustainability is an intrinsic part of First Quantum's operations.
We recognize that mining has a significant impact on the environment, and we work as hard as we can to mitigate these impacts and to deliver positive contributions from mining to the communities around us. In line with our commitment to transparency and the ongoing development of First Quantum's ESG reporting, we recently published our 2020 Environment Safety and Social Data Report and our Tax transparency report, which are both now available on our website. This year's report highlights for the first time the significant CO2 emissions savings realized by some of our industry leading mining technology, including the use of trolley assist and in pit crushing and conveying, which are part of First Quantum's approach to place innovation and operational excellence, the core of our business and in our response to climate change. Also in this year's report, we've expanded our CO2 emission intensity disclosures to reflect our downstream Scope three CO2 emissions and the emissions benefit of our largely hydropowered on-site smelter in Zambia. At Cobre Panama, we are currently evaluating opportunity to increase our use of renewable power as part of our efforts to reduce emissions intensity.
We will continue to provide updates in respect to the energy strategy at Cobre Panama as these plants become more developed. The company continues to make progress on our 2021 commitments related to climate change. We have commenced our efforts to report in alignment with a task force on climate related financial disclosures framework, a program to set tangible and realistic emissions level and carbon intensity targets with an identified pathway to achievement remains on schedule, and we are making progress on establishing an internal carbon price and consequent commodity prices in the evaluation of our new projects. The company also continues to make substantial fiscal contributions to the countries in which we operate. And during this quarter, we disclosed our 2020 ESMA Tax Transparency Report, which is also now on the website.
In 2020, our direct tax and economic contributions to our host governments reached close to US1.1 billion dollars I'm proud of what the First Quantum team has achieved this quarter and the ongoing improvements we continue to make across our operations. Much has been done and more work remains, but I'm excited about what the future holds and look forward to reporting on our progress throughout the year. With that, I'll hand things over to Hamas, and I'll be back in a few minutes to wrap things up. Hamas?
Thanks, Tristan, and good day to everyone. I would like to direct you to the slide titled Financial Overview. Financial performance in the quarter was driven by strong sales and increased metal prices, resulting in significant increase in comparative EBITDA and net earnings as well as a notable reduction in net debt. Gross profit of $625,000,000 and a comparative EBITDA of $9.00 $2,000,000 for the quarter was significantly higher than the same period in 2020, attributable to record contained copper in concentrate shipped at Cobre Panama as well as a 37% increase in realized copper price. Net earnings attributable to shareholders of the company of $140,000,000 and comparative earnings of $173,000,000 also represent a significant improvement on Q2 twenty twenty.
Net debt decreased during the six month period by $658,000,000 to $6,750,000,000 as at 06/30/2021, including a $311,000,000 reduction in just the second quarter. With the current strength in the copper price, a significant further reduction is expected in the second half of this year. C1 cash cost of $1.29 per pound was $09 per pound higher than Q2 twenty twenty, driven by lower production at both Zambian operations as well as at Las Cruces. Capital expenditure in the quarter was $264,000,000 which includes the costs associated with the Kansanshi smelter shutdown and the construction of Shoemaker Levee conveyor and crushing station. In May 2021, the company announced that it has entered into a binding agreement to sell a 30% equity interest in Ravensthorpe for cash consideration of $240,000,000 to POSCO.
The company will retain a 70% interest in Ravensthorpe and continue to be the operator. Transaction is expected to be to complete in the third quarter of twenty twenty one. Turning to the next slide on quarterly copper unit cash cost. Total C1 cost for the quarter of $1.29 per pound was $09 higher than Q2 twenty twenty, driven by the impact of lower grades at the Zambia operations and cessation of the open pit mining at Las Cruces in August 2020. Cobre Panama C1 cash cost of $1.25 per pound was $0.47 per pound lower than Q2 last year and reflects the significant increase in production.
Strong year to date copper production at Cabre Panama has resulted in an increase to copper production guidance for 2021 by 10,000 to 5,000 tonnes to between three and ten thousand and three hundred and thirty five thousand tonnes. All in sustaining cost for the quarter of $1.91 per pound was $0.29 per pound higher than the comparative quarter. The increase in all in sustaining cost reflects the higher royalty of 10% in Zambia following the higher copper price and higher sustaining CapEx, which includes the planned smelter maintenance shutdown at Kansanshi. Whilst copper C1 costs for the second quarter and for the first six months of the year have been in the middle of the guidance range, all in sustaining cost has been under pressure, particularly in the second quarter from higher Zambia royalty rates. Accordingly, all in sustaining cost guidance has been increased by $0.10 to allow for higher royalty expense, which for the year to date has exceeded prior year levels by $0.11 and for the quarter by $0.12 Turning to the next slide, Q2 summary financial overview.
Comparative EBITDA of $9.00 $2,000,000 was 156% higher than Q2 twenty twenty, attributable to 37% increase in the realized copper price and increased sales volume at Carre Panama with near record quarterly production and record contained copper shipped. The comparative period sales were also significantly affected by COVID-nineteen related restrictions. Comparative earnings for the second quarter of $173,000,000 is an increase of $257,000,000 compared to Q2 twenty twenty. Basic earnings per share of $0.20 and comparative earnings per share of $0.25 of $0.43 and $0.37 higher than Q2 twenty twenty, respectively. There's a reduction in net debt, as previously mentioned, of three eleven million dollars in the quarter, which brings the total reduction over the last twelve months to over $900,000,000 Further reductions remains a key priority.
Capital expenditure in the quarter was $64,000,000 which includes the smelter shutdown at Kansanshi. Our full year guidance for capital expenditures unchanged at $950,000,000 The next slide is a significant increase in gross profit, and it just shows a bit more detail in the gross profit quarter on quarter movement with a $484,000,000 increase in Q2 gross profit from improved metal prices and higher contribution from Cobre Panama. Turning to the next slide on debt and liquidity profile. The company's net debt of $6,750,000,000 at the end of the quarter has decreased over $900,000,000 in the last twelve months. The company ended the quarter with $1,800,000,000 of net unrestricted cash and cash equivalents and was in full compliance with all of its financial covenants.
The company signed a bilateral borrowing facility of $175,000,000 in April 21, available for twelve months from the date of signing. Following the upgrades by S and P Global Ratings and Fitch Ratings in April to a B credit rating, the company outlook remains stable. Copper prices and demand continue to be robust. As Tristan has highlighted, the tapering off of the hedging program will further benefit financial results in the remainder of the year. Now turning to the copper hedging program outlook.
Approximately one quarter of expected copper sales in the next twelve months are hedged at an average floor price and average ceiling price of $3.16 per pound and $3.7 per pound, respectively. This compares to approximately 35% at the end of the first quarter of 'twenty one with an average floor price and average ceiling price of $3.44 and $3.44 per pound, respectively. As at 07/27/2021, the company had just over 44,000 tonnes of unmargined copper forward sale contracts at an average price of $2.96 per pound, with periods of maturity out to December '1. In addition, the company had a little bit more than 150,000 tonnes of unmargined zero cost copper collar sales contracts with maturities to March 2022 at average prices of $3.21 per pound to $3.92 per pound. Company also had unmargined nickel forward sales contract of a bit more than 1,000 tonnes at an average price of $7.74 per pound outstanding with maturities after December 2021.
In addition, the company has zero cost nickel collar and margin sale contract for nearly 1,300 tonnes at an average price of $7.68 per pound to $8.58 per pound with maturities out to May 22. Thank you. And with that, I'll hand back over to Tristan.
Thanks, Dennis. Let me just take a few moments to discuss the path forward for First Quantum as we continue to execute our vision into the future. We do have a number of key strategic priorities that are underway at the current time and which we believe will help build sustained long term value for shareholders. In the longer term, we have optionality within our portfolio that we also believe has the potential to deliver significant shareholder value. For now, the current focus of our capital allocation approach within the context of a very strong commodity market remains: firstly, on debt reduction, which is a commitment and strategic focus secondly, on execution of brownfield projects to add incremental value and thirdly, on cautiously improving our dividend policy to reward shareholders.
Spend on greenfield projects will remain limited while we deliver on these core focus areas, particularly debt reduction. I'll take a moment to discuss each of these key strategic thrusts in a little more detail. First and foremost, debt reduction will continue be the major focus in the near term as we work towards reaching our goal of reducing our debt by more than $2,000,000,000 And thanks to strong operational and solid commodity prices, when we achieve this goal, our gross debt will be below $6,000,000,000 and our net debt to through the cycle EBITDA ratio will be below two. Next is brownfield expansion. We are fortunate to have a robust internal pipeline of new mine growth projects at our disposal.
To that end, progress on delivery of the 85,000,000 tonnes per annum target throughput rate at Cobre Panama continues and we remain on track to grow to 100,000,000 tonnes or more than 100,000,000 tonnes per annum by the end of twenty twenty three. In the mine, during Q2, we broke ground at the in pit crusher box cut location for the new Kalina Pit location and the overall Kalina mine planning effort remains on track. At the process plant, a primary screening facility is expected to be delivered in Q4 twenty twenty two and upgrades to process water supply in Ball Mill 6 are expected to be delivered by Q1 twenty twenty three. At the Enterprise project in Zambia, the design for development of the pit has been revised and optimized to support an accelerated mine plan, targeting early pre stripping in the second half of twenty twenty one. Following potential Board approval, which could potentially come later this year, majority of the pre strip would be done following the start of the dry season in April 2022.
This project has the potential to add around 30,000 tonnes per annum of nickel production. The decision on the S3 expansion at Kansanshi remains pending as we continue to work with the Zambian government to formulate a framework to move this expansion forward. There has been limited progress on this through the last quarter given the election processes in Zambia, and we do expect further noise and distraction in this regard in the near term. However, once given the green light, S3 would increase materially Kansanshi's annual throughput to well over 50,000,000 tonnes per annum and ensure production levels remain strong for more than twenty years. Last month, we received our mining license for Cobre Las Cruces underground.
We expect the water concession license may be granted by late twenty twenty one as we continue to make solid progress towards being fully permitted. Study work continues with the drill program currently underway. As part of this work, the company expects to release a National Instrument 40 three-one hundred one report with an associated resource in the second half of the year. We still have a way to go before deciding on where this project may fit into our pipeline, but it is pleasing to see the recent progress. Next, we expect to have an update on guidance around our dividend policy by the start of next year, which will include an increase to our current nominal dividend.
We will start cautiously once confident our debt reduction targets are being met, and this policy will not be at the expense of brownfield growth. At this point, as we focus on debt reduction and the brownfield opportunities I just discussed, we can take a more measured and cautious approach to greenfield opportunities within our portfolio, most notably, Argentina and Akira in Peru. We are certainly excited by the prospects of these projects and the longer term potential they offer. At Takataka, for example, we recently completed an NI 40 three-one hundred one declaring a maiden mineral reserve of more than 7,700,000 tonnes of contained copper. However, before proceeding with an investment and construction decision, we would like to further understand the fiscal environment in Argentina.
Similarly, at we see strong potential in the project situated in the prolific copper belt in Southern Peru. However, at Akira, our current primary goal is to continue to work with the local communities who reside in the area where the project is located. Finally, on behalf of the entire company, I want to thank our people once again. Our workforce continues to demonstrate adaptability, commitment and resilience and make significant contributions to the success of the business. I'm proud of how our workforce has continued to focus on executing in a safe and sustainable manner in the face of ongoing logistical and operational challenges resulting from the COVID-nineteen pandemic.
Operator, we would now be happy to take questions. Thank you.
Certainly, thank you. We will now take questions from the telephone lines. The first question is from Orest Wowkodaw with Scotiabank. Please go ahead.
Hi, good morning. In your release, you disclosed that you plan to increase the throughput at Cobre Panama to 100,000,000 tonnes a year by the first quarter of twenty twenty three. That was certainly earlier than I was thinking. And I'm just curious if you plan to complete the rest of the work needed for the expansion at the same time from a tailings and mining perspective? Or is that going to come later?
Orest, I'll take the question. Yes, look, that was really in regards to Ball Mill 6 delivery of that installation in Q1 twenty twenty four, and we'll be commissioning and ramping up throughout the year. So really, the previous guidance we put there remains in place in 2023. That is we expect to be at the 100,000,000 tonnes per annum rate throughput rate by the end of the year, not necessarily from the end of Q1. Does that help?
So you basically plan to
be
fully operational at that 100,000,000 tonne throughput rate exiting 2023, that's the way to think about it?
Yes. That's yes, that is a good way to put it.
Yes. Okay. And then just also on Cobre Panama, it sounds like you're getting close to sitting down to negotiate a replacement for Law nine with the government. There's been some media reports about government officials asking for higher royalties over the 5% current copper royalty. Should we anticipate that there could be some give and take in terms of the current terms in order to get a replacement for Law nine?
Or any color would be
appreciated. Sure, Orest. Yes. Look, I think that's right. We do expect that there will be noise around this process given that it's a public process.
That's a good thing. Given that it's a public process, it means that we expect a transparent outcome and we expect it will lead to a robust and defendable outcome for both the government and ourselves. We wouldn't comment on the minister's comments other to say that a significant investment was made on the basis of the original Law nine fiscal assumptions. It's also pleasing to see comments from the minister earlier this year that Panama wants to see mining at the forefront of its recovery from COVID-nineteen coming out from the current situation. And also, we did see comments from the President of Panama, Laurentino Cortezo yesterday in the national media, which was on that he considered that there can be a win win outcome in the process.
We're certainly aligned with that. There will be give and take, but it can be a win win for the company and the government in terms of realizing benefits and increasing certainty for both the country and the company.
Thank you, Tristan. And then just finally, can you give us a sense of timeline for this Law nine replacement type negotiation? Like would the expectation be that there's something completed by the end of the year? Or could this take a lot longer?
Yes. Orest, I realize that it's been a challenge through the COVID-nineteen period in that prior to this, we were engaged and then that's being held back by just the inability to meet face to face. That is improving. As I said in previous calls, we are having those face to face discussions. I think what you should read from this is that there is momentum building.
What the government has learned, so I can give a bit of background to some of the comments recently, they did have a process on the Panama Canal sorry, the Panama Port Commission and concession, and that was around making sure that there was public engagement. And so we do see that now, the public engagement, these public announcements, and that builds momentum around timing. But it is a government process. It goes through the negotiation with the administration and then into the National Assembly. Those are the steps.
They remain the same, but it's challenging to give a time line around that. And I understand that it would be good to give you a clear picture, but it's got to go through those steps.
Thank you.
Thank you. The next question is from Matthew Murphy with Barclays. Please go ahead.
Hi. Another one on covipanemone, just on a recent story on this pipeline spill. I mean, should we read anything into that? Is there a likelihood of anything meaningful in terms of borrowings or
sanctions coming from that?
Yes. Thanks, Matthew. Yes, the median Panama has picked up on what was really a minus bill and of a small volume of water and slurry rock from the pipeline two weeks ago. Our response teams and the spill protections worked very well, and we're confident the adjacent stream was not impacted beyond an hour or so of some high suspended solids, but and those were diluted by heavy rains. But nonetheless, the incident, it's regrettable for us, and we're working to continue to improve the equipment and the systems involved and also with the Ministry environment in regards to the recommendations for corrective actions.
As I said, it's a low level incident. I think it's really around the noise and the processes that are ongoing that it's come that we've seen those media reports.
Okay. Thanks. And then if I could just ask another one on the risk front. Just looking ahead to Zambian elections, I mean, it's interesting to me that the mining sector hasn't seemed to become really a lightning rod in election process. But I'm wondering how we should think about news flow.
I guess there's a new budget presented sixty days after elections. I mean, do you think mining doesn't really come to the fore through all this?
Yes, Matthew. Thanks. Look, I guess the challenge during your election is that those that's a competition and there's noise and we've seen international elements come up in those discussions or at least in terms of the electioneering. It's been hard to make progress. The ministers are in recess, and that means there's only really the President and a number of key public office holders that are in position at the moment, and that means we can't engage to any great extent in terms of outcome there.
And then yes, the election is on the August 12, and we will see a budget sixty days thereafter. We expect that the whoever comes back in, whether it's incumbent or otherwise, will need to engage, but in particular, on the IMF process and in consolidating the fiscal position in Zambia. In terms of how that relates to the mining industry, the government is now a cooperator through ZCCM of two of the major mines in the country, subject to ongoing court cases in South Africa in regards to one mine. But they have a very good picture now of what it's like to run and operate the mines, and the part and parcel of the industry going forward. So we don't see any significant risk there given where the tax rates are at the moment in Zambia, but there is a need for ongoing engagement.
And particularly as we look to the S3 investment, there needs to be the right kind of framework around that investment. I hope that covers your question, Matthew.
That's perfect. Thank you.
Thank you. The next question is from Jackie Przybylowski with BMO Capital Markets. Please go ahead.
Thanks very much. I think I'm just going to follow-up on Matt's question, but in maybe slightly different way. I just I guess maybe Tristan, if you could clarify, in the slide deck presentation, I think it says the Board is looking to make a decision on enterprise by end of twenty twenty two. And I think you mentioned earlier, maybe I misheard you, but I think you said the end of this year. So maybe if you could just talk a little bit about what the timing is?
I know you guys are working on some pre stripping second half of this year. How much activity do you plan to do at Enterprise before you make a Board decision? And maybe if you can just clarify like when you think you'd need to make a Board decision and what you need to see for that decision to be a positive one? Thank you.
Sure. Thanks, Jackie. The so enterprise, we are able to do some preliminary works. And as you said, that's just some ongoing pre stripping work out there and actually always on the ground there the week before last and very good to see some preliminary works ongoing after the rainy season. In terms of the decision later this year, it will be linked to the broader fiscal environment in Zambia.
It's just that we're outlining that this that a decision can come and then actually fairly quickly, we can be in production because this is a brownfield project. It's by no means a new greenfield project given that a lot of the plant is already standing. So the total capital for the investment is around 90,000,000 and that number will be reviewed as part of the Board approval process. And yes, we could we would hope to be able to put that in front of the Board later this year, notwithstanding the preliminary works ongoing for the full approval, but it's subject to the situation in Zambia.
And I guess we'll see that feasibility study that you're planning to update as part of that Board approval process as well, right? So that will come out later this year as well?
Yes. Look, we'll once we're engaged in the project, we'll make sure that there's an understanding of the production profile and everything around the project, whether it's a full feasibility study, given that it's a greenfield project, we'll make sure that you've got all the parameters around it. That's for sure.
Fantastic. And maybe if I could just ask on the hedge program. So you mentioned or Hannes mentioned that you are tapering that off a little bit and it's now less of your represents less of your copper sales going forward. Can you give us some updated guidance in terms of like what you may do with that hedge program. Are you still planning to add hedges?
Is there some level of hedging that you're planning to maintain? Or as we kind of roll the quarters forward over the next year or so, should we expect that to sort of wind down entirely? Can you just maybe give us an update on what your thinking is with that?
Hamas, would you like to take that question? Sure.
Jackie, mean, we had that hedge program when whilst we were building Panama and highly leveraged. You would have seen the leverage come down quite dramatically over the last year. And as we said, we would sort of reduce that level of activity. And you would have seen probably the hedge book dropping off by 10% of the next twelve months sales in each of the last three, four quarters. Our last hedges that we have placed was just before the previous quarter's conference call, so at the early end early start of this quarter.
So we haven't had any new hedges. So I think that's probably a good indication of where we're heading.
Great. Thanks very much. That's all my questions. Thank you. Congratulations.
Thank you. The next question is from Matthew Fields with Bank of America. Please go ahead.
Hey, everyone. Congrats on the strong execution. Appreciate the sort of more specific commentary on debt reduction, capital allocation that you've sort of put in writing and sort of codified a little bit more than in the past. Just on the balance sheet side, you've had a few quarters now of very strong cash flow. You've had the hundred and $75,000,000 bilateral facility come in.
You've got $240,000,000 of cash coming in from Ravensthorpe in the third quarter. My question is why is the revolver fully drawn at quarter end?
Thanks, Matt. Do you want to take that question?
Sure. Hi, Matt. Look, we had a few things sort of in the quarter. So we had a smelter shut in Zambia and inventory buildup that we just have to fund as well. So that we went through that.
And as part of that process and just planning, we had a drawn under that. I think what you would see is now sort of managing I mean, the next question you will ask is when will we take up bonds. But what we would look at is now sort of saying, all right, the smelter is now shut us behind us. It's smelter started up early this month again. So that inventory is then flowing through and all the cash flows flowing through.
So what we would see is cash POSCO cash coming in. We're also working on a corporate refinancing that should be done by end of this year. And then I think within the next year, we'll start addressing some of those bond maturities then. So you would see some movement. I mean, so it's just particular to a certain situation in this quarter, but thereafter, you should see improvement overall and absolute debt reduction as well.
All right. Well, I appreciate that. And believe it or not, I want to ask about refinancing bonds. You sort of read my mind. Obviously, 7.25% s are callable now.
The 6.5 s are callable now too and your cost of new debt would be well below that. The 6.5% s premium, the call premium steps down on September 1. So you only have to really wait a few days now for a thirty day redemption notice to get that lower call price. Does the sort of high amount of cash on the balance sheet from revolver draw kind of coincide with that 23s and 24s being kind of prime targets for a refi in the coming weeks here?
Look, Matt, we tend to be opportunistic in this regard. I don't want to speculate on exact timing as to when we will do it. I think within the next year is probably a good enough response for now.
Okay, great. Well, thanks very much and good luck with the rest of the debt reduction in the coming year.
Thank you. The next question is from Greg Barnes with TD Securities. Please go ahead.
Yes. Thank you. Tristan, you kind of slipped in that the Sandian operations are no longer under discussion to sell down the interest in the business. You're looking at investing in S3. You're looking at enterprise.
Seems to me you've kind of reassessed your view towards Zambia again. There was a time that where you didn't want to invest now. Sounds like you do. You're feeling much more comfortable about Zambia going forward.
Thanks, Greg. Yes, look, we've got to get through an election, Greg. And I just want to make the point that we will see noise, and these periods are always vocal. And so we do expect some distraction in that. But notwithstanding that, we those are great assets that we have at Sentinel and Kansanshi between them producing nearly 500,000 tonnes of copper, certainly, we'll be at that level after investment in S3.
So in the longer term, yes, we're absolutely we're great supporters of Zambia. We think it's a good destination for investment over the longer term. But certainly, we do need to get through some short term interactions with governments. As I said, at the current time, we can't really do that given that ministers are in recess. And so but we do see that after the election, an appetite to engage on that because these investments are good for Zambia.
And
have you had any further discussions with JMC about ownership at this now that those discussions about selling an interest and now what are happening, do you have
a sense of where they stand or what they want? Yes, Greg. So that's fallen into just a regular conversation that we have each quarter, really off the back of each quarterly results. And so it's an ongoing engagement and an ordinary course now. You know, mean, no, I don't have an inside understanding as to, you know, their intentions, but what what we understand is that they're happy with the investment and they're happy with the delivery against the strategy and where the share price is at the moment and so on, given where they came in.
And we're in a sort of in an ongoing engagement phase with them at the moment. Okay. Great. Good. Thank you, Tristan.
Thanks, Greg.
Thank you. The next question is from Lawson Winder with Bank of America Securities. Please go ahead.
Hello. Good morning. Thank you for taking my call. Tristan, I wanted to just ask you a little bit more on the whole tailings spill at Panama and just some comments that were made by the ministry. So one of the comments was that they were looking for maximum sanctions.
Maybe it would help if you could just quantify what that could possibly be in terms of numbers.
Yes. Thanks, Lawson. Look, we can understand that there's a lot of public visibility on mining at the moment, given the government's comments around looking to expand mining. We it's our intent to be the responsible miners and to mine as well as we can and be a good corporate citizen in that regard. Certainly, we hold ourselves to the highest environmental standards.
We continue to improve the capability of the business. This incident was pretty minor. So the incident itself was less than twelve minutes. Our guys responded within five minutes. The actual volume of material was very insignificant.
It doesn't in our estimation, doesn't reach Level three. It was captured by event ponds. There was some escape. It did create some suspended solids, but it's fairly inert material. And so we would contend that it's fairly minor events and not material, not significant.
But the minister, there is greater public visibility on mining, and we need to behave as responsible as we can. So we will certainly take all the preventative actions to ensure that something like this doesn't happen again. And that's been improving
I'm sorry, I believe we have lost connection with the speaker.
Operator, if we can maybe move on to the next question then.
I apologize. It was your speaker, Mr. Pascal, I believe that has disconnected.
Yes. But I think let's wait for him maybe to dial in again, and then we can maybe move on to the next question. Tristan, are you still on the line?
No, he is disconnected.
All right. Let's see if we've got another question that we in the line.
Certainly. So the next question will be from Karl Blunden with Goldman Sachs. Please go ahead.
Great. Thanks guys. Congrats on the strong results A couple of questions for Hannes. On the debt reduction target, just want to make sure I understand that. You talked about $2,000,000,000 of debt reduction to get below $6,000,000,000 total.
So you're currently at $8,500,000,000 and some of that has to do with the revolver draw. But is it right to assume then that you're looking to reduce debt versus the quarter end by $2,500,000,000 And if there's any breakdown of bank facilities versus bonds, that'd be very helpful.
Sure, Karl. Look, when we talk about the debt reduction, we look at the net debt number. So you would have seen, I mean, we've made significant progress over the last, certainly, year in terms of that. So we're well on the way in terms of that. And with the we will get some proceeds in from the minority stake sale in Ravensauce as well, plus continued stronger cash flows in the second half of the year where we've got much more exposure to the upside in the copper price.
So that will drive it a long way. I think we'll probably go beyond that, but I don't want to give you exact numbers here. But we've got a certain amount of brownfields projects that we'll spend some money on, but it's not that significant in the cash flow generation. So what we'll do is I mean, there will be some reduction in the bonds. In the next year, we will start reducing that, plus we'll refinance the bank facility.
So the bank facility was at $2,700,000,000 probably about three years ago or so. So we'll look before end of the year to replace that probably by a similar amount or slightly smaller. It doesn't make much of a difference if it's a bit smaller as well. And of course, we'll use that thing to reduce the bond side. The banks have been very supportive in the bold and in through tough times as well.
So we've got a very supportive banking group there. So it's key for us to retain that sort of credit appetite from the banks and that support. So we'll look at replacing that again and then reduce some of the banks, but as the bond debt, but it is important for us in the long run to have still a significant presence in the bond market. So there will be some reduction, but so that will flow through in the next year.
Okay. That makes a lot of sense. And then just in terms we haven't really spoken much about the Delta variant of COVID and you've done really well since the initial mandated slowdowns to keep the operations running smoothly. When you think about what that variant could mean in some of the areas with lower vaccination rates, how confident you are around the ongoing operations in Africa and then in Panama?
Hi, Anshul. Let me just check a few good stuff. No, I answered the balance sheet. So I saved the health questions for you Tristan.
Thanks. Apologies for that. Look, thanks for the question. And I was in Zambia the week before last. And certainly, the delta variance is there.
It's in South Africa, and it's in Southern Africa more broadly and in Zambia. But the third wave that was causing has come off from the last fortnight. So what we're seeing is an ongoing reduction of cases and certainly an ongoing reduction in deaths, and that includes the testing because some of the testing is not capable to continue to roll out at the same high levels. But what we are seeing in death is also is a reduction. So on the sites, I think what it has the third wave has done is increased understanding, increase it has brought it home to Zambia, and we are seeing a greater uptake of vaccination.
The challenges around delivery of vaccines, and we're certainly assisting the government in that regard, although governments that can talk to the primary producers of the vaccine. And we do see increased shipments of vaccine to the country and more broadly in Southern Africa, which is good news. And so we do see that it will be a slow progress, but increasing in terms of vaccination. And but the numbers have come off in the interim in the last few weeks, which is a good sign. I hope that covers the question.
Yes, I think it does. And maybe I'll kind of extend that to Panama as well. It sounds like things are all broadly under control, but any color there would be very helpful.
Yes. As I said on the in my comments, the vaccination has gone extremely well. So the number of people that have decided not to take the vaccine so far is three point three percent. And really that's down to our employees being very progressive and engaged, part of the solution. And the uptake has been very strong.
The protocol in Panama is that over 30 are eligible for AstraZeneca. And so nearly 4,000 of those doses have already been delivered to employees. And we're supporting a broader vaccination rollout in both Cologne and Coklais provinces with funding of around $1,500,000 for drive through vaccination centers that have been very successful in rolling out the program across the regional areas as well as the capital city. The under-30s in Panama are on the Pfizer protocol and shipments of that vaccine are coming into the country this month, been delivered. And so we do see a pickup in the under-30s as well, which is good news.
And that's against the backdrop of reducing third wave across the country, which I think is good news. And the plan in Panama, the government's plan is to fully vaccinate by October.
Thanks very much for the color on the health and then also on the balance sheet side, Hannes. Thank you.
Thank you. The next question is from Abi Agarwal with Deutsche Bank. Please go ahead.
Yes. Good morning, Christian and Hamid. Thanks a lot for the call. I have a couple of questions. The first one is around CapEx.
So there's been a shift around in CapEx. So I think capitalized shipping has gone down by around $40,000,000 yet total CapEx is unchanged. Has that been allocated to the enterprise project? That's my first question.
Thanks, Abi. We look, the reality is given the labor shortages at Cobre Panama, it's really been in Panama that we've seen that reduction in stripping capitalized stripping. So it came down about $40,000,000 Our strip ratio in Panama is currently sitting at about 0.4. The plan for the year is 0.66. So we'd like to build that up in the second half of the year.
The shortfall has been on really maintenance operators, truck operators to be able to continue to deliver all the capital equipment to do that. Nonetheless, and the other challenge, I should say, is we've been finding too much copper, which is a nice problem to have. But in the particularly on the hanging wall in the North, everywhere that we thought was waste has been more mineralized than originally expected. So that's a good problem to have, but it does mean that the strip ratio is not as high as planned. That will shift as we get into Kalina.
And as I said, we've broken ground on the box cut position for the new Kalina pit. And so that is definitely waste. We're able to mine that as waste and that stays waste, which is good news from a waste perspective. So that's why we do see the we would like to get back to that the overall target strip ratio for the year. But in the meantime, we it'd be a challenge to catch up with that.
And so that's why the total capitalized stripping number has come down for the year.
And that $40,000,000 so that the sustaining CapEx has increased. So has that been sustaining CapEx and other projects, So that $40,000,000 has that been allocated to Enterprise?
No. Enterprise is not taking a significant portion of that. It will be in some of the overruns at Ravensthorpe and also on the other operations. But no, it's not allocated to enterprises.
Got it. And my last question is on Cobre unit cash costs. So I think in the release, you mentioned there is still a component of COVID costs incorporated. Could you tell us what that component is?
Yes. It was running at around $10,000,000 a quarter, if I recall correctly, And that relates to the hotel isolation costs, that is that we rent hotels for a period of a week for every employee prior to coming onto the site. Obviously, the vaccination program, once we get through that and to the right level, we'll be able to stop that. And then it's also in just overtime and labor costs because we are able to have less people on-site, we are paying above standard rates for labor that is on-site.
Got it. Thank you very much.
Thank you. The next question is from Emily Chang with Goldman Sachs. Please go ahead.
Good morning and thanks for the update today. My first question is just around the capital allocation strategy. So once you have your $2,000,000,000 of growth debt reduction achieved, you mentioned a cautious approach to dividends. But is that perhaps a framework we can use to think about how First Quantum would balance shareholder returns versus growth? For example, should we expect a payout ratio or some kind of percentage of free cash flow being returned?
Or do you still perhaps have a preference for a progressive dividend policy instead?
Thanks, Emily. I'll make some comments and then maybe Hannes will jump in. So look, that's what we intend to come out with. And as we said towards the end of the year or early next year to outline that more clearly, what we are outlining for shareholders is the intent to move from the nominal dividend. But as we said, it will be a cautious approach and probably link more to cash flow in the business potentially, although previously, we've linked it to comparable earnings and paid out on that basis.
Hannes, do you have any more comments on that?
Yes. Tristan, I think it's fair enough. And look, I wouldn't describe it definitely not as a progressive dividend policy. So it will be linked to some sort of earnings or cash flow measure, but that will allow the company still to continue with its Brownfields expansion and growth ambitions going forward.
Great. Appreciate that. That's helpful. And my second question is just around the Las Cruces underground option there. Can you remind us what the size of the price here, any rough estimates of capital cost and anticipated sort of timeline on decisions?
And then sort of following on from that, it seems like in terms of sequencing growth, brownfield is certainly ahead of the greenfield options you have there. But so would it be fair to say that the decision making time line around some of your greenfield opportunities are longer dated than sort of the two three year plan that you've outlined for the brownfield so far?
Sure, Emily. Thank you. So firstly, on CLC, as I said, we'll our intent is to come back with a 40 three-one hundred one that will give more clarity for the market on the decision. And John Gregory, you might comment on that further in terms of what that would look like. But in that, we would include the capital and the cost estimates and so on and the production profile.
But in the meantime, CLC does continue to operate based off reprocessing of initially stockpiles and then tailings. And so really what we're doing here, the decision around closure and things are definitely being pushed out. And what we see is that the study efforts on the underground and the opportunities there, we continue to work on. And as I said, expecting to receive full permitting, hopefully, by the end of this year would be good. And then more broadly on the greenfield decision before John might comment further.
The greenfield decisions, that's right. We pushed the decisions out on those towards sort of 2023, '20 '20 '4 and they're not included in everything on the brownfield side is included in our capital guidance around £100,000,000 at Cobre Panama and there is some capital in 2023 around £250,000,000 in our guidance for S3 and then the remainder of S3 comes through in the following year. Those timings for S3 won't change significantly, but there's no capital and no decision we expect on things like Takataka and Akira in that period. They would come after that period. John, did you have any more clarity on CLC and the 40 three-one hundred 1?
Yes, sure, Tristan. At the moment, we're just finalizing delineation drilling program and our intent is to provide an update on the underground resource in the 40 Three-one Hundred 1. We have ongoing works technical in terms of dewatering geotechnical, which means it will be a period before we can actually announce a reserve. But our intent is to get a forty three-one hundred one update produced by the end of this year.
Got it. I appreciate the color. Thank you.
Thank you. The next question is from Ioannis Masdoulas with Morgan Stanley. Please go ahead.
Yes, hello. Thanks for taking my questions. Two left from my side. The first one, again, on the net debt reduction, that $2,000,000,000 target, is this enough? Let's say, it's $5,000,000,000 Could it be the case that you may need to bring leverage further down even below levels that you feel comfortable with just before you launch the next major greenfield project over the next few years?
Because if we look at some of your peers, they are running net cash balance sheet positions. And I would say that many investors tend to favor that. I'd be interested to hear your thoughts on that point. Thank you.
Thanks, Jan. Hannes, do you want to take that one?
Sure. Look, we stated the debt reduction at $2,000,000,000 that was the target. I think what you will see is if you run the current numbers, you'll see that level actually being higher, that reduction that we'll achieve within the next year. So I think if you look at our greenfields projects, they are still it's not imminent. So our debt will reduce further from that.
I think it's then also important to look at so gross debt will reduce and it will reduce probably by more than that level. And then it's also to look important to look at the sort of leverage ratio and what we stated in the past sort of less than 2x net debt to EBITDA. Now we're already nearly there. But I think what we'll look at there is sort of the longer term copper price. So if you run longer term copper price scenarios, not be not extend this above those sort of numbers.
So and that will be achievable when we get to the next decision on the next greenfields project.
Okay. That's clear. Thanks very much for that. And one more question, if I may. You made an interesting comment around Cobre Panama and the fact that you're looking to at least partly switch the power mix to renewables.
It's interesting because you just commissioned the coal fired power plant a couple of years ago. How are you thinking about monetizing that asset? Could it be the case that you sell more to the power grid in the country? Or are you thinking of some other arrangements?
Thanks, Janus. Look, we're very happy with the coal fired power station in terms of the way it's running and the cost of generation. What we do see though, however, is the coal fired power station is responsible for perhaps 40% of the CO2 emissions within First Quantum. And so it's right that we look closely at it. It wasn't right that we look at that during construction and commissioning.
What was important that we got the power source up and we inherited that coal fired power station. It was in was a Meccano set sitting on the ground, and it was the right thing to do to install and get the mine started. But now it's appropriate that we relook at that. And what we're saying is that initially for the growth of Cobre Panama to $100,000,000 we're looking at other sources of power, including renewable. And then we do continue to look at the power station itself and what options might be available there.
I think it's broadly important for Panama that they have stability in the grid. Hydroelectricity in the country goes up and down very significantly across the year because there's no storage. It's all run of river hydro in the west of the country. And so they are reliant on thermal energy, but at this time, particularly from diesel generators in the country. And so that's an important consideration.
But all of these things will weigh up in our deliberations. And as we said, we'll come back to and explain those later in the year in terms of our strategy around the power station and come back and report more as we have more information for you.
That's very clear. Thank you very much.
Thank you. The next question is from Jitender Goel with BNP Paribas. Please go ahead.
Thank you. Good morning and good afternoon. Just a couple of questions. First one on carbon price integration. Is there any timeline by when you'll be able to conclude?
And would that then apply to all the projects that are unapproved in your portfolio, including S3 expansion and so on? And second, just a quick one, is there any cash tax guidance you can offer for this year, please? Thank you.
Thanks, Jatinder. The first question first. So carbon pricing, yes, we will come back by the end of the year in terms of how we will approach that within the group. What we do see initially, we're looking at new projects, so in particular, things like Takataka and Akira, but we are evaluating it against the other projects in the business, which include S3. And we'll just give more color on that as we go forward.
What we do have is a number of initiatives within the business to save on CO2. And really, that's around continuing to push our productivity and to reduce our emissions intensity against every unit of copper production, and that's important. Sentinel already sits very low down on the curve, but it's the higher intensity operation, but which really Cobre Panama is the highest that gets most important in addressing that, that moves the needle the most for us. Consenci is in the middle, but it's really not on carbon pricing. It's much more around the processing stream, which is, in particular, the carbonates that come through on the leaching side.
But as we go forward, we'll be continuing to reduce the proportion of oxide leaching in the process plant and so it does fall away itself. So that's just a bit of color there. Your second question, just in the sorry, could you repeat that one?
It's on the taxes, Tristan. But, Giulio, do you have a number on the cash taxes? I don't think we've changed that much since early the year.
Thanks, Thomas.
Juliet, you're still on the line?
I apologize. She has been disconnected.
Jatinder, I don't think it's changed much from earlier the year when we gave guidance. What you would I mean, I would expect some of that to as we you can appreciate in Panama, we spent, call it, better part of $7,000,000,000 building the mine. So it will take a while before we start paying cash taxes or significant cash taxes in Panama. But in Zambia, with the higher prices and the nondeductibility of the royalty, what you would see is that sort of effective tax rates increase, so this is a 10% royalty now, but that's not deductible for tax purposes. So in Zambia, you'll see a slightly higher increase in the overall tax effective tax rate.
That's very clear. Thank you.
Thank you. The next question is from John Tumazos with John Tumazos Very Independent Research. Please go ahead.
Thank you very much. Should we be worried from the minor tailings discharge or the slippage in the strip ratio or the labor shortages at Cobre Panama that operations need more attention and maybe it's premature to be focusing and thinking ahead to the four brownfield and two greenfield capital projects?
Thanks, John. No, I don't think that's the case. I think that the management on-site is doing an excellent job under the pressures of COVID-nineteen and all of the challenge of continuing the ramp up. What we have seen is measures against production in the mine have been progressing extremely well, that is in terms of the capabilities of the capital equipment to deliver the trucks. So for example, we look at full and empty ratios, we look at the KPIs compared to benchmarks on our other operating mines, in particular Sentinel, as to how it's performing against those benchmarks.
And in some areas, Cobre Panama is exceeding. In other areas, we have continued work to do, for example, on tire maintenance and road conditions. But in other areas, we're already doing better than other mines. And we compare ourselves to the other benchmarks in the region, including the dry mines down in Peru and then in Chile, and our suppliers are there regularly, and we compare ourselves to those. In the process plant, recovery is performing extremely well.
We now have the gold plants performing much better after investment in maintenance on that side. The process through tailings is working extremely well, and we're well on track in terms of the Phase two lift around the tailings dam, which is all to get that ready and cope with the current inundation rate, but also to have it ready for the 100,000,000 tonne inundation rate. We have regular external audit from independent orders to come through and check how operations are performing and whether they're at the required standard. And we're very happy with the outcome of that. Terms of safety management on the site, there's continued improvement from where we were eighteen months and twenty four months ago.
So we see the leading indicators continue to improve and the safety adherence and so on from the workforce from the Panamanians been exceptionally good for a new workforce where the country has no history of mining, but has developed very quickly and shown a great deal of capability. The incidents on the pipeline is an aberration and regretted, but it's very small and minor. It does need focus, and we're confident that it's getting the focus that it requires. This is we were seeing three or four of these events last year. And so certainly, the frequency has improved.
It boiled down to a failure on a weld. So that weld, we difficult to analyze. It does require a higher technical capability of NDT testing in order to examine that weld to make sure that has that everything else in the line has been performing exceptionally well after the improvements last year, the earlier problems we had. And so this is a one off related to a failure on a weld. And but again, we will put in place corrective actions because it needs to be done.
So I hope, John, that gives you an idea that the application of management, the application of the operational excellence at the site is already reaching the standards of our older operations, although we continue to lift the standards of those to global benchmarks, and we're very happy with the progress in that regard.
Thank you, Tristan. If I could ask you one more. I'm thinking of a history in 1986 when Magma Copper hedged at $0.70 which was at or below their breakeven or 02/1926 when Phelps Dodge lost a couple of billion dollars because of zero cost collars as the price rebounded. And I'm a little bit tongue in cheek, but I'm wondering if you're almost trying to trigger a hostile takeover with your hedge practice or your failure to renounce hedging. And I just want to call your attention to companies that had similar hedge problems in the past disappeared quickly?
Hamid, do you want to take that call on the hedge book? Yes,
clear. Yes. We made it clear. We haven't added hedges this quarter. So we've stopped early this quarter.
If you look at the history in the last three, four quarters, it has reduced by 10% in each quarter. So that program was in place whilst we were spending quite a bit of capital at Cabre Panama and highly leveraged. As Panama has ramped up, that hedge program has rolled off and there's much less hedged now. So it's less than 25% of the next twelve months sales are hedged and you would see from, I think, August, we'll participate significantly more on the copper price.
Thank you. I'm a shareholder
and wish you the
best. You.
You. This will conclude the question and answer session. I would now like to turn the meeting back over to Ryan MacWilliams.
Thank you very much to everyone for joining today's call. Enjoy the rest of
your day, and we look forward to speaking to you again with our Q3 results.