First Quantum (TSX:FM) Minerals (OTC:FQVLF) Limited (TSX:FM) announced its second-quarter results for 2024 with a solid operational performance, particularly in Zambia. The company reported an increase in copper production and improvements in cash costs, despite challenges such as power restrictions in Zambia and the maintenance status of Ravensthorpe.
The commercial production of Enterprise began, and discussions with the Panamanian government and environmental audits at Cobre Panama are underway. Shareholder agreements were formalized with Jiangxi Copper, and the company initiated a copper hedging program. Although revenue and EBITDA increased, the company experienced a net loss attributable to shareholders of $46 million and an increase in net debt to $5.4 billion.
Key Takeaways
- Copper production increased to 103,000 tons, a 2% rise from the previous quarter.
- The commercial production of Enterprise started on June 1.
- Ravensthorpe was placed on care and maintenance, incurring $5 million per month in costs.
- Copper hedging program initiated to manage the balance sheet.
- Shareholder rights agreement reached with Jiangxi Copper.
- Environmental audit of Cobre Panama and discussions with Panamanian government authorized.
- Severe drought and power restrictions impact operations in Zambia.
- C1 cash costs improved by 14% to $1.73 per pound.
- Net debt rose to $5.4 billion, with liquidity remaining strong at $1.6 billion.
Company Outlook
- Sales process for Las Cruces mine and potential minority investments in Zambia are ongoing.
- Full restart of Cobre Panama mine unlikely this year, but discussions continue.
- Environmental audit expected to take a few months, with focus on water management.
- ICC arbitration scheduled for September 2025.
Bearish Highlights
- Ravensthorpe placed on care and maintenance due to high costs.
- Net loss attributable to shareholders recorded at $46 million.
- Electricity costs rose due to power shortages in Zambia, impacting cash costs by approximately $55 million for the full year.
- Net debt increased by $160 million due to the S3 expansion project.
Bullish Highlights
- Revenue and EBITDA increased by 19% and 86% respectively, mainly due to higher copper prices and improved operational performance.
- Zambia's mining investment climate has improved, with its ranking jumping in the Fraser Institute's annual mining survey.
- Company remains comfortable with its C1 cash cost guidance range for the year.
Misses
- Despite the increase in revenue, the company reported a net loss attributable to shareholders.
- Copper prices peaked but have since fallen, impacting potential future revenue.
Q&A Highlights
- The company is securing additional imported power to meet the needs of the S3 expansion at Kansanshi.
- ICC arbitration related to the power supply situation in Zambia is set for September 2025.
- Company only seeks strategic value in bringing a partner into its Zambian operations, not just economic value.
In conclusion, First Quantum (NASDAQ:QMCO) Minerals Limited demonstrated resilience in its second-quarter performance, navigating operational challenges and market fluctuations. The company's proactive measures, such as the copper hedging program and shareholder agreements, alongside its strategic initiatives in Zambia and Panama, reflect its commitment to managing risks and capitalizing on growth opportunities. The results of the ongoing environmental audit at Cobre Panama and the progression of the S3 expansion will be critical factors in the company's future performance.
InvestingPro Insights
First Quantum Minerals Limited (TSX:FM) has shown a remarkable ability to adapt and persevere despite facing a multitude of challenges. According to the latest data and analysis from InvestingPro, there are several financial metrics and analyst insights that investors should consider:
InvestingPro Data:
- Market Cap (Adjusted): 12.64B USD
- P/E Ratio (Adjusted) last twelve months as of Q2 2024: -12.55, indicating that the company is currently not profitable.
- Revenue last twelve months as of Q2 2024: 5514M USD, with a notable decline in revenue growth by -18.53%.
InvestingPro Tips:
- Analysts have recently revised their earnings upwards for the upcoming period, suggesting a potential turnaround or better-than-expected operational performance in the near future.
- Despite the challenges, the company has maintained dividend payments for 19 consecutive years, demonstrating a commitment to shareholder returns even in tough times.
For those looking to delve deeper into First Quantum Minerals' financial health and future prospects, there are additional InvestingPro Tips available. By using the coupon code PRONEWS24, investors can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, gaining access to valuable insights that could inform investment decisions. Visit https://www.investing.com/pro/FQVLF for a total of 7 InvestingPro Tips that offer a more comprehensive understanding of First Quantum Minerals' financial and operational outlook.
Full transcript - First Quantum Minerals Ltd (FQVLF) Q2 2024:
Operator: Thank you for standing by. This is the conference operator. Welcome to the First Quantum Minerals Limited Second Quarter 2024 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Bonita To, Director, Investor Relations. Please go ahead.
Bonita To: Thank you, operator, and thank you everyone for joining us today to discuss our second quarter results. During the call we will be making forward-looking statements. As such, I encourage you to read the cautionary notes that accompany this presentation, our MD&A and the related news release. As a reminder, the presentation is available on our website and that all dollar references are in U.S. dollars unless otherwise noted. On today's call are Tristan Pascall, our Chief Executive Officer, Ryan MacWilliam, our Chief Financial Officer and Rudi Badenhorst, our Chief Operating Officer. And with that, I will turn the call over to Tristan for opening remarks.
Tristan Pascall: Thank you, Bonita and thank everybody for joining us today for our second quarter update. Operationally, we had another solid quarter in Zambia, which Rudi will cover in his remarks and both Kansanshi and Sentinel are set up well for the second half of the year. We remain on track to deliver on the copper production guidance which we provided earlier in the year. We were pleased to announce the commercial production and Enterprise on June 1. However, in April, we made the difficult decision to place Ravensthorpe on care and maintenance due to the high-cost structure of the operation. Despite this, with Enterprise performing better than expected, we have maintained our nickel production guidance, albeit at the bottom of the range. Whilst we are not natural hedges, the copper price in May reached levels that provided assurance on maintaining balance sheet strength during this time of elevated debt and while we look for a resolution in Panama. As such, in our continued efforts to prudently manage the balance sheet, we initiated a copper hedging program to which Ryan will provide more details in his financial overview. It was pleasing to reach a shareholder rights agreement with Jiangxi Copper during the quarter, which formalizes our relationship and removes uncertainty for all of First Quantum stakeholders by establishing guardrails with respect to three key areas. Firstly, with a few exceptions, Jiangxi Copper will not vote against Board recommended matters. Secondly, Jiangxi Copper remains under standstill for the term of the agreement. And thirdly, any material block of shares that Jiangxi Copper wishes to sell will have the oversight of first quantum. As part of the agreement, Jiangxi Copper will have the right to nominate rather than appoint one directed to First Quantum sport, with the nominee being subject to the recommendation of the nominating and governance committee of First Quantum sport. The nominee must fit the skills matrix as required by the Board, as well as discharging all of the duties regularly expected of directors sitting on the Board of a Canadian company. Over the years since, its initial investment in 2019, the relationship between Jiangxi Copper and First Quantum has strengthened. Jiangxi is supportive of the strategic direction of the company and both parties expressed a willingness to formalize the boundaries of this relationship. This agreement has been many years in the works and we are pleased to have reached this outcome. In Panama, President Mulino was inaugurated on July 1. He has authorized discussions between the company and his various ministers and officials. Initial meetings have taken place and there shall be further dialogue in the coming weeks, once his government is ready. In the meantime, there continues to be 121,000 dry metric tons of concentrate on site. Shipment of this concentrate is part of the Preservation and Safe Management program and therefore, sale of this concentrate will not take place until the program is approved. We continue to work with the new officials for the approval of the Preservation and Safe Management program, which involves getting the new administration up to speed on the current situation at the mine. In his inauguration speech, President Mulino announced that a strict environmental audit would be conducted on Cobre Panama. Our understanding is that the government is currently assembling a list of independent international experts who could conduct this audit. We understand and welcome this move as a necessary step for the new administration and the Panamanian public to learn more about Cobre Panama's exceptional environmental practices and standards, and we are prepared to cooperate fully. The company has always operated its operations with transparency and in full compliance with international environmental standards. We are confident the results of this environmental audit, in line with all previous audits of the mine, will demonstrate the world class nature of our operations. Moving on to arbitration. The company has taken steps towards two arbitration proceedings, one under the International Chamber of Commerce and the other under the Canada Panama Free Trade Agreement. The ICC is the most advanced of these two proceedings, with the arbitration initiated in November of last year with a final hearing scheduled for September 2025. Under the FTA arbitration and updated notice of intent was filed on February 7, the company has three years from Panama's breaches of the FDA within which to file its arbitration claim. I would once again reiterate that arbitration is not our preferred outcome, and we remain committed to dialogue with the new governments and to being part of the solution for the country and the people of Panama. Over to Zambia. The severe drought continues to impact the country. I'm proud that First Quantum is supporting Zambia's food security efforts by contributing to transportation costs to import grain into Zambia from Tanzania. The severe drought conditions also continue to impact power availability. In June, ZESCO imposed a further 20% increase in power restrictions across the mining sector for a total of 40% reduction overall. As such, the company made the decision to source power beyond the formal restrictions imposed by the ZESCO contract and will be sourcing 193 megawatts of power or 52% of its needs from imports. There will be an impact on costs which Ryan will review. However, the company anticipates it will be able to sufficiently substitute power with imports and avoid operational interruptions. In addition, the company is proactively securing sufficient power for the commissioning and ramp up of the S3 expansion at Kansanshi with three independent power producers. The situation in Zambia is serious and we will continue to work constructively with government and civil society to achieve the best possible outcomes that ensure employment and income to the country remain stable and Zambia's debt restructuring efforts remain intact. With that said, we are pleased and supportive of the commitments made by the country for additional and reliable power generation capacity, including wind, solar and hydro projects, as well as infrastructure investments, including interconnections with other countries across the Southern African power pool to address the country's power needs for the future. With that, I will conclude the opening remarks and pass the call to Rudi to review our operational results.
Rudi Badenhorst: Thank you, Tristan and thank you everybody for joining our call today. Total copper production for the second quarter of 2024 was 103,000 tons, a 2% increase from quarter one. This was another solid quarter operationally and with the work accomplished during the quarter, we are now well set up for the remainder of the year and on track to achieve our copper production guidance, as Tristan noticed earlier. Copper sales volumes did lag during the quarter by approximately 8,000 tons lower due to the timing of shipments, vessel delays at Walvis Bay and Dar-es-Salaam ports related to weather, port congestion and scheduled disruptions. Copper C1 cash cost declined by $0.29 to average $1.73 per pound, benefiting from higher gold production at Kansanshi and record gold prices. At Kansanshi, copper production totaled 42,000 tons in the second quarter, an improvement of 10,000 from quarter one, driven by higher feed grades. During the quarter, we gained access to higher grade material at the Main 15 cutback. This, along with access to Main 17 will allow for grades to remain at elevated levels for the remainder of the year. In addition, we will be swapping the mixed and sulphide mills during the third quarter in order to maximize mixed ore and grade through the mills. This will allow us to comfortably achieve our production guidance of 130 to 150,000 tons of copper at Kansanshi. Copper production at Sentinel totaled 54,000 tons in the second quarter, a decline of approximately 9,000 tons from the previous quarter. The decline in production was expected as the mine experienced higher grades during the first quarter and have since returned to normalized levels. The ongoing Stage Three development progressed well during the quarter with the input crushes successfully commissioned well ahead of schedule that enabled access to softer ore. The access to the western cutback at Stage Three will increase the availability of softer ore and allow for improved mining performance and throughput over the remainder of the year. As such, copper production guidance at Sentinel has been maintained at 220 to 250,000 tons. At Enterprise. Over 6,000 tons of nickel was produced during the second quarter, an increase of over 2,000 tons from the first quarter. Mining volumes have been steadily improving and plant performance has been strong, allowing for the declaration of commercial production. Due to the stronger than expected performance at Enterprise, nickel production is expected to be at the upper end of guidance at 17 to 20,000 tons. As Tristan noted earlier, we made the difficult decision to place Ravensthorpe under care and maintenance. This work commenced in May and should be completed during the third quarter. Care and maintenance costs are estimated to be approximately $5 million per month during the third quarter and will reduce the $2 million a month thereafter. Production guidance has been lowered to 5,000 contain tons of nickel in reflection of this. We continue to support our personnel, particularly those living here in the locally Ravensthorpe region and we are thankful for support from the community and local and state governments to the mine during this challenging phase. Cobre Panama remains in a phase of preservation and safe management. During the quarter, the process plant preservation and maintenance cycle was changed from 14 days to 28 days. The new maintenance cycle will allow for the execution of corrective maintenance activities to maintain optimal conditions. The focus continues to be on environmental, care and maintenance activities for all areas including cleaning and maintenance work at Sentinel ponds and pumps, managing surface water at the waste dump and low grade stockpiles, redirecting rainwater, the treatment of water to manage the PH levels. These expenses are expected to range from 15 million to 17 million per month for the remainder of the year depending on the level of environmental stability and asset integrity programs. I wish to thank all our employees at Cobre Panama for their ongoing commitments to safe and responsible environmental management of the mine area and its surrounding communities. Thank you and I will now hand the call over to Ryan to review the financials.
Ryan MacWilliam: Thank you, Rudi. During the quarter, copper prices reached a peak of $4.92 per pound following the collapse in copper treatment charges, the resulting concern of smelt production cuts combined with lower mine supply forecasts. The copper price has since spilled back to around $4.20 per pound on the back of expectations of slower growth in China. During the quarter, we took advantage of the stronger pricing environment and entered into a copper hedging program made up of unmargined zero cost collars to the end of 2025 and roughly 40% of our production. The hedge program is the next step in protecting the balance sheet following the successful completion of the financing activities in Q1. We've been consistent that while our goal as a company is generally to be unhedged, we will consider the use of hedging as an insurance policy to protect the balance sheet during more capital-intensive phases. This hedging strategy ensures a minimum price on a portion of our production while Cobre Panama is offline and until the S3 expansion is fully commissioned at the end of 2025. The hedges are front end weighted as this is when the S3 expansion project is most capital-intensive. Once fully operational, S3 is expected to return First Quantum to a positive to strong positive free cash flow generation. Revenue and EBITDA increased from the first quarter by 19% and 86%, respectively, mainly on the back of higher realized copper prices and improved operational performance, particularly at Kansanshi. Our Q2 net loss attributable to shareholders also improved to $46 million, although it was impacted by a further impairment at Ravensthorpe. We wrote off the majority of the remaining inventories following the decision to place the operation into care and maintenance during the quarter. As Rudi noted, second quarter C1 cash costs averaged $1.73 per pound, a 14% improvement over the previous quarter. In general, costs have largely stabilized. However, as guided in our Q1 results, electricity costs increased as of May 1 at Kansanshi and Trident as a result of the power shortage in Zambia and the need to import power at higher rates. As Tristan noted, ZESCO has requested further restrictions, so we'll be more than doubling our imported power from July 1 onwards. With these additional imports, the impact to our cash costs increased to approximately $55 million, or $0.06 per pound for the full year. In other areas, input costs and prices are tracking favorably to the assumptions used in our C1 cash cost guidance. Oil prices have averaged in the mid-80s year-to-date, while we continue to use $90 per barrel in our assumptions. The kwacha has been weaker than the 21 assumed in our guidance. And lastly, gold prices have been a significant tailwind for us, more than offsetting the impact of the higher power prices as the gold prices averaged well over $2,000 per ounce through the first part of this year. Considering all these factors, we remain comfortable with our C1 cash cost guidance range for the year of $1.80 to $2.05 per pound. In respect to our balance sheet initiatives, the sales process of our Las Cruces mine in Spain remains ongoing, as well as the potential minority investments in the company's Zambian business where we'll bring in a partner to create strategic value for our business in Zambia. Net debt increased this quarter by $160 million to $5.4 billion. The strong progress on S3 and the resulting increase in capital expenditure was the main driver of this cash outflow. Liquidity remains strong at $1.6 billion at the end of the quarter, comprising of approximately $876 million in cash and $740 million of undrawn revolver. And that concludes the finance section. I'll now hand the call back to Tristan.
Tristan Pascall: Thank you, Ryan. Two years ago, First Quantum approved the Enterprise and the S3 expansion project, following a commitment made by Zambia's new Dawn administration to reform the mining sector and establish a platform for more stable, durable and responsible mining in Zambia. It is very pleasing to share with you that Zambia was recognized in the latest annual mining survey by the Fraser Institute for its improved investment climate. Out of 86 countries, Zambia's ranking improved from 58 to 34. The country achieved the third highest ranking in Africa and now ranks ahead of traditional mining jurisdictions, including Chile and Peru. The current administration has made great efforts to improve the investment climate for the mining sector within the country and it is very pleasing to see this bear fruit. At Enterprise, it is pleasing that the mine was completed, commissioned and delivered into commercial operation ahead of schedule. I wish to acknowledge our in-house projects teams for another project successfully executed that distinguishes First Quantum's approach to delivering growth. At the S3 expansion project, we continue to receive long lead deliveries, with the last major delivery of flotation cells completed early in the third quarter. Construction continues to focus on the assembly and installation of major components, mainly the mills and the primary crusher, and we are pleased to show you the progress of our S3 project in the presentation on our website. Work has also begun on configuration of the plant control system. The S3 expansion is key to restoring First Quantum strong cash flow generation, and we remain on track for first production mid next year. We have also published a 43-101 technical report for Kansanshi. The copper production profile at Kansanshi has smoothed over the life of the mine, while unit cost and capital spending has increased, reflecting inflation since the last report in 2020. Also reflected in the higher capital spending are fleet replacements related to the S3 expansion. As part of the report, we were pleased to see an increase in mineral reserves that has extended the operating life of Kansanshi by five years to 2049. This brings our prepared remarks to an end. There was a lot of information with our second quarter results and I would be pleased to take any questions. Operator, we can open the call for Q&A.
Operator: Certainly. We will now begin the analyst question-and-answer session. [Operator Instructions] The first question comes from Orest Wowkodaw from Scotiabank (TSX:BNS). Please go ahead.
Orest Wowkodaw: Hi, good morning. It's great to hear that the new President of Panama has authorized, I guess, some discussions to restart with the company. The President has made some public comments about potentially restarting the mine to close it, and I'm wondering if you can provide any color on what you think that means from a restart perspective and whether you think that could be a partial restart, a full restart, and under what sort of timeline, potentially.
Tristan Pascall: Hi, Orest. Sure. Thanks very much for the question. Yeah. So the President, in his inauguration speech, and since that day, has made a number of comments around the mine, and we note his comments around open to close. I think it's been very pleasing to see the dialogue around the mine, which is a very important issue for the country in terms of the need to deal with, in particular the environmental issues and how those need to be managed through an operating asset. It's very hard to manage an immediate closure such as happened at the end of last year, and so it's very necessary that there is a level of activity that can ensure environmental security. So that's the first point. Initially, we see that progressing through the Preservation and Safe Management plan that we have submitted, and I think that's very important to underline the costs and the ability to keep ensuring assets and environmental security in the interim. But we're very open to and committed to dialogue with the new administration to put in place a framework around which we can have those conversations that will see a stable level of operation to ensure the long-term environmental security of the asset. The timing of that, Orest, is difficult. I think there's a number of complexities to work through. We don't see that happening this year, and certainly the President's made comments around that. We are committed to engage in the dialogue in order to get to that position.
Orest Wowkodaw: Thanks. What's the timing for the environmental audit?
Tristan Pascall: Yes. Thanks, Orest. So, firstly, to say we're absolutely open to the audit, and we see it as a necessary step for the government of Panama. We're waiting for the instructions from government. We understand they're currently putting together a short list of international experts. That could take a few weeks. And so, we're waiting to hear back on the government at the exact timing. But the indications were that it would come this year, and the cost will be perhaps to be discussed and agreed with the government. The consequences, I think, of doing nothing at the mine will be very challenging for the environment. And so, we welcome this audit, which we expect would understand that doing nothing right now is not a good outcome for the country.
Orest Wowkodaw: Thank you.
Operator: The next question comes from Jackie Przybylowski from BMO (TSX:BMO) Capital. Please go ahead.
Jackie Przybylowski: Thanks very much for taking my questions. I guess, maybe my first question would be for Ryan on the hedge program. It seems very well timed and opportunistic, and I totally understand the rationale behind it. Can you talk a little bit about what you might look at in terms of adding hedges, what you may need to see in the market to add further hedges going forward?
Ryan MacWilliam: Sure, Jackie. Our intent would be to replace hedges as they roll off and to stay broadly 40% to 50% hedged through to the end of 2025. And that really ties in with the delivery and ramp up of the S3 project. And then from there, we move to a stronger phase of cash flow generation, and therefore, we don't need that hedging insurance policy from then on.
Jackie Przybylowski: Thanks, Ryan. And it's my follow up question. Maybe I'll just ask, have you sort of looked at that in terms of the scenarios for restarting Cobre Panama in 2025 or not? Does that affect your hedge program? I mean, it obviously would in terms of that 40% to 50% calculation. But would you be more comfortable being hedged or not hedged in a different scenario with that restart.
Ryan MacWilliam: Jackie, we've made that decision and approach independent of Cobre Panama timing. So, it really focuses on what the S3 ramp up looks like and then matching a program that ties in with that.
Jackie Przybylowski: Okay, thank you very much.
Operator: The next question comes from Ioannis Masvoulas from Morgan Stanley (NYSE:MS). Please go ahead.
Ioannis Masvoulas: Hello. Thank you very much for the presentation. My first question is around asset sales or stake sales, actually. You mentioned that you will only bring a partner in Zambia if this would present strategic value. Would this preclude discussions with certain types of potential bidders that may offer an attractive economic value instead?
Tristan Pascall: Hi, Ioannis. Ryan, do you want to take that question?
Ryan MacWilliam: Sure. Ioannis, the comment was really focused on the fact that we don't have to do a transaction in Zambia, but we think the improved investment climate there, which Tristan referenced in his script, gives us an opportunity to engage with parties who are now looking at Zambia afresh following the positive business reforms in the last few years. And if there's a partner that has the capability, the experience in the mining sector and the desire to work with us and the Zambian government in moving those assets forward, we will really take that very seriously. But the comment really was focused on, we'll consider it holistically rather than just the dollar value of any transaction.
Ioannis Masvoulas: Very clear. Thank you very much. And just to follow up back to Cobre Panama. Certainly, lots of uncertainties on the path forward, but assuming the environmental audit concludes successfully, what would be the next milestones towards a possible restart? And within that, how should we think about a new contract agreement between you and the government, given recent comments made by the President? Thank you.
Tristan Pascall: Sure, Ioannis. Thank you. So, the milestones as we see them, but we committed to dialogue around that with the government really initially to address the immediate activities required under the Preservation and Safe Management plan to ensure environmental security. Currently, we're covering all of that cost, and we outlined that in the second quarter results as to where that cost is now $17 million a month, approximately ranging 15 to 20. And that's important that we cover that cost. Initially the concentrate sale would go a long way to support that, and that's part of the Preservation and Safe Management plan that we would hope is approved. Going forward from that, I think it's important that we provide space for dialogue, and that would really be a conversation around a framework as to how that dialogue could work to really understand the full solutions required for Panama and its people, but to work in order to ensure the ongoing environmental security, asset security of the mine and the conditions there, the mine exists, and it needs to be dealt with in a respectful way and in a patient manner. So, those are the milestones we think this year. The President has made comments around that timetable. I think he said you not before the summer months, which runs through from December. But really, for us, the importance is not when, the importance is getting to a proper agreement that benefits both parties, that ensures a stable operation forward and must make sense for our shareholders.
Ioannis Masvoulas: Thanks very much.
Operator: The next question comes from Dalton Baretto from Canaccord Genuity (TSX:CF). Please go ahead.
Dalton Baretto: Thank you. Good morning, Tristan and team. Maybe I can start by following in that same vein there. Just a point of clarification, Tristan. Does the approval of the Preservation and Safe Management plan depend on the outcome of the audit, or are they completely separate?
Tristan Pascall: Dalton, look, we'll go through that process. A lot of that conversation needs to happen with government. From our perspective, though, the Preservation and Safe Management plan was really needed just to deal with the immediate environmental requirements. And with or without an audit, with or without a future framework, there are a number of environmental matters that need to be -- there needs to be the right framework by which those can be covered and be dealt with. And that's what the Preservation and Safe Management plan really was set out. We submitted that in January, and it's really about dealing with those upfront key environmental matters. Well before we get to the sort of long-term items that we would envisage come into a more holistic framework discussion.
Dalton Baretto: Got it. But from Mulino's perspective and from the government's perspective, the two are completely separate. Or are they waiting to see what the audit looks like first?
Tristan Pascall: Look, we see the audit as a key step. There's been a number of environmental audits at Cobre Panama. The last one at the end of last year, from August to October, while the mine was operating. The audit demonstrated that we were 100% compliant with the environmental and biodiversity requirements of the 371 obligations under the ESIA. There were five health and safety areas to be addressed, which we were addressing at that time. And that demonstrates the very strong environmental standard of the operation to international standards at the highest level. So, we would welcome the audit. We think it's an important part for Panama to understand the situation on the ground at the mine, to provide transparency, to provide meaningful context around what needs to happen that the mine just can't stop in mid-air. There needs to be to ensure integrity of the environment there.
Operator: The next question comes from Marcio Farid from Goldman Sachs (NYSE:GS). Please go ahead.
Marcio Farid: Thanks, everyone. Good morning. My questions around the operations is on the obviously consultant, performed quite well in the quarter, both in terms of cost improvement as well. We talk about potential further efficiency gains on the release. So just trying to understand what are you thinking about in terms of magnitude of potential cost improvement if the grades that you reported in the quarter can be sustained into the next quarter. And if the surprise that you published highlights any potential upside risks in terms of costs and grades for us through expansion as well. Thank you.
Tristan Pascall: Sure. Thanks for the question, Marcio. I'll let Ryan answer the first part of that question and then just a look ahead. I can give you some context as well.
Ryan MacWilliam: Sure. So, on costs, we did see very strong cost performance through the quarter. That was largely driven by the low unit cost at Kansanshi, which in turn were driven by the strong gold production there, which tied in with the strong gold price environment. We do expect through the second half of the year Sentinel to represent a larger share of the production. Sentinel doesn't come with that byproduct credit. So, we would expect higher costs through the second half of the year than what we had in Q2, but still well within guidance.
Tristan Pascall: Yeah. And then looking forward, Marcio, we were very happy to release the updated 43-101 technical report at Kansanshi. I think that gives a very fulsome picture. And the team has done an excellent job presenting the overall look forward as we get into Southeast Dome and as the S3 project comes online in terms of costs, you'll note in that our assumptions around inflation and as we bring new mining fleets and shift from the traditional, the methodology we had, which was a selective mining methodology at Kansanshi, and as we shift across to a bulk mining methodology, that's the major impact on costs at Kansanshi looking forward. And we're pleased being on site very recent in the last few weeks to see those large trucks operating under trolley assist, the Hitachi (OTC:HTHIY) 250 tonners, including the first battery truck, which we saw running under its own power, completely carbon neutral in terms of emissions from that truck. So, it's an exciting time for Kansanshi as we deliver the S3 expansion and as we bring on that bulk mining methodology, we expect to see costs reduce in the future.
Marcio Farid: Great. Thank you. And a quick follow up on the energy side. Obviously, ZESCO reduced power supply about another 20%, which is probably it now gets to the 40%. You have contracts with important sources, right? Just trying to understand what is the risk that you see that further curtailments happens between now and the end of the year and what are the actions the company is taking to avoid any production displacement. Thank you very much.
Tristan Pascall: Thanks, Marcio. So, yeah, look, the situation is serious with regard to the drought that appears to be an effect from El Nino in terms of dry conditions in Zambia, similarly dry conditions in Australia, and wet conditions in Brazil and in Latin America. A lot of the outlook is for a flip to neutral conditions by the middle of this year, August, September is what the metallurgical forecasts seem to be pointing to, and potentially a flip to La Nina, around a 40% likelihood, which would reverse things the other way. And we would see higher rainfall in Zambia, similarly higher in Australia and lower in Latin America. So, we're preparing for a heavy wet season, but also planning that if there are limitations to power and the drought does continue through the dry season as to how to go about that, in particular with relation to the S3 expansion. And Marcio, we put in place the flexibility in the contract with ZESCO. We're very pleased with that long term relationship we have then. ZESCO is working very proactively around that in terms of headlining the challenges looking forward in the country for power delivery. But then we're able to secure power through imports with independent power providers and we feel confident at the moment in those agreements that we'll be able to cover our operational requirements. Although, the situation is serious in the country, that's coming from sources that are from gas and very interesting on the East Coast of Africa, they've had good rainfall in places like Mozambique, Malawi and so on, and so are not impacted to the same degree. So, those are strong sources of supply in the current market environment. And we're able to import that power and believe that we'll be able to see no impact on operations.
Operator: The next question comes from Bryce Adams from CIBC (TSX:CM). Please go ahead.
Bryce Adams: Hi, everyone. Thanks for the presentation. There was a note about government officials visiting site and the report for the immediate export of the concentrate and the power plant restart. I wanted to clarify, is that a couple of months stale? When was the report? Was it early in the year or was it more recent? What's the latest on the concentrate in shed?
Tristan Pascall: Thanks, Bryce. Yeah. That was officials from the previous administration visited the site in the run up to in June. In the run up to the inauguration on July 1, so was up to date at the end of the quarter. The feedback from that site visit, as far as I understand, was positive in terms of all of the structure and the way in which we presented the Preservation and Safe Management plan, including the export of concentrate. Although, we're still waiting for that approval. We are in dialogue with the government around that approval and the need to ensure that the provisions that are in that Preservation and Safe Management plan we can enact in order to ensure environmental security as the first priority, both for the country and in order to ensure that the mine is in a good, stable position. So, the answer is waiting for that approval, though the technical official visits went well.
Bryce Adams: Okay. What are the key drivers for the shareholder agreement? It's a more formalized relationship, but what practically changes. And then I can see the reasons FM would enter into the agreement. But what do you think is a key benefit for Jiangxi?
Tristan Pascall: Yeah. Thanks, Bryce. Look, we were happy to enter into that agreement. It's been a long time coming. We've been working with our partner, Jiangxi, for some time, and really it does now provide formalization of the relationship between us. The key provisions, number one, ensure the guardrails around our relationship and the ongoing relationship with Jiangxi in the form of a standstill, restrictions on dispositions of shares and ensuring Board support, not for all matters, but encompassing the majority of matters that the Board will come. Those guardrails, we think are very important. They really the benefit for First Quantum, I think, and for our shareholders, remove uncertainty for all of our stakeholders regarding the nature of our relationship with Jiangxi and their intentions into the future. In terms of Jiangxi, they've been very clear. They're backing the strategic direction of the company, backing the strategic direction which we're heading in. And to your question around motivations for them to ensure a customer and supplier relationship in a time where copper is scarce, we saw that in the prepay agreement that they were seeking to ensure security of supply into what is the number one or number two largest copper smelting business in the world. And there a lot of strength and capability and downstream processing, all the way from smelting through to rod and bar and into copper foils for battery technologies, a huge capability in those downstream areas. So, for Jiangxi, I think it provides them access to the front end in terms of scarce copper supply and ensures a relationship going into the future with this certainty for both parties.
Operator: The next question comes from Myles Allsop from UBS. Please go ahead.
Myles Allsop: Great. Thanks very much. Could you give us a sense on the timing of the sale of Las Cruces and the stake in Zambia? Is it kind of hoped for over the next six months, or could it take longer?
Tristan Pascall: Thanks, Myles. Ryan, do you want to take that one?
Ryan MacWilliam: Yeah. We expect both of those to play out through the second half of this year.
Myles Allsop: Okay. And then maybe just going back to the environmental audit, would you expect it to take three months like last year? And what are the key sensitive areas? Do you expect to come out of this audit that we should be focused on?
Tristan Pascall: Sure, Myles. Yeah. Challenging to give a timeframe for that. Although these things -- we would expect a detailed audit would take a few months to get resolved. But in terms of where the asset stands and the capability of us to respond to those orders, its requirements, we can do so very quickly. The President, in his comments, noted that he wanted it done. He wanted it done quickly in order to prepare the grounds. And so, the government and the people of Panama had a good understanding of the conditions and more transparency or understanding of conditions at site. In terms of the main focus areas for the audit, look, the key always at Cobre Panama has been handling the water, in particular through the tailings dam. And our objectives and our continued strong management of the environmental conditions at site really do relate around water, and in particular the tailings dam, to ensure the integrity of those assets. That's challenging. While the asset is not operating, because of the buffering, because of the addition that the process plant provides to managing that water. But as we see now and bringing technical people to site, bringing auditors to the site in the past, we continue with a strong track record in terms of the downstream water key indicators. So, fish in the stream, microfauna is all in a very strong and healthy from the discharge, but the water is really the key issue, always has been. And our continued management of that requires the approval of the preservation safe management plan in the interim and long-term, our ability to operate the plants in order to ensure that that asset integrity continues.
Operator: The next question comes from Lawson Winder from Bank of America (NYSE:BAC). Please go ahead.
Lawson Winder: Hi. Thank you, operator. And good morning, Tristan, Ryan and team. Rudi, I wanted to ask about the report that the Panama Canal Authority now has some level of jurisdiction over the watershed in which Cobre Panama is contained. Does that change how the environmental audit might be done or how anything might be considered in any sort of negotiations or arbitration?
Rudi Badenhorst: Hi, Lawson. Yeah, not sure on that one. I mean, we're sort of three or four watersheds over from the Panama Canal. Look, I need to follow up on the detail, and perhaps you can reference where you're looking at there. Not something particularly aware of. We're a long way from the canal. The sort of previous miscommunications, fake news around that we were taking water from the canals. Completely misplaced, I think very positive for Panama. Rainfall in the last few months has meant that the canal has improved its operating capacities. It's getting back towards normal provision of draft and ability to service ships coming through the canal. Although, I'm aware the canal authority is worried in the long-term about ongoing effects of climate change on the canal and how they'll deal with that in the future. Certainly, we would be willing to be part of it solutions for the country and part of solutions for the Panama Canal.
Lawson Winder: Okay. Fantastic. And then just my follow up would be on the cash cost guidance. Would you guide us to -- or suggest that we model on the higher end of the range, just given the power cost impact, or can we still think of it as being the middle of the range?
Tristan Pascall: Sure. Ryan, will you take that one?
Ryan MacWilliam: Lawson. So, no change to the commentary on our cash costs. I'd still use the same range as we provided before, and we wouldn't point you to the top or bottom end of that cash cost, a function of. In some areas we've seen tailwinds, such as gold price, such as kwacha, such as diesel prices, and in some areas we've seen headwinds, such as electricity prices in Zambia.
Operator: The next question comes from Dalton Baretto from Canaccord Genuity. Please go ahead.
Dalton Baretto: Thanks for taking my follow up, guys. I wanted to ask about the partnering process in Zambia. My understanding is that Vedanta (NYSE:VEDL) is also looking for a partner. And I'm just wondering, given what you said about the improved business climate, the fact that Jiangxi is also looking to secure supply, is there an opportunity for you guys to do something together?
Tristan Pascall: Thanks, Dalton. I'll let Ryan take that one.
Ryan MacWilliam: I think we monitor developments in Zambia, but our focus at Zambia really, at the moment, is on the ramp up of S3 and really pleased to see the delivery of enterprise.
Tristan Pascall: Yeah. Dalton, we follow the progress at Mopani and at Vedanta. We think those operations are very important for the ongoing capacity of Zambia. They're big employers. They're important to the copper belt as being the traditional sort of source of mining in the country, and so they're very important providers. We previously had an ownership in Mopani. We know that asset very well. We understand the characteristics of underground mining at Mopani and potentially what that would look like at Vedanta. No interest directly in that at the moment. And our focus, as Ryan said, is on developing S3 and ensuring that comes in on track, on schedule. Alongside that, we're very excited quarter to have delivered commercial production from enterprise. That's a huge step forward. The team there, both on the project side, to execute that successfully ahead of schedule. And then on the operating side, we've seen really strong progress and huge, better than expected performance on the flotation. In particular, dealing with talc and dealing with what we typically, nickel mines can be very difficult to bring into commercial production. So, it's been very pleasing to see that happen. And really, Dalton, that's what's taking our focus right now and into the future.
Dalton Baretto: Thanks for that, Tristan. If I can squeeze enough follow up. I wanted to ask also about a comment you made on the ICC arbitration. I think you [technical difficulty]
Tristan Pascall: Hi, Dalton, just dropped there. Are you still there?
Operator: Sorry, his line dropped. I'll move to the next question and ask him to rejoin in case he wants to finish his question again. The next question comes from Ralph Profiti from Eight Capital. Please go ahead.
Ralph Profiti: Thanks, operator. Tristan, when you look at the power supply/demand situation across Zambia, and you look at excess power from countries and sort of competing industrial demand outlook, and you think about this 193 megawatts that is currently sourced, does some of that address the increased power draw potentially required at S3? And I'm just kind of wondering, trying to reconcile the 40% requirement versus the 52% actually sourced. And then maybe my second question is, what is the step up in max power requirements once S3 comes on? My apologies. I couldn't find it in the Kansanshi technical report.
Tristan Pascall: Yes. Thanks, Ralph.
Rudi Badenhorst: Tristan, do you want…?
Tristan Pascall: Yeah. Rudi, you want to take that question. Thank you.
Rudi Badenhorst: Yeah. I'll just jump in on the first question, Ralph, or the first portion of your question. The reason for us to commit to a slightly larger proportion of imported power right now than ZESCO is asking for is because we are in a position to secure power from third-party providers as fixed and firm power, so that we are 100% certain of what power we're going to get hour by hour, with the emergency power reports that ZESCO is doing. It's not all firm power at the moment, which provides less and less uncertainty. However, from August, which is next month, a few weeks from now, there's an additional 800 megawatts power available coming out of South Africa with the new turbines that have been brought in line and synchronized on the South African grid from Kusile, that power is available, or some of that power is available for the Southern African power pool, either directly to be procured by ourselves on imports or through ZESCO. And that power is a substantial, substantially cheaper than the existing emergency power imports that are taking place. Similarly, ZESCO has entered into an agreement with Mozambique for additional power imports on a new gas fired power station that becomes available from January, an additional 250 megawatt from that area. And then, we have also gone into various agreements that Tristan has highlighted earlier, including an additional 150 megawatt that we might need for S3 going forward. So, we're very comfortable that the commissioning of S3 will not be dependent on power issues.
Ralph Profiti: Great. Thank you. That's the answer I was looking for. Thank you.
Operator: The next question comes from Dalton Baretto from Canaccord Genuity. Please continue your last question.
Dalton Baretto: Thanks, guys. I'm sorry, I'm not sure what happened there. Tristan, just a question, a point of clarification, if you will. I think you said the ICC arbitration is scheduled for a final hearing just over a year from now, in September of '25. And I'm just wondering, will that result in a binding decision?
Tristan Pascall: Yeah. Hi, Dalton. Thanks for the follow up. Yeah. That's our understanding that that's the final hearing on the ICC arbitration.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Tristan Pascall for any closing remarks.
End of Q&A:
Tristan Pascall: Thanks, operator. Thanks, everyone. I want to thank you all for your interest and time today, and I wish everyone an enjoyable summer in the Northern Hemisphere. Thank you.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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