Earnings Transcript for ANTO.L - Q2 Fiscal Year 2020

Ivan Arriagada: Welcome and greetings from Chile. I am Ivan Arriagada, Chief Executive of Antofagasta and I am here with Mauricio Ortiz, our CFO. I will take you through our 2020 Half Year Financial Results. I would like to start with a brief overview of our performance during this challenging first half of the year. Then I will talk about our response to COVID-19 and how the resilience of our operations and financial strategies has allowed us to continue operating safely and with very limited effects on our plans. Mauricio will then take you through our 2020 half year financial results and I will then talk about the copper market, our development options with a focus on value creation and returns, and our priorities for this year. Finally, I will close by summarizing Antofagasta's investment case. Safety is our first priority. And during this first six months of 2020, we have continued our good safety performance. I'm very pleased to tell you that we have had no fatalities and we have improved our safety performance across all our operations at the mining and the transport divisions and we continue to strengthen the safety culture especially during this period of COVID-19, ensuring there are no fatal accidents by being vigilant and applying critical controls management and promoting operational discipline. We had a solid first six months operating performance. Our safety performance has continued improving, while our copper production of 372,000 tons is very close to our original plans for the year. Our EBITDA was $1 billion, down 22% mainly on a lower realized copper price and our EBITDA margin was 47%. Despite a lower production we have managed to continue reducing our costs. Net cash cost of the half year were $1.12 per pound. That is $0.07 down compared to the same period last year and this reflects our tight cost control as we continued our cost and competitiveness program the weaker Chilean peso and the impact also of lower input prices. Our already robust balance sheet has strengthened further to 0.15 times net debt-EBITDA. We are committed to maintaining our financial discipline and delivering shareholder returns. We'll now look briefly at the performance of each of our operations. Los Pelambres had a very good first half increasing copper production and reducing costs by more than 10% to $0.80 per pound, positioning it as one of the lowest-cost mines in the world. As expected, Centinela production fell as the sulfide grade dropped to 0.53%. Centinela Cathodes had a good start to the year operating at above designed capacity. There was a significant improvement at Antucoya where we have successfully optimized man and plant reliability to achieve the full potential of the operation. Copper production increased by close to 8% and costs were down by 23.5% to $1.73 per pound. Copper production at Zaldivar was down as the ore grade fell, but throughput increased 20% on improved reliability. Our transport division increased its haulage volume as we saw the first deliveries under the new contracts. The impact of COVID-19 on Chile has been significant with nearly 400,000 people being tested positive to date. The rate of infections rose quickly and peaked in July and is now running at lower levels. The state health system has been able to handle the challenges presented by the pandemic and testing and tracking has been successfully carried out, by its authorities. We have managed to keep our operations running by applying, strict health protocols. The safety and health of our workers and local communities, has always been our first priority and never more so, than in this time of crisis. Since the very beginning of the outbreak, we have taken proactive actions, to prevent and contain the risk of infection, at our facilities. These actions have included a substantial shift, to remote working, health screening, social distancing, organizing dedicated private air and road transport, to and from our sites, enhancing sanitary personal protective equipment, and sanitation. We have also changed the work rosters, for some of our contractors. Throughout the pandemic, we have worked in coordination with government authorities, to ensure a consistent approach. And we have also established a $6 million fund to provide equipment, supplies and financial support to communities, near our operations. Following the measures we have taken, we are currently operating with about two-thirds of our workforce on-site, with the rest working from home, or in preventive quarantine. Mine development and maintenance, have resumed as operations have adjusted to the new working conditions and are now at almost normal levels. Mining is important for Chile, generating some 10% of GDP. And the industry's ability to continue operating, in these times is important to the country and its economic and social recovery. Our growth projects at Los Pelambres expansion, Centinela and Zaldívar have largely been suspended, since March, with only limited work continuing. But now, as the number of new infections is decreasing we are restarting the project in stages while at the same time integrating new COVID-19 health protocols, into the projects' revised execution plans. I will talk in a bit more detail about, our projects later in this presentation. We now expect this year's copper production will be at the lower end of our original range, of 725,000 and 755,000 tonnes, of copper. Group cash cost in 2020, after by-product credits, are expected at $1.20 per pound, $0.10 per pound lower than originally guided, assuming our revised production guidance is achieved and the Chilean peso is at a similar level, to where it's trading currently, for the balance of the year. Capital expenditure for the year is now expected to be, lower than €1.3 billion assuming the work on the Los Pelambres expansion and Zaldívar Chloride Leach projects, continue to ramp-up in the second half of the year. I would now like to pass over to Mauricio, who will give you some more detail, on our financial performance, Mauricio?

Mauricio Ortizb: Thank you, Iván. Let us start with a brief overview of our financial results, before going into more detail. The realized copper price for the period was $2.46 per pound, which is 12% lower, than in the same period last year and as expected, production and sales volume were lower as well. Although the gold price was strong during the period, sales volumes were down, so overall by-products revenue was lower than last year, explaining the 15% decrease in revenue. During the first half of this year, our net cash cost of $1.12 per pound, were 6% lower than the first half of 2019, mainly driven by our expanded cost and competitiveness program, a weaker Chilean peso and lower input prices. These factors offset the impact of the lower copper production and lower by-product credit contribution. EBITDA was just over $1 billion, 22% lower on lower revenues, partially offset by lower operating costs. Underlying earnings per share were down to $0.178 on lower EBITDA and higher depreciation and amortization. At Antofagasta, we are maintaining our strong financial position and our net debt-to-EBITDA ratio is 0.15 times. Our interim dividend has been maintained at 35% payout ratio and is $0.062 per share. Our copper production decreased by 4%, as the grade at Centinela Concentrate fell as expected. However, this was partially offset by higher throughput at Antucoya and Centinela Cathode operations and improved recoveries mainly at Los Pelambres. We manage our costs finely. Cash costs before by-product credits decreased by $0.15 per pound compared with the same period last year, mainly due to a more favorable exchange rate and lower diesel and energy prices. And savings coming from our cost and competitiveness program, contribute to improving our gross cash cost by $0.08 per pound. CCP remains as a key contributor to our cost performance, providing a structural platform to continuously challenge our teams and processes. These factors explain the 9% lower pre-credit cost of $1.51 per pound. After $0.39 per pound of by-product credits, our net cash costs were $1.12 per pound. This represents a 6% reduction in comparison with the same period last year. As mentioned before, EBITDA was just about $1 billion, some $290 million lower than in the first half of 2019 with most of the fall explained by lower realized copper price during the period. Lower sales volume of $111 million were offset by lower mine site costs of $100 million and exploration and evaluation expenditure $8 million lower. Our associates and joint venture decreased their contribution to EBITDA by $31 million mainly as a result of lower contribution from Zaldívar and no contribution from the Hornitos thermal power station. On the back of a lower realized copper price, underlying net earnings for the first half of the year were $175 million. This is $127 million lower than in the same period last year. The lower EBITDA from subsidiaries, higher depreciation and amortization, mainly due to an increased amortization of capitalized stripping and the lower contribution from our associates and JVs were partially offset by

Ivan Arriagada: I would like to say a few words about the copper market. After the COVID-19 outbreak started, we witnessed a sharp fall in the financial markets and also in the copper price, which reached levels of close to $2.10 per pound. However, with activity in China bouncing back and signs of recovery in the U.S. and Europe, there has been a steady recovery in the copper price, which has also been supported by heightened expectations in the financial markets. COVID-19-related supply disruptions in the copper market have been about 500,000 tonnes to date with little in Chile. Shipments continued unaffected with the forced closure of some mines in Peru, creating increased demand for Chilean products, especially concentrates. Scrap sales are down and China's demand for concentrates and finished metal has increased to compensate for this, leading to falling spot TC/RCs and increased cathode premiums. The outlook for the remainder of the year looks positive, but depends largely on the impact of COVID-19 on global consumption. The delays to growth projects around the world may lead to a tightening of supply. But this year, we expect there to be a small surplus of a few hundred thousand tonnes. However, in the long-term the fundamentals for demand growth of urbanization, renewables and electro mobility remained unchanged. As always, we will continue to focus on cost control to protect our margins. Now, I will take you through our growth opportunities. We have significant expansion optionality in our current portfolio of operations, especially in our two main districts; Los Pelambres and Centinela. The Pelambres expansion is a high return project that will bring forward production without extending its current mine life. The timing of a subsequent Phase 2 expansion at Los Pelambres will depend on the receipt of the necessary environmental approvals. This Phase 2 will extend the mine life of Los Pelambres by 15 years and achieve a further increase in production. At Centinela on the other hand, we're opening the Esperanza Sur pit. This will bring greater flexibility and will also allow Centinela to smooth and optimize its year-on-year production profile. Centinela second concentrator Phase 1 would have ore throughput capacity of approximately 90,000 tonnes per day with an annual production of approximately 180,000 tonnes of copper equivalent. Once Phase 1 has been completed and is operating successfully, a future expansion is possible increasing the capacity of the concentrator to 150,000 tonnes of ore per day with annual production increasing to 250,000 tonnes of copper equivalent, maximizing the potential of Centinela's large resource base. The Zaldívar Chloride Leach project will increase copper recoveries by approximately 10 percentage points, increasing production at approximately 10,000 to 15,000 tonnes per annum. In summary, we have attractive growth optionality and can choose when we develop our districts where we hold large undeveloped mineral resources. We will invest over time to bring this to market, but only in accordance with the discipline provided by our capital allocation framework. As mentioned before, we are currently restarting all three of our growth projects in stages during half two 2020, integrating new COVID-19 health protocols. At Los Pelambres some limited work has continued through the half year mostly on the desalination plant at Los Vilos. And as at the end of June, the project was 37% complete. As a result, the suspension of activities to date has already delayed the original project schedule by six months at a cost of approximately $50 million. To reduce the risk to water availability the original design capacity of the desalination plant is being reviewed to facilitate a future phased expansion to 800 liters per second with the additional capital cost of the changes to the desalination plant and marine works estimated to be approximately $150 million. This expansion in the desalination plant will be a separate project to the Los Pelambres expansion, a project currently in execution and is expected to be approved once the additional necessary environmental permits have been received. COVID-19 restrictions on future construction work will require the project to continue, we reduce manpower numbers. And as this together with the additional changes to the destination plant will impact the construction schedule and cost beyond what is included in the above estimates, the project schedule and costs remain under review. An updated estimate will be provided in quarter four 2020. At Centinela, pre-stripping at Esperanza Sur started in quarter two 2020. And following the delay caused by COVID-19, the project is now expected to be completed in the first half of 2022. The capital cost estimate for the project is unchanged at $175 million. The Chloride Leach project had just commenced at the time of the COVID-19 outbreak at Zaldívar. And as a result further mobilization to site was suspended in March. Activities are now resuming largely as per the original schedule, but delayed by approximately six months to the first half of 2022 due to the suspension and integration of fully revised health protocols. Antofagasta is committed to mitigating and adapting to climate change. On mitigation, we have set a target to reduce our CO2 emissions by 300,000 tonnes by 2022 through energy savings and efficiency gains and we're all well on track to achieving our targets. We have renegotiated our supply contracts to decarbonize our electricity supply taking advantage of the price of renewable energy, which in Chile is cheaper than more polluting technologies. New energy supply contracts have been negotiated at all the group's mining operations over the last three years and they are progressively converting to 100% renewable energy with Zaldívar making the transition at the beginning of July this year. From 2022, the mining division will use only renewable energy. We believe this is an important milestone and it is part of our commitment to operating sustainably. Water is a critical challenge for all our mining operations, particularly, the Los Pelambres in Central Chile as we adapt to the impact of climate change. Last year was the driest year of a 10-year drought in Choapa Valley. And although rainfall in the first six months of the year has been greater than all of the rainfall in 2019, we're continuing to optimize our usage to ensure sufficient water availability to fulfill our plans at Pelambres. Today 85% of water used is recirculated, and with the construction of the desalination plant at Los Pelambres, our dependence on continental sources will reduce. In the meantime, we continue to improve the efficiency of our water systems maximizing recoveries and minimizing losses. In the case of Centinela and Antucoya we already use seawater which accounts for 46% of the Group's total water consumption. And at Zaldívar we have submitted our application for extension of water permits from 2025 to 2031. We have made important progress on innovation and the current situation is enabling the acceleration of these changes both with our transformation portfolio and in facilitating new ways of working becoming more flexible and adaptable. We have large-scale strategic initiatives such as developing a way to leach primary sulfides, which we have continued to successfully advance and are now conducting industrial-scale tests at Centinela. We have accelerated the adoption of real-time information management and analytics across our organization. We're working on the design and deployment of a remote operations center for Centinela to be located in the city of Antofagasta. We're using data analytics for planned throughput and recovery optimization at both Los Pelambres and Centinela and we're digitally transforming our support functions and maintenance processes. In automation and robotics, we have implemented autonomous drilling operations at Los Pelambres. And we are in the process of tendering for an autonomous fleet for the new Esperanza Sur pit which will allow high utilization and average speeds. We are targeting specific performance improvements to come from these changes. The priorities for the year reflect our original goals and the new operating conditions created by COVID-19 are now therefore as follows

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